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Underpayments: A Seven-Step Framework for Quantifying the Issue

By Matt Bridge

January 9, 2024

Underpayments pose a significant challenge for providers in revenue cycle management, as shared in our recent articles on navigating the issue and the causes and implications of underpayments. These elusive revenue shortfalls occur when payers do not reimburse the full eligible amount for services rendered. To tackle this issue effectively, healthcare organizations can follow a structured seven-step framework for quantifying underpayments and maximizing revenue recovery.

Underpayments A Seven Step informative

Step 1: Analyze Data

Start by collating accounts with a zero balance that have already been paid, specifically those without denials. Performing a zero balance analysis (ZBA) is crucial to identify underpayments that often go unnoticed. It provides the foundation for quantifying the issue accurately.

Step 2: Identify Net Revenue

Next, identify the appropriate eligible reimbursement amount for each account by analyzing various contracts, carve-outs, and fee schedules. This step can be labor-intensive and challenging when done manually, emphasizing the need for robust contract management technology.

Step 3: Calculate Underpayment Opportunity

Determine the underpayment opportunity by applying industry benchmarks. For example, the MGMA benchmark range of 7% to 11% serves as a reference point. Additionally, analyze underpaid amounts by financial class to refine your estimate further.

Step 4: Determine Recovery Opportunity

Apply a recovery rate based on historical data and account for false positives. While benchmarks provide a gross opportunity, not all underpayments can be recovered. Apply a conservative percentage to estimate realistic recoveries.

Step 5: Evaluate Technology Costs

Determine the technology costs required to pursue underpayments effectively. This may involve implementing new technology, optimizing existing systems, or loading new contracts into contract management technology. Technology is essential for streamlining the process and achieving accurate results.

Step 6: Assess Services Costs

Evaluate whether reallocating or adding internal staff is necessary to pursue underpayments. Alternatively, consider partnering with external service providers to manage the underpaid claim workload cost-effectively.

Step 7: Calculate ROI

Finally, calculate the return on investment (ROI) by subtracting the technology and services costs from the revenue opportunity. This step provides a clear picture of the net opportunity for revenue recovery.

Conducting a comprehensive data analysis empowers healthcare organizations to gain insights into their resources' efficiency, payer behavior, and claim lifecycles and provides a proactive approach to address underpayments and optimize revenue recovery. Performing the analysis on an annual or fiscal basis establishes an annual recurring ROI.

As underpayments persist, implementing technology and services can lead to consistent revenue recovery year after year. However, despite the potential benefits, underpayment teams often face challenges, including capacity constraints and budget limitations. Healthcare organizations that adequately resource underpayment teams and consider outsourced staffing models can take advantage of the opportunity to maximize revenue and increase financial sustainability.

Underpayment Recovery and Its Impact on Your Bottom Line blog

Watch our webinar, “Underpayment Recovery and Its Impact on Your Bottom Line” to learn more about how to leverage this structured framework, and watch for the next article in our series that shares strategies and best practices for managing underpayments.

Matthew Bridge

Matthew Bridge

Author

As senior vice president of RCM services at AGS Health, Matt oversees strategic growth initiatives for the company’s Patient Access and Patient Financial Services business units. He possesses more than 15 years of experience in professional and managed services with expertise throughout the revenue cycle continuum. Matt’s career has provided him with broad experiences covering diverse provider settings and a deep understanding of the challenges facing customers of all provider types. He is passionate about mentoring and coaching others as they pursue their career journeys in revenue cycle and healthcare business management. Matt possesses a bachelor’s degree in business administration and management from Curry College in Milton, MA.

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