Don’t Leave Money on the Table: A Guide to Underpayment Recovery
Denied claims often dominate the conversation when it comes to revenue cycle challenges, but underpayments are the silent killer of healthcare profitability. Unlike denials, which are obvious and usually trigger an immediate response, underpayments can quietly erode revenue over time.
Studies show that 3–5% of claims are underpaid on average, costing practices hundreds of thousands to millions annually. For some specialties, this number is even higher. Understanding how underpayments happen and implementing a systematic recovery process is crucial for financial sustainability.
“Every dollar matters in healthcare. Ignoring underpayments is like ignoring a slow leak in your revenue pipeline.”
📌 Table of Contents
- What Exactly Is an Underpayment?
- The Common Culprits: Why Underpayments Occur
- The Financial Impact: Why You Can’t Afford to Ignore Them
- Why Underpayments Are Overlooked
- A Step-by-Step Recovery Process
- Conclusion: Don’t Let Underpayments Drain Your Bottom Line
- MBW RCM: Your Partner in Underpayment Recovery
What Exactly Is an Underpayment?
An underpayment occurs when a payer reimburses less than the contracted amount for a covered service. It’s not a denial (no payment) or a patient responsibility balance; it’s a direct shortfall between what was promised and what was delivered.
Example: If your payer contract states $500 for a procedure but you receive $450, the $50 discrepancy is an underpayment. One claim may not seem like a crisis, but across hundreds of claims, the financial impact compounds quickly.
The Common Culprits: Why Underpayments Occur
Underpayments are not random mistakes—they typically stem from recurring issues:
Payer Fee Schedule Mismatch: Outdated or incorrect fee schedules applied by payer systems.
Incorrect Coding or Bundling: Services wrongly bundled or unbundled by automated adjudication.
Missing or Incorrect Modifiers: Reimbursement-impacting modifiers misapplied or ignored.
Manual Review Errors: Human oversight in manual claim processing.
Ambiguous Contracts: Payers interpreting vague terms in their favor.
Underpayments: Visibility vs. Capability
A 2023 MGMA survey found that 40% of providers report underpayments frequently enough to require dedicated tracking, but only 25% feel adequately equipped with tools to monitor them.
The Financial Impact: Why You Can’t Afford to Ignore Them
Before diving into the numbers, it’s important to recognize that underpayments are not just an accounting nuisance—they ripple across every part of a healthcare organization. Think of them as silent drains on revenue that quietly weaken cash flow, distort performance metrics, and ultimately compromise both strategy and patient care.
Industry reports have described underpayments as one of the top three avoidable revenue cycle losses, with some hospital systems losing millions annually. This makes them not only a financial issue but also a strategic risk that leadership teams cannot afford to overlook.
Cumulative Loss: In a $10M practice, even a 3% underpayment rate equals $300,000 in lost revenue annually. Over five years, that’s a staggering $1.5M lost—capital that could fund new equipment, expansion, or staff training.
Operational Strain: Persistent revenue gaps force practices to make tough choices, from delaying technology upgrades to limiting staff hiring. This directly impacts patient access and care quality.
Misleading A/R Reporting: Underpayments artificially inflate financial health by showing claims as “paid,” even though they are underpaid. This distorts forecasting, budgeting, and revenue cycle performance evaluations.
Strategic Risk: Chronic underpayments weaken negotiating leverage with payers during contract renewals and reduce cash reserves that cushion against market changes.
Patient Trust: Billing discrepancies sometimes flow down to patients as unexpected balances or corrected statements. This not only creates confusion but also erodes patient trust—80% of patients say billing errors reduce their satisfaction with providers (HFMA survey).
Underpayments & Margin Impact
Advisory Board data shows that eliminating underpayment losses can boost practice operating margins by up to 12%.
Why Underpayments Are Overlooked
Underpayments often slip under the radar due to a combination of operational blind spots, resource constraints, and behavioral dynamics. While denials attract urgent attention, underpayments are subtle and require active monitoring to uncover. Practices without strong reporting tools often miss these small discrepancies, and many billing systems set thresholds that ignore low‑dollar variances. Staff understandably focus on higher‑value claims, but this mindset overlooks how small shortfalls compound into major losses.
Limited staffing, insufficient training, and the manual effort needed to reconcile Explanation of Benefits (EOBs) against contracts further exacerbate the problem. There is also a cultural hesitation: some providers avoid challenging payers out of concern for straining relationships—even when contract terms support them. Industry studies reveal that over 60% of healthcare leaders admit they rarely pursue underpayments below $50, yet these alone can drain six figures annually from a midsize practice.
Lack of Visibility: Most systems lack automated variance detection for low‑dollar amounts.
Focus on Denials: Denials consume bandwidth and overshadow underpayment recovery.
Resource Gaps: Small or overworked teams struggle with detailed reconciliation.
Perceived Low ROI: Providers underestimate the significant cumulative impact of “small” shortfalls.
Relationship Concerns: Fear of friction with payers discourages necessary follow‑up.
Here are some of the Fact Sheet: Underpayment by Medicare and Medicaid
A Step-by-Step Recovery Process
1. Identify and Audit
Start by developing visibility into where underpayments occur. This means regularly reconciling expected payments against actual remittances, ideally at least monthly if not weekly. Sophisticated practices employ payment variance software that automatically flags discrepancies at both the claim and line‑item level. Establishing an audit log ensures variances are not only identified but also categorized by type (fee schedule mismatch, modifier issue, bundling error, etc.), making follow‑up more efficient.
2. Strengthen Contract Management
Your contracts are the foundation of recovery. Keep all payer agreements updated, centralized, and digitally accessible. Assign responsibility for monitoring contract changes, amendments, and fee schedule updates. Compare actual reimbursements against contracted rates on a rolling basis, not just at renewal time. Practices that benchmark consistently are able to quickly identify when a payer is slipping out of compliance.
3. Leverage Technology
Manual processes are no match for today’s payment complexity. Revenue cycle management platforms equipped with payer rules engines can proactively catch discrepancies before payments are finalized. Dashboards and automated alerts provide real‑time visibility into underpayments, allowing staff to prioritize follow‑up without waiting for month‑end reports. Integrations with clearinghouses and electronic remittance advice (ERA) systems further streamline detection.
4. Build a Dedicated Workflow
Recovery requires a defined workflow rather than ad‑hoc follow‑up. Assign specialized billing staff to manage underpayment resolution, or consider outsourcing to firms with payer negotiation expertise. Standardize appeal templates with references to contract language and supporting documentation. Create timelines for appeal submission and escalation to prevent revenue leakage from missed deadlines.
5. Track, Report and Improve
Consistent reporting closes the loop. Monitor payer‑specific underpayment trends to spot systemic issues. Share variance and recovery data with leadership to strengthen your negotiating position during contract renewals. Translate findings into process improvements—whether updating staff training, refining coding workflows, or adjusting payer prioritization strategies. Regular reporting ensures accountability and transforms underpayment recovery from a reactive task into a strategic advantage.
Conclusion: Don’t Let Underpayments Drain Your Bottom Line
Recovering underpayments is not just about chasing small variances—it’s about safeguarding the financial health and future of your practice. By developing visibility, leveraging technology, and establishing a structured process, providers can reclaim revenue that rightfully belongs to them. The cumulative effect of even small recoveries translates into stronger margins, more investment in staff and technology, and better patient care.
“If you don’t measure underpayments, you’ll never recover them. And if you don’t recover them, you’re giving away free care.”
For practices serious about growth and stability, making underpayment recovery a standard, disciplined process is not optional—it’s essential.
MBW RCM: Your Partner in Underpayment Recovery
At MBW RCM, we specialize in helping practices identify, recover, and prevent underpayments through proven strategies and advanced technology. Our team of experts provides contract reviews, payment variance audits, and payer negotiation support, ensuring you receive every dollar you’ve earned. By partnering with us, you not only protect your revenue but also gain a strategic ally committed to the long‑term financial health of your organization.
Ready to stop leaving money on the table? Contact MBW RCM today to schedule a consultation and take the first step toward maximizing your reimbursements.
