Part of the money your practice is losing is hiding inside claims marked PAID.
That is what makes underpayments so dangerous. A denial announces itself. An underpayment quietly closes the claim and moves on. It posts below the contracted rate, the balance slides into the adjustment column, and unless someone compares the payment to the contract, nobody ever knows.
Underpayments are one of the first things I check when an owner tells me the numbers feel off. I picked up that habit in a quarterly review in Tampa that I will get to below, where a billing company with a denial rate under 6 percent turned out to be missing six figures on claims marked paid. Most billing teams watch denials closely and give a paid claim a quick glance at most.
Most small practices never load their contracted rates into their billing system. More than once, I asked a practice what a payer is supposed to reimburse for a common CPT code and watched everyone in the room look at each other. Without that number, there is nothing to compare the payment against, and a short pay becomes invisible by design.
Why underpayments hide in plain sight
Underpayments disappear for a few ordinary reasons.
The claim carries no rejection code. The payer adjudicated it, paid it, and adjusted the rest. On the ERA it looks identical to a correctly paid claim.
Your billing staff spend their time on denials. When a team is working a denial queue with hundreds of items, a claim marked paid is the last thing anyone reviews. That is a reasonable way to prioritize a workload. It is also exactly why short pays slip through.
Then there is CO 45. Your staff sees that adjustment all day, which is exactly why it is easy to stop looking at it closely. CO 45 means the charge exceeds the fee schedule or maximum allowable amount, and it shows up on 28% of denial and adjustment codes. When a payer uses the wrong fee schedule, the extra reduction hides inside an adjustment your team writes off every day without a second look.
Put those together and a short pay can repeat on the same code, from the same payer, for months.
Common causes
The outdated fee schedule. Your contract moved to $105, but the payer is still sending $96. Nothing rejects. Nothing flags. The claim simply closes nine dollars short.
The misapplied reduction. Two procedures go out on one claim, and the payer is supposed to reduce the secondary one. Its system reduces the higher paying procedure by mistake. The remittance looks fine unless you know which line was supposed to take the cut.
The ignored modifier. This one frustrates coders. They appended the right modifier, and the payer’s pricing system skipped right past it. The allowed amount drops, and nothing on the ERA tells you why.
The unannounced rate change. A code that paid $140 last quarter pays $126 this quarter. No letter. No notice.
Fourteen dollars does not look like much. Multiply it by 40 claims a month and you are losing more than $6,000 a year. One CPT code. One payer.
None of these numbers look wrong on their own. They look plausible. That is what bothers me about underpayments. Only a comparison against the contract reveals them.
How to catch them
Underpayment detection has to be a report, not a lucky catch. If finding an underpayment depends on a biller happening to notice one claim, you are not running a process. You are running on luck.
So start with a question. Do you know what your largest commercial payer is supposed to pay for your ten most common CPT codes? If the answer is no, you can’t know whether those claims are being paid correctly.
If I walked into a practice tomorrow and suspected underpayments, I would start with the top five payers. For most small practices, those five cover the bulk of revenue.
I’d load the contracted rates for those payers into the billing system or a simple reference table. Then I’d compare the allowed amount on each ERA against what that CPT code should pay under that contract. The difference is the variance.
One variance may be a one time error. The same variance on the same code from the same payer across 30 claims is a pattern, and it is worth real money. Sort by payer and code, and send anything over five dollars a claim to a work queue.
A few years ago I was in a quarterly review with a billing company owner in Tampa. He spent eight years as an Army combat medic before he ever looked at a claim form, and he still ran the place like a triage tent. His denial rate was under 6 percent and his clients were happy, but his margins kept shrinking and he did not know why.
I asked him how he knew the payers were paying the right amount.
He didn’t. His team posted payments and worked denials, but nobody compared what came in to what the contracts said. We picked his largest gastroenterology client to start. Their office manager found the contracts for the top five commercial payers in a filing cabinet, his team loaded the rates, and the variance report came back three days later.
One payer had been paying about 8 percent below contract on colonoscopy and upper endoscopy codes for eleven months. Another never applied the rate increase that started in January. A third was bundling a pathology related code when it was billable on its own. Over twelve months, that one client was short $186,000.
He was quiet on the call for a long time. Then he said, “If that’s one client, what does it look like across all of them?”
Once they ran the same report across the rest of the book, his team recovered about $410,000 for clients in the first year. Three clients raised their monthly fees on their own after they saw the recoveries, and his operating margin went from 12 percent to 20 percent over the next eighteen months.
Nobody on the billing team did anything wrong. Every one of those claims posted as paid. That owner now opens every new client meeting with the same question: “Do you know for certain that every payer is paying you what they agreed to pay?” Almost nobody says yes.
What to do when you find one
Do not send the payer a vague message saying, “We believe this claim was underpaid.”
Make the payer do the math with you. Here is the contracted rate. Here is what you paid. Here is the difference you still owe. Attach the contract language and the remittance, and put the dollar amount in the first sentence.
Then pull every other claim with the same code and payer from the same period. A variance on one claim frequently points to the same variance on dozens of others, and one well documented appeal can open the door to reprocessing the whole group.
Track every recovery by payer. Over time you’ll know which payers underpay repeatedly and which codes are most exposed. That record is useful at your next contract negotiation too.
Making it a monthly routine
Give this job a name and a person. “The billing team handles it” is how it never gets handled.
Assign an owner. Review the top five payers every month. Keep a simple log: payer, code, variance, claims affected, appeal date, recovery amount. Add payers once the process runs smoothly.
The first audit may be ugly. You may find months of the same CPT code being paid incorrectly. That is frustrating, but it is also exactly why you ran the report. After that, the review turns into a routine check that pays for itself the first time it catches a fee schedule error.
How HARRIS CareTracker makes underpayments visible
This gets much easier when the claim, payment, and reporting data are not scattered across three systems.
HARRIS CareTracker keeps the claim and remittance data together, so staff can see payment variances without exporting reports and rebuilding the analysis in Excel. Payment posting and reporting run in one place, and payer level views show which payers are paying below expected.
When staff can see the variance, they appeal it. When they can’t, it gets written off.
Pull your largest payer. Pick ten common CPT codes. Compare what the contract says to what you were paid. You may not like what you find.
Follow for more on revenue cycle management, automated payment posting, and RCM reporting tools that protect your net collection rate.
Frequently Asked Questions
What is the difference between a denial and an underpayment?
How do I know if a payer is underpaying my practice?
What does CARC code CO 45 mean?
Can a practice appeal an underpayment?
How frequently should a practice audit payments against contracts?
About the Author
Thomas Koehl is a 30 year health technology veteran and currently Director of Marketing at Harris CareTracker. Prior leadership roles at QRS Healthcare Solutions focused on supporting revenue cycle management partners. Following Hurricane Katrina, he served as Director of a large New Orleans medical clinic that delivered care to over 32,000 patients. Koehl has testified before the U.S. House Committee on Energy and Commerce as an expert witness on disaster healthcare delivery. He also volunteers as COO of International Medical Alliance, a nonprofit providing free medical care to impoverished communities in developing countries. He writes about the business, strategy, and human side of health technology for the practitioners and leaders living it day to day.
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