Quick Answer
Medical billing underpayments occur when an insurance company pays less than the amount a healthcare practice should receive for a covered service. Unlike a denied claim, an underpaid claim may appear resolved because a payment was issued, making the lost revenue easier to overlook. By reviewing payer reimbursements, contracted rates, payment patterns, and accounts receivable data, healthcare practices can identify potential underpayments and take steps to recover revenue that may otherwise go unnoticed.
For many healthcare practices, the biggest revenue problems are easy to recognize. Claims are denied, payments are delayed, or accounts receivable continues to grow. But another problem can be much harder to detect: claims that are paid—but not paid correctly.
Medical billing underpayments can quietly reduce a practice’s revenue over time. If the payment is posted and the claim appears complete, staff may assume the reimbursement was accurate. However, when an insurer pays less than the contracted or expected amount, the difference can add up across hundreds or thousands of claims.
Understanding how underpayments happen is an important part of maintaining a healthy revenue cycle and protecting the money your practice has earned.
What Are Medical Billing Underpayments?
A medical billing underpayment happens when a healthcare provider receives less reimbursement than expected for a service that has been billed to an insurance company.
This can happen for several reasons. The payer may apply the wrong contracted rate, process the claim incorrectly, bundle services differently than expected, or make an administrative error.
The important distinction is that the claim may still show as paid.
That is what makes underpayments particularly challenging. A denied claim usually creates an obvious problem that requires follow-up. An underpaid claim, however, may move through the payment posting process without immediately being flagged.
Healthcare practices need visibility into their billing and reimbursement data to determine whether payments are accurate and whether revenue is being lost after claims are processed.
Underpayments vs. Claim Denials: What’s the Difference?
A claim denial means the insurance company has refused payment for all or part of a claim.
An underpayment means the insurance company has issued payment, but the amount may be lower than what the provider should have received.
Both can affect cash flow, but they require different review processes.
For example, a denied claim may require:
- Correcting missing or inaccurate information
- Providing additional documentation
- Filing an appeal
- Resubmitting the claim
An underpaid claim may require the practice to:
- Review the patient’s insurance benefits
- Compare the payment against the expected reimbursement
- Review payer contracts or fee schedules
- Investigate the explanation of benefits
- Identify whether the claim was processed incorrectly
- Follow up with the payer when appropriate
A strong revenue cycle management process should help healthcare practices monitor both denied claims and potential reimbursement discrepancies.
Why Do Medical Billing Underpayments Happen?
There are several reasons a healthcare practice may receive less reimbursement than expected.
Incorrect Contracted Rates
Healthcare providers often have negotiated reimbursement rates with insurance companies. If a claim is processed using an incorrect rate, the practice may receive less than the amount outlined in its agreement.
Without comparing actual payments against expected reimbursement, these discrepancies can be difficult to identify.
Coding or Claim Processing Issues
Medical coding and claim processing errors can also affect reimbursement.
A claim may be submitted correctly but processed differently by the payer. In other situations, a coding issue may result in a lower level of reimbursement than the provider expected.
This is one reason accurate billing and coding are critical throughout the revenue cycle.
Bundling or Payment Policy Differences
Insurance companies may apply specific payment policies when processing claims. Certain services may be bundled together, reduced, or reimbursed according to payer-specific rules.
Practices need to understand whether the payment was handled appropriately or whether the reimbursement should be reviewed further.
Coordination of Benefits Issues
Patients with more than one insurance policy can create additional billing complexity.
If coordination of benefits information is incorrect or incomplete, claims may be processed incorrectly or payments may be delayed. ORI discusses how accurate insurance information and proper payer sequencing can help practices avoid reimbursement complications in its guide to Coordination of Benefits in medical billing.
Administrative Errors
Not every underpayment is the result of a complicated billing issue.
Sometimes, simple administrative or processing errors can result in incorrect payments. Without a process for reviewing reimbursement patterns, those errors may never be identified.
How Can Healthcare Practices Identify Medical Billing Underpayments?
Identifying underpayments requires more than simply confirming that a claim was paid.
Healthcare practices should have a process for comparing expected reimbursement with actual payments.
Review Expected vs. Actual Payments
One of the most important steps is establishing what the practice expects to receive for specific services and comparing that information with actual payer reimbursements.
When there is a meaningful difference, the claim should be reviewed.
Monitor Payer Payment Patterns
Individual underpayments may be difficult to notice. However, patterns can become more obvious when payment data is reviewed over time.
For example, a practice may discover that a particular payer consistently reimburses certain procedures differently than expected.
Monitoring trends can help identify larger revenue cycle issues that would be difficult to find by reviewing claims one at a time.
Review Explanation of Benefits Information
The explanation of benefits can provide important information about how a claim was processed.
Reviewing adjustments, patient responsibility, allowed amounts, and payer explanations can help determine whether the payment was appropriate.
Monitor Accounts Receivable and Adjustments
A growing A/R balance is often a warning sign, but adjustments and write-offs also deserve attention.
If balances are being written off without adequate review, a practice could be losing revenue that may have been recoverable.
This is why detailed reporting and visibility into billing performance are important. ORI provides practices with customized reporting and insights designed to help identify opportunities for improvement across the revenue cycle.
The Hidden Cost of Ignoring Underpayments
One underpaid claim may not seem significant.
But medical billing underpayments can become a much larger problem when they occur repeatedly.
Consider what happens when a practice loses a relatively small amount on a specific type of claim. If that same issue affects dozens or hundreds of claims over the course of a year, the lost revenue can become substantial.
The problem is compounded when no one is actively monitoring reimbursement accuracy.
A healthcare practice may believe its claims are being processed successfully because payments are arriving. Meanwhile, the practice could be receiving less revenue than it should.
That is why revenue cycle management should focus on more than simply getting claims submitted and paid.
The goal should be to improve visibility, identify problems, and help ensure the practice is being reimbursed accurately.
What Should a Practice Do After Identifying an Underpayment?
When a potential underpayment is identified, the first step is determining why the discrepancy occurred.
The practice may need to review:
- The original claim
- Coding and documentation
- The payer’s explanation of benefits
- The applicable fee schedule
- Contracted reimbursement terms
- Patient insurance information
- Previous payments for similar services
Once the cause is understood, the practice can determine the appropriate next step.
Depending on the situation, this may involve contacting the payer, requesting a claim review, correcting information, or following the payer’s established dispute or appeal process.
Having experienced billing professionals manage this process can help practices avoid allowing complex reimbursement issues to sit unresolved.
How Outsource Receivables Helps Practices Improve Revenue Visibility
For healthcare providers, medical billing involves much more than submitting claims.
Effective revenue cycle management requires ongoing attention to claims, payments, denials, accounts receivable, reporting, and reimbursement performance.
Outsource Receivables works with healthcare practices to help improve billing efficiency, increase visibility, and identify opportunities to strengthen financial performance.
ORI provides customized billing solutions for a variety of healthcare practices and specialties, with a focus on helping providers manage the complexities of billing while remaining focused on patient care.
The right billing partner should not simply tell you that claims were paid. You should also have access to meaningful information about your practice’s financial performance and areas where improvements may be needed.
ORI’s medical billing services are designed to support the full revenue cycle, including billing management, claims follow-up, reimbursement support, reporting, and accounts receivable management.
Could Underpayments Be Affecting Your Practice’s Revenue?
If your practice is experiencing inconsistent reimbursement, unexplained adjustments, or concerns about whether insurance companies are paying claims correctly, it may be time to take a closer look at your revenue cycle.
Many billing problems are not immediately visible. A claim can appear complete while an underlying reimbursement issue continues to affect your practice’s financial performance.
ORI offers a FREE Financial Health Assessment to help healthcare practices identify opportunities to improve their revenue cycle and increase collections.
Contact Outsource Receivables to learn more about your billing options and find out where your practice may have opportunities to improve revenue performance.
Frequently Asked Questions About Medical Billing Underpayments
What is a medical billing underpayment?
A medical billing underpayment occurs when an insurance company pays less than the amount a healthcare provider expects or should receive for a covered service.
How can a healthcare practice identify underpaid claims?
Practices can compare expected reimbursement with actual payments, review payer payment patterns, analyze explanations of benefits, and monitor adjustments and accounts receivable activity.
Are underpayments the same as denied claims?
No. A denied claim is not paid as expected, while an underpaid claim receives payment that may be less than the appropriate reimbursement amount.
Why do insurance companies underpay medical claims?
Underpayments can occur because of incorrect reimbursement rates, claim processing errors, coding issues, payer policies, coordination of benefits problems, or administrative mistakes.
Can an outsourced medical billing company help identify underpayments?
Yes. An experienced medical billing partner can provide reporting, claims follow-up, reimbursement analysis, and revenue cycle support to help practices identify potential billing and payment issues.