This post is an excerpt from the ebook, “The Hidden Cost of Payment Variance: How to Stop Underpayments From Undermining Your Practice.” Click here to read the full ebook free.
When insurers pay the wrong amount, the costs include revenue, time, and patient satisfaction. Underpaid claims are a common issue to anyone who deals with medical practice management. We’ll be discussing how health systems can work with insurance payers to reduce discrepancies and address the root causes of payment variance.
In healthcare, payment variance is the difference between what you expect to receive from a claim and what you actually receive. In most cases, “variance” refers to underpayment, but overpayment happens too.
You’ll hear the term often during discussions of revenue cycle management (RCM).
According to the Medical Group Management Association (MGMA), insurers routinely underpay U.S. healthcare providers by an average of 7–11%. Becker’s Hospital Review says payers and providers are both at fault for mistakes that cause underpayment. For each group, they cite the most common mistakes as:
|
Payer Mistakes |
Provider Mistakes |
| 1. Pricing claims using incorrect contract terms | 1. Submitting bills incorrectly and/or without required documentation |
| 2. Calculating allowed amounts incorrectly | 2. Taking too long to identify incorrect amounts |
| 3. Interpreting contract terms differently | 3. Interpreting contract terms differently |
If you’re a provider, finding and correcting medical billing mistakes isn’t easy—or free. MGMA estimates the average cost of reworking an “unclean claim” (any claim with errors) is $25. They also estimate that 50–65% of these claims are never reworked and remain underpaid.
Perhaps even more damaging to your bottom line are patient perception costs. For patients struggling with the lack of transparency in healthcare, getting corrected statements months after treatment may lead to low satisfaction scores and poor social reviews for your practice.
And, if a disgruntled patient walks away for good, you stand to lose over $1 million in lifetime household healthcare expenditures.
While you can’t stop payers from adjudicating claims incorrectly, you can eliminate mistakes in your billing office through contract management. The key steps are keeping contracts and fee schedules up to date.
The first step toward eliminating underpayments is adopting a system or process to continually monitor contracts, so you always know:
The term of each contract
Services covered and reimbursement rates
How long you have to submit claims after treatment
How long the payer has to submit reimbursement
Dispute procedures for denials and timelines for appeals
The next step is understanding why payers make contractual adjustments, so you can adjust your processes and expectations accordingly.
Contractual adjustments can happen for many reasons, but are most often the result of procedure codes and modifiers such as:
When multiple procedures are performed on the same date of service, it can cut reimbursement for subsequent procedures by as much as 75%.
When a procedure is cancelled, partially reduced or eliminated, it can impact your expected allowable.
When payers are billed for services by advanced care practitioners (ACPs), including nurse practitioners and physician assistants, many states allow a reduced rate for the same allowable.
Being aware of these coding-related clauses in your contracts will help eliminate mistakes when you submit claims. It will also help you determine when you’re being underpaid and need to file an appeal.
You may be tempted to allow underpayments and overpayments to cancel each other out, but it doesn’t work that way. While different payers have different takeback clauses—and states have their own regulations governing those clauses—healthcare providers aren’t legally entitled to keep overpayments.
If you suspect a claim has been overpaid, contact the payer in writing to request that they reprocess the claim and send you an explanation of the payment along with a formal request for refund. Only then should you repay your payer.
To learn more about how to identify and resolve payment variance, download our ebook, “The Hidden Cost of Payment Variance: How to Stop Underpayments From Undermining Your Practice.”
1. What is payment variance in healthcare?
Payment variance is the difference between the expected reimbursement for a claim and the actual payment received from insurance payers. This variance can result from underpayments, overpayments, or contractual adjustments.
2. What are the main causes of payment variance?
Payment variance often occurs due to errors in contract management, incorrect allowed amounts, discrepancies in contract terms, and coding mistakes, such as missing modifiers or misinterpreted fee schedules.
3. How does payment variance affect healthcare providers?
Payment variance can impact a healthcare provider’s cash flow, increase administrative costs, and decrease overall net revenue. It also requires healthcare providers to allocate resources for identifying and resolving discrepancies, which can be time-consuming.
4. How can healthcare providers reduce payment variance?
Healthcare providers can reduce payment variance by maintaining accurate contractual terms with payers, implementing revenue cycle management solutions, and using payment variance reports to track discrepancies. Proper training in medical billing and contract management is also essential.
5. What is Multiple Procedure Payment Reduction (MPPR), and how does it impact payment variance?
MPPR is a payer policy that reduces reimbursement for additional procedures performed on the same date of service. This adjustment can significantly lower the expected payment, leading to a variance if not accounted for in pricing claims.
6. Are there legal requirements for handling overpayments?
Yes, healthcare providers are typically required to return overpayments to the insurance company. Providers should contact the payer in writing to request a reprocessing of the claim and await a formal refund request before sending any repayment.
7. Why is contract management important for controlling payment variance?
Effective contract management helps providers understand contract terms, track reimbursement rates, and ensure claims are processed correctly. This reduces the likelihood of underpaid claims and helps avoid unnecessary write-offs or appeal processes.
8. How do contractual adjustments affect payment variance?
Contractual adjustments, often related to specific procedure codes or provider credentials, change the amount a provider receives for a claim. Understanding these adjustments can help providers detect underpayments and take corrective action if needed.
9. What role does RCM play in managing payment variance?
Revenue cycle management (RCM) is crucial for monitoring reimbursement processes and identifying discrepancies early. RCM solutions can automate workflows, detect common issues, and support revenue recovery efforts, which helps providers maintain a healthy bottom line.
10. How does payment variance impact patient satisfaction?
Incorrect or delayed reimbursements can lead to patient billing discrepancies, affecting patient satisfaction and trust. When patients receive unexpected bills or statements long after treatment, they may view the healthcare practice as disorganized, impacting the patient experience and potentially leading to negative reviews.