Payor Contracting

What is Payment Variance in Healthcare

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For hospitals, healthcare clinics, and private practitioners, underpayments and invisible denials are a silent revenue killer.

While healthcare underpayments, also known as payment variance, from public and private insurers have been negatively impacting hospitals for decades, the situation has gotten out of hand in recent years. In 2017, just Medicare and Medicaid reimbursements alone fell $76.8 billion short of the actual costs of treatment.1

As a healthcare provider, you can’t afford to maintain that type of revenue loss—not when budgets are tightening and reimbursements are shrinking. Instead, you must take steps to identify the root causes of payment variance and then adjust your payor contract management strategies accordingly. Here’s how.

What is Payment Variance?

Underpayments in healthcare represent the difference in a claim’s expected payor value and the payments provided.

While they’re often referred to as underpayments, it’s worth noting that not all payment variance results from an underpayment. For example, there are sometimes overpayments.

Payment variance happens more frequently than you might expect. The Medical Group Management Association (MGMA) estimated that insurers frequently underpay healthcare providers by approximately 7-11%.2 And, according to Health Tech Zone:3

“The American Medical Association found in their Health Insurance Report Card that, with a complex reimbursement and coding system, the accuracy rate in payments among insurance companies has dipped as low as 77 percent.”

This problem isn’t going to get better on its own. The rapidly changing healthcare landscape will  likely only exacerbate the issue, especially as providers need to deal with:

  • Endless claim denial cycles
  • Changing payment methodologies
  • Increased payor scrutiny
  • Cash protection strategies
Provider credentialing

What Causes Payment Variance?

There are several reasons for payment variance from both sides of the payor provider relationship.

  • Provider mistakes
    • Pricing claims and using the wrong contract terms
    • Incorrectly calculating allowed amounts
    • Interpreting contract terms differently from the payor
    • Not catching underpayment early
  • payor mistakes
    • Submitting bills incorrectly
    • Submitting bills without the necessary documentation
    • Taking too long to identify billing errors
    • Interpreting contract terms different from the provider  

You must take the time to analyze your practice’s specific causes of payment variance. From there, you can see how they can be fixed or avoided going forward. This will also help you know whether you’re responsible for the underpayment or the payor is.

The Unaccounted Costs of Payment Variance

Small errors add up. Even billing issues that are as minor as a $5 discrepancy can result in tens of thousands of dollars in underpaid claims throughout the year.

In addition to the loss of revenue caused by underpayments, providers have to spend money and resources identifying and fixing the billing problems. You also have to factor in the time it takes to rework erroneous claims. Because of this hassle, a significant percentage aren’t reworked and stay underpaid.

But those costs aren’t the only negative ramifications of payment variance. The most significant issue may actually be the damage to your reputation with patients.

Patients are already annoyed by the high costs of service and the lack of price transparency. Those feelings are only magnified when they receive a corrected bill weeks, if not months, later.

Although they won’t be happy either way, patients will be particularly perturbed if the cause of the payment variance was your fault.

When this occurs, it can lead to poor satisfaction ratings or even cause a patient to leave your practice.  

How To Avoid Underpayments

Although you can’t eliminate all payor variance sources, you can address many of the root issues to stem this revenue leakage. Steps you can take to optimize your payor contract management include:

Understand The Contracts and What payors Owe

The burden of proof for insurance company underpayments falls on the provider. The onus is on you to point out the insurer’s contractual obligations and then demonstrate how they failed to satisfy them. But understanding your contracts and the terms within can help avoid many of the mistakes that cause payment variance.

One of the most significant causes of this results from payors or providers using the wrong contract terms. While there’s little you can do about payor mistakes in this area, you can prevent many of the errors from your billing office by ensuring that contracts and fee schedules are accurate and up-to-date. As Becker’s Hospital Review notes:4

“Make the gray areas black and white. The best form of prevention is to make sure that contract terms are clear and unambiguous, and can be paid consistently and accurately with automated systems. Many seemingly straightforward contract terms can be interpreted differently by the hospital and payor.”

A significant aspect of this involves monitoring payor contracts, especially contract adjustments, which can happen for several reasons. Typically, they are caused by procedure codes and modifiers like:

  • Multiple procedure payment reductions
  • Provider credentials
  • Partial procedures

Document Everything, Accurately

Being able to cite the precise contract terms and billing info as proof of underpayment will increase the likelihood of a successful case. Documenting how calculations are handled and bills are charged for each line of the claim will force the insurer to illustrate how they came to a different billing figure.

Often, you can reuse a successful case of underpayment, citing that in later requests for additional payment on a group of claims stemming from the same problem. But if you don’t have all of this information documented and categorized, you’ll find yourself in a continuous uphill battle with insurers over payment disputes.

Identify Payment Variances Immediately

Most states allow payors a 30-45 day window to pay their claims. As a result, you may have to wait weeks before you even realize that you weren’t paid in full.

Underpayments represent lost revenue and time. And those compound the further away you get from the billing date. The longer you wait to address underpayments, the less likely your case will end agreeably for either party. Therefore, you must streamline your review and appeals process:

  • Review all payments as soon as possible – You aren’t allowed to bill patients until you’ve confirmed that the insurer has paid the bill in full. So, you should be reviewing bills immediately after they’ve been received. This allows you to cross-check line item claims against fee schedules, contract terms, and benefit explanations.
  • Group the codes and modifiers that tend to result in underpayment – To ensure that the issue doesn’t keep popping up, you need to identify trends in payment variance. As mentioned, there are often common issues that will create multiple underpayments. So, once you identify a common culprit, you can look at payments from other payors for the same underlying issue.
  • Rank and segment payors – If certain payors regularly underpay, it’s important to segment them and address their issues immediately. You can reach out to your contract representative or payor contract manager to request that the payment errors are logged and then fixed going forward.

Bill Accurately

Inaccurate bills create a significant headache for both parties. If it continues to happen, it can lead to payor disillusionment and frustration, causing them eventually to look elsewhere for healthcare services.

If you bill accurately the first time, you can prevent much of the hassle and confusion. This means appealing before you bill so patients can stay entirely out of the payment variance debate.  

Similarly, if you notice a patient has overpaid, notify them and the insurer immediately with an explanation of charges. In most states, you’re legally required to return overpayments. So, if you believe a claim was overpaid, contact the insurer and request them to reprocess the claim and provide a request for a refund.

PayrHealth: Helping Practices Solve payor Contracting

Payment variance can be a slow but steady stream of revenue loss. Left unaddressed, it could spell the difference between a successful healthcare practice and one that has closed its doors.

And underpayments don’t just negatively impact your revenue. Frequent billing misunderstandings and errors can result in patient frustration and turnover, especially if you wait to remedy the problem.

While managing and mitigating payment variance is a matter of significant importance, it’s only a small aspect of contract management. Because there’s so much involved, sometimes, you may need a little help.

This is where PayrHealth can make the difference. As a managed care contracting solution, we strategize with providers to get better contracts and rates. As your advocate, we can either support your contracting team or handle all of those services on your behalf.

Are you ready to drive growth and revenue? We are. See our blog for more tips on how to grow your practice, and contact us today.


  1. Revcycle Intelligence. Medicare, Medicaid Reimbursement $76.8B Under Hospital Costs.
  2. Becker’s Hospital Review. 3 keys to staying on top of your underpayments.
  3. Health Tech Zone. Three Smart Ways to Examine Your Payment Variances.
  4. Becker’s Hospital Review. Identifying and Collecting Underpayments: 7 Ways to Increase Your Success.

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