Underpayments occur when insurance companies pay less than the contracted amount for approved services, creating hidden gaps in your practice’s revenue. A claim for a routine office visit might come back $10 short, or a procedure reimbursed at 80% of the agreed rate—these small discrepancies slip through unnoticed at first.

Over time, they compound into major losses. A mid-sized practice might lose 5-10% of annual collections—tens or even hundreds of thousands of dollars—to underpayments, pulling funds away from staff salaries, equipment upgrades, or expanding services. This steady drain affects cash flow, forcing tough choices just to keep doors open.

This article explains underpayments clearly, including how they differ from denials and common triggers like coding errors or contract mismatches. You’ll find actionable strategies for prevention, from better documentation to payer audits, plus expert help options to recover lost revenue and secure steady payments.

What Is an Underpayment in Medical Billing?

An underpayment in medical billing happens when a payer sends less money than your contract allows for a clean, approved claim. Unlike denial claims, which reject a claim outright and send it back for fixes, or a rejection, which never even reaches the payer due to errors like missing data, underpayments slip through as partial payments.

Payers might underpay because of their own fee schedule changes, applied discounts you didn’t agree to, or simple posting mistakes on their end. These issues often hide in the fine print of your Electronic Remittance Advice (ERA), making them tricky to spot without close review.

The key difference matters: denials and rejections demand rework and resubmission, but underpayments require comparison against your contract terms to claim the difference. Catching them quickly turns quiet losses into recovered revenue for your practice.

Common Reasons Underpayments Happen

Underpayments sneak in through everyday billing glitches that add up across high claim volumes. Spotting these patterns helps practices plug revenue leaks before they grow.

Here are the most frequent culprits:

• Incorrect coding or missing modifiers: Using a lower-level CPT code than warranted, or skipping key modifiers like -25 for separate E/M services, triggers automatic payer reductions. A simple code mismatch on 10% of claims can cost thousands monthly.
• Fee schedule mismatches: Payers quietly update their allowed amounts without notice, paying out-of-date rates. If your practice bills off old contracted fees, every claim pays short until you catch it.
• Contractual adjustments applied incorrectly: Payers over-apply discounts, bundling, or write-offs not in your agreement. A procedure coded correctly still comes back $50 light because they misread the fine print.

Payment posting errors round out the list—staff enter partial amounts wrong or miss line-item details in the ERA. These human slips, combined with payer-side mistakes, create silent shortfalls. Regular reviews turn these fixes into steady revenue gains for your practice.

How Coding and Documentation Impact Underpayments

Coding errors and weak documentation quietly drive many underpayments, turning approved services into lost revenue. When bills use the wrong CPT or ICD-10 codes, payers pay less—or nothing—because the submitted work doesn’t match the contracted rates for higher-level services.

Undercoding tops the list: choosing 99213 instead of 99214 for a complex visit means accepting $50 when $75 was allowed. Over time, this habit drains thousands, especially in busy practices. Accurate coding captures the full effort of your care, from time spent to procedures performed.

Documentation makes or breaks it all. Payers scrutinize notes for medical necessity—detailed histories, exam findings, and plans justify higher codes and modifiers like -59 for distinct services. Strong records also defend against bundling denials, ensuring every claim pays what it should.

CPT, ICD-10, and modifiers work together as your revenue shield. Pair specific diagnosis codes with procedure codes, add modifiers when services stand apart, and watch payments align with contracts. Teams trained on annual updates avoid these pitfalls, keeping your collections strong and predictable.

Importance of Verifying Payer Contracts and Fee Schedules

Outdated payer contracts and fee schedules quietly trigger many underpayments, leaving practices to chase money they’re rightfully owed. When your billing team works off old allowed amounts, every claim pays short until someone notices the disconnect.

Why outdated fee schedules cause issues: Payers update reimbursement rates yearly—or mid-year without notice—based on negotiations, CMS changes, or market shifts. If your practice still bills expecting last year’s $100 rate for a procedure now contracted at $120, you leave money on the table with each submission.

Matching allowed amounts to contracts: Review every payer agreement annually, pulling the exact fee schedule for your CPT and HCPCS codes. Cross-check against Electronic Remittance Advice (ERA) payments to spot variances, like unexpected bundling or write-offs not in your terms.

Monitoring payer reimbursement trends: Track patterns by payer—Blue Cross might pay 95% of contracted rates consistently, while another payer lags at 85%. Use reports to flag drifts early, renegotiate weak contracts, and adjust billing strategies for maximum recovery.

This step takes effort upfront but prevents chronic shortfalls. Updated contracts mean predictable cash flow, fewer appeals, and revenue that matches the care you deliver. Practices that verify regularly see collections rise 5-15% without adding patients.

Tracking and Identifying Underpayments Early

Catching underpayments right away stops small issues from turning into big revenue losses. Once claims post, your team has a short window to spot and fix discrepancies before payers close the books.

Accurate payment posting forms the foundation. Train staff to enter every line item from the Electronic Remittance Advice (ERA) or Explanation of Benefits (EOB) exactly—no shortcuts or assumptions. A missed $15 adjustment on one claim multiplies across hundreds.

Using EOBs and remittance advice correctly: Don’t just file them away. Compare each payment against your fee schedule and contract terms, line by line. Look for patterns like consistent short pays on specific codes or payers, which signal systemic problems.

Identifying repeat payer issues: Run monthly reports flagging underpayments by payer, CPT code, or provider. Tools like practice management software highlight outliers—say, one insurer routinely discounting modifier -25 services. Address these with targeted appeals or contract reviews.

Early tracking turns reactive billing into proactive revenue management. Practices that review payments weekly recover up to 90% of underpayments, boosting cash flow without extra work. Start simple: dedicate 30 minutes weekly to ERA audits for immediate wins.

Best Practices to Prevent Underpayments

Preventing underpayments starts with strong habits at every stage of the billing cycle. These steps keep claims clean, payments accurate, and revenue flowing steadily into your practice.

Follow these key practices:

• Front-end verification: Confirm insurance eligibility, benefits, and authorizations before services begin. Use real-time tools to catch coverage gaps or deductibles that lead to short pays later.
• Clean claim submission: Double-check coding, modifiers, and documentation matches before sending. Scrub claims through software to flag errors—90% of underpayments tie back to avoidable submission mistakes.
• Regular internal audits: Review 5-10% of payments monthly against contracts and fee schedules. Look for patterns in short pays, then retrain staff or appeal systematically.
• Timely follow-ups with payers: Dispute underpayments within 30-60 days, when most payers still accept adjustments. Use tracked templates citing contract terms for faster resolutions.

These habits work together to cut underpayments by half or more. Start small—pick one or two to implement this month—and build from there for lasting revenue protection. Your practice deserves every dollar earned.

How MedAce Helps Providers Prevent Underpayments

Managing underpayments can overwhelm busy practices, but MedAce steps in as your dedicated billing partner to spot issues early and recover every dollar owed. We handle the heavy lifting with expert reviews, ensuring your revenue matches the high-quality care you provide.

Our team conducts thorough billing reviews and follow-ups. We audit ERAs and EOBs daily against your contracts, flagging underpayments by payer or code pattern—like missed modifiers or fee schedule drifts. When we find shortfalls, we appeal immediately with contract citations and documentation, often recovering 80-90% within weeks.

Coding accuracy and payer communication set us apart. Certified coders ensure CPT, ICD-10, and modifiers align perfectly with your notes, preventing undercoding from the start. 

We negotiate directly with payers on your behalf, resolving disputes faster than in-house teams can manage, while tracking trends to strengthen future contracts. With MedAce, underpayments become a thing of the past. 

Practices see collections rise steadily, cash flow smooths out, and you focus on patients—not paperwork. Reach out for a free revenue audit—we’re here to protect your practice and boost your bottom line.

Frequently Asked Questions

1. What exactly is an underpayment in medical billing?

An underpayment happens when an insurance company approves your claim but pays you less than the amount you both agreed upon in your contract. Unlike a “denial,” where they pay nothing, an underpayment is a partial payment that often goes unnoticed because it looks like a successful transaction at first glance.

2. Why do these underpayments happen?

They usually happen for three reasons: simple human errors (like a staff member typing in the wrong code), outdated records (billing based on last year’s prices), or the insurance company applying “hidden” discounts or rules that aren’t actually in your contract.

3. How much money do practices usually lose to this?

On average, a mid-sized practice can lose between 5% and 10% of its total annual collections. While a $10 or $20 shortfall on one claim seems small, it can add up to tens of thousands of dollars over the course of a year.

4. How can I tell if I’m being underpaid?

The best way is to compare your “Explanation of Benefits” (EOB) or “Electronic Remittance Advice” (ERA) directly against your signed payer contracts. If the “allowed amount” on the paperwork is lower than what your contract says, you’ve found an underpayment.

5. Can I get the missing money back?

Yes, but you have to act fast. Most insurance companies have a “window” (usually 30 to 60 days) where you can appeal a payment. You’ll need to send a formal dispute that points to the specific part of your contract showing they paid the wrong rate.

6. What is the easiest way to prevent this from happening?

The most effective steps are keeping your fee schedules updated every year and doing a “mini-audit” once a month. By checking just 5% of your claims against your contracts, you can spot patterns—like one specific insurance company always shortchanging a specific procedure—and fix the root cause.