Analysis of Unpaid and Underpaid Healthcare Claims

Understanding the Financial Challenges for Hospital Billings with Commercial Healthcare Plans

Introduction

Hospital billings for commercial healthcare plans often face significant financial challenges due to **unpaid and underpaid claims**. This pervasive issue is a major contributor to revenue cycle leakage for hospitals and can seriously jeopardize their financial stability and ability to provide quality patient care. Experts estimate that hospitals lose anywhere from 1% to 11% of their net revenue to underpayments from commercial payers annually.

Reasons for Unpaid and Underpaid Claims

Unpaid and underpaid claims result from a complex mix of provider errors, payer actions, and administrative inefficiencies.

Provider-Side Errors:

Billing and Coding Errors: Incorrect or incomplete medical codes (such as CPT and ICD-10), outdated fee schedules, or improper bundling or unbundling of services can lead to claims being underpaid or denied entirely.
Inaccurate Documentation: Inadequate or missing clinical documentation fails to support the medical necessity of the services provided, causing insurers to request additional information, which delays payment or results in a lower reimbursement.
Administrative Mistakes: Common administrative errors include failure to obtain pre-authorization, missing submission deadlines, or inaccurate patient demographic and insurance information.

Payer-Side Issues:

Incorrect Application of Contract Terms: Payers may misinterpret or incorrectly apply contract terms, such as using outdated fee schedules or miscalculating the allowed amount, leading to underpayments.
Downcoding: An insurance company may intentionally change a billed code to a lower-paying one, arguing that the service was less complex than what was actually provided.
"Lesser of" Clauses: Many contracts include a "lesser of" clause, which means the payer will reimburse the hospital for the lower amount between the billed charge and the contracted rate. If a hospital mistakenly bills less than the contracted rate, it loses out on revenue.
Systemic Delays and Denials: Some insurance companies employ tactics like requesting excessive, irrelevant documentation or unnecessarily delaying payments to reduce their financial liabilities and increase profits.

Impact on Hospitals

The financial impact of unpaid and underpaid claims on hospitals is substantial and far-reaching.

Revenue Loss: The most direct effect is a reduction in revenue, which can be in the millions of dollars annually for larger hospital systems. This lost income directly affects a hospital's operating margin.
Administrative Burden: Identifying and appealing unpaid and underpaid claims is a labor-intensive process that requires significant time and resources. Hospitals may need to hire dedicated staff or invest in costly software to manage this.
Operational Strain: Reduced revenue and increased administrative costs can force hospitals to delay or cut back on critical investments in new technology, facilities, and staff, which can ultimately impact the quality of patient care.
Patient Financial Burden: When a claim is underpaid, the remaining balance can sometimes be shifted to the patient, leading to surprise medical bills, billing disputes, and a loss of trust between the patient and the provider.

Strategies to Address the Issue

Hospitals can take several proactive steps to minimize unpaid and underpaid claims and improve their revenue cycle management.

Robust Contract Management: Regularly review and understand the details of all commercial payer contracts. Utilize contract management software to automatically compare payments received against contracted rates to quickly identify discrepancies.
Enhance Billing and Coding Processes: Ensure staff receives continuous training on the latest coding guidelines and payer-specific policies. Implement automated systems and AI-powered software to improve the accuracy of documentation and coding, reducing the chance of human error.
Improve Claims Tracking: Establish a system for tracking all claims from submission to payment. This allows staff to quickly identify underpaid or denied claims and begin the appeal process promptly, as payers often have strict deadlines for resubmissions.
Verify Patient Insurance: Verify a patient's insurance coverage and eligibility before services are rendered to confirm that the planned procedures are covered and to collect co-payments and deductibles upfront.
Negotiate and Advocate: Hospitals should advocate for fair reimbursement rates during contract negotiations and, when necessary, be prepared to challenge payers on systemic underpayment issues, including through legal action.

Key Statistics and Data

The combined effect of these trends is a major strain on hospitals' financial health. An AHA report released in late 2024 detailed how rising costs, particularly for labor, drugs, and supplies, combined with inadequate reimbursement from both government and commercial payers, have created "an environment of financial uncertainty." The report also highlighted that payments for certain services, like outpatient burn and wound care, were on average **43% below costs** across all payers. This "cost of caring" deficit is exacerbated by revenue leakage from unpaid and underpaid claims, forcing many hospitals to operate on thin or negative margins.

The administrative burden of managing these claims is also a significant factor. Healthcare billing and insurance-related activities cost an estimated **$99,000 per medical provider per year**, representing nearly **$1 in every $7 collected** by a medical facility. This administrative waste, driven in part by commercial payer practices, diverts resources that could otherwise be used for patient care or strategic investments.

Key Data Points:

Significant Revenue Leakage: Hospitals lose an estimated **1% to 11% of annual net revenue** due to underpayments and denials, with specific estimates for hospitals at **4% to 5%**. [1, 2, 3]
Soaring Denial Rates: In Q1 2023, **15% of inpatient and outpatient claims were initially denied** by commercial insurers. Commercial payer denials increased by **20.2%** between early 2022 and mid-2023. Overall, **5% to 10% of claims are denied annually**, costing up to **$262 billion**, with **65% of denied claims never resubmitted**. [4, 5, 6]
Costs of Appealing Claims: Reworking or appealing a single denied claim costs hospitals approximately **$181**. **95% of hospitals** report increased staff time spent on prior authorization. [7, 8]
Payment Delays: In Q1 2023, **one in three inpatient claims** to commercial insurers were not paid for over three months. [4]
Litigation and Legal Action: A **$2.8 billion settlement plan** from Blue Cross Blue Shield was approved in late 2024 to address underpayment disputes with Alabama hospitals. [9]

References and Citations

MD Clarity. "Healthcare Underpayments: A Guide for Providers." July 16, 2025.
CapMinds. "Reducing Billing Errors and Revenue Leakage in Mid-Sized Practices." May 8, 2025.
AKASA. "How To Improve Healthcare Underpayments." Retrieved August 19, 2025.
AHA News. "Report: Hospitals struggle to collect payments from commercial insurers." May 22, 2023.
Fierce Healthcare. "Payers' increasing claims denials, delays 'wreaking havoc' on provider revenue cycles." December 14, 2023.
Thoughtful AI. "RCM Statistics: A Data-Driven Look at Healthcare Finance." March 12, 2025.
Journal of AHIMA. "Claims Denials: A Step-by-Step Approach to Resolution." April 25, 2022.
American Hospital Association (AHA). "Survey: Commercial Health Insurance Practices that Delay Care, Increase Costs." Infographic, November 1, 2022.
Whatley Kallas. "The AHA Issues Report Showing Financial Pressures On Hospitals Due To Increased Costs And Inadequate Reimbursements." August 12, 2024.
American Hospital Association (AHA). "New AHA Report: Hospitals and Health Systems Continue to Face Rising Costs, Economic Pressures." May 2, 2024.
Adonis.io. "Why Medical Providers Struggle with Revenue Leakage." Retrieved August 19, 2025.