Medical Billing Denials 1 Payers Tactic to Reduce Costs at Providers

A recent AMA study found that doctors spend 14 percent of the fees they receive from insurance companies and Medicare on the process of collecting those fees, adding more than $200 billion (about ten percent) a year to the nation’s healthcare costs [Lisa Girion, 2008]. Sadly, about 30 percent of over 5 billion claims generated annually, are rejected, and surprisingly, only 50 percent of the rejected claims are ever resubmitted [Walker et al, 2004]. Note that physicians are giving up this revenue in addition to losing revenue because of the annual cuts of allowed fees. (Since 2000, health insurance premiums increased by 73 percent compared to cumulative increases in inflation and wages of about 15 percent. Yet physician’s inflation-adjusted incomes dropped by 7 percent from 1995 to 2003 [Herzlinger, 2007]. )

Why are the costs of collecting the earned fees so high and why, adding insult to injury, do providers often skip resubmitting rejected claims?

Insurance companies would like us to think that billing costs are high because of inefficiencies, and they are quick to blame the doctors for them [Lisa Girion, 2008]: UnitedHealthcare spokesman Gregory Thompson said, “Data show there is often a significant lag time between when services are provided and physician claims are submitted. ” Another often cited reason for delays and underpayments is the time that doctors take to resubmit claims or provide additional information upon insurer’s request.

But a recent AMA’s “report card” shows a wide variance between various payers in terms of payment accuracy and timeliness, ranging from 61 to 87 percent of the time [Bergen 2008]. Such a wide variance in payment accuracy and timeliness across the payers contradicts the “physician’s inefficiency” theory. If this theory was true, then, the more efficient physicians should be losing less money on rejections than others, uniformly across all payers. Conversely, since the largest insurance companies are present in most states and are exposed to vast majority of physicians and their claim delays, the differences in underpayments and denials must be attributed first of all to the differences in payer’s business strategies and processes and not – to inefficiencies in the provider’s office.

For instance, a simple calculation following an example in [Walker et al, 2004] shows that systematic claim denial is beneficial to payers when the cost of rework outweighs the benefit of resubmitting the claim. Let us assume $130 for initial charge, $55 – allowed amount, $29 – service cost, $6 – claim preparation and mail, and $25 – claim rework cost. If the claim is paid in full after contractual adjustment ($75), practice total costs would add to $35 and income – $20. But if the payer denies a part of the claim, say, $30, then the provider has a choice between leaving it alone and losing $10 on the entire incident or reworking it and then taking a chance of losing even more – $35, in case of a repeat denial, or losing $5 if the payer chooses to pay the previously denied part of the claim.

In other words, depending on the claim rework costs, denial amount, and repeat denial odds or claim rework efficacy, it may be in the provider’s best interest to minimize losses by abandoning the denied claim instead of working the denial. Therefore, a rational payer will deny a higher number of claims, counting on the good business sense of the rational provider who will only rework a small subset of the denied claims, specifically those claims that can be justified with a quick cost-benefit calculation such as the aforementioned example. Such rational payer’s behavior explains the AMA findings much better than any inefficiency on the provider’s side.

To justify rework of every denial and to eliminate a financial incentive for payers to deny claims, providers need systems with low claim rework costs and high rework efficacy. To “educate and empower physicians so they are no longer at the mercy of a chaotic payment system that takes countless hours away from patient care, ” (William Dolan, MD, member of AMA board [Japsen, 2008]) requires a leveled playing field for both providers and payers. And leveling the playing field with the payers requires equal footing in terms of strategies, processes, and resources [Lirov, 2007].

1. Bergen, Jane M. von, AMA issues report card on health insurers, Philadelphia Inquirer, June 16, 2008
2. Girion, Lisa, “Failings by insurers and Medicare add more than $200 billion a year to the nation’s healthcare tab, report says, ” Los Angeles Times, June 17, 2008.
3. Herzlinger, Regina, “Who Killed Health Care? America’s $2 Trillion Medical Problem – and the Consumer-Driven Cure, ” McGraw Hill, 2007.
4. Japsen, Bruce, “AMA to rate business practices of health plans, ” Chicago Tribune, June 16, 2008
5. Lirov, Yuval, Practicing Profitability – Billing Network Effect for Revenue Cycle Control in Healthcare Clinics and Chiropractic Offices, Affinity Billing, New Jersey, 2007.
6. Walker, Deborah, Larch, Sara, and Woodcock, Elizabeth, The Physician Billing Process – Avoiding Potholes on the Road of Getting Paid, MGMA, 2004

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