MSO Underpayments: How to Uncover Hidden Revenue

Most MSOs are looking forward to the next year with excitement. 

EY-Parthenon Macroeconomic outlook expects merger and acquisition activity to rise 10%. Declining interest rates and easing regulations are just two tailwinds that will help lucrative partnerships close. 

With entities rapidly changing hands, MSOs can now consider new acquisitions, cost-effective MSO recapitalization opportunities, and overall expansion of revenue and market share. And yet, competition for investment will be tough. It’s more critical than ever to win your best deals from private equity possibly beyond your original investor. To compete, you have to present every last revenue capture opportunity, one of which is healthcare underpayments. Too many MSOs overlook the revenue locked up in underpayments, an often million dollar opportunity. 

A revenue cycle management staffing shortage can make it challenging for busy physician groups and MSOs to effectively pursue underpayments and other financial shortfalls. However, if an investor or partner possesses the necessary staff, technology, and expertise to address these issues, it can significantly enhance the value proposition of your MSO. This increased value can strengthen your negotiating position, potentially leading to more favorable rates and terms in recapitalization or partnership agreements.

Review how and why you can identify and then insist that payers reimburse per the exact amounts agreed to in your contracts. You and your providers have earned this important revenue. 

What are MSO underpayments?

MSO underpayments are instances where management services organizations receive less reimbursement than contractually agreed upon for the healthcare services they manage. These underpayments occur when payers, such as insurance companies, fail to reimburse the full eligible amount for services provided to patients under the MSO's management.

MSO underpayments can result from various factors on both the providers’ and payers’ sides. Common payer errors include inaccurate bundling and downcoding of services, contractual misinterpretations, coordination of benefits issues, payer policy changes, and processing errors. With MSOs responsible for business services, including accurate payment collection, underpayments fall under your purview. 

Healthcare underpayments can be a challenge for MSOs, potentially impacting their financial stability and ability to support the healthcare providers they serve. It takes underpayment identification systems (either extensive manual labor or automation) and recovery processes for healthcare organizations to prove this revenue exists. 

Benefits of an MSO underpayments program

When you cast unrecouped underpayments as potential revenue, don’t forget these additional benefits. With an underpayment recovery program, the investor can:  

• enhance financial performance - Underpayments are particularly valuable because they can be achieved without deploying additional resources or growing the market – a boon for partners and a rationale for higher valuation. Exhibiting effective underpayment management can be a key value driver.

• demonstrate attention to compliance risk and operational efficiency - Regulatory agencies want to see evidence of private equity’s commitment to compliance and revenue cycle efficiency. An underpayments program demonstrates an understanding of healthcare regulations and payer contracts, highlighting the MSO's compliance efforts.

• establish fair market value considerations - As with your MSO, private equity will always have an exit plan. An underpayment program will enhance revenue, adding value to their investment in your MSO. Showing underpayment awareness helps establish that management fees and financial arrangements are in line with fair market value, which is critical for stakeholder confidence.

By effectively showcasing underpayment recovery potential, MSOs position themselves more favorably in recapitalization events, bankruptcy proceedings, or other financial restructuring scenarios, potentially leading to increased stakeholder value.

The money at stake in MSO underpayments

Underpayments can represent significant working capital, an amount many providers now fight for. A study published in Becker’s Hospital Review found providers lose one to three percent of net revenue annually due to underpayments from commercial payers. Another study put the figure as high as 11 percent. Our clients have revealed that their underpayments reach five to seven percent of net revenue – if they even have a grasp on these figures.  

MSOs are often unaware of payer underpayments

A combination of factors contributes to providers being behind on underpayment identification. The complexity of payment systems, with multiple payers offering various plan types, and frequent updates to reimbursement rates and coding requirements, makes it challenging to accurately track and identify underpayments. 

Many practices lack the necessary resources – including staff time – to review and analyze payments against contracted rates thoroughly. Denials tend to take priority in the billing office mostly because they arrive explaining why the claim was denied, a concrete notification that prompts staff to act.

Underpayments, on the other hand, slip under the radar because when a payment comes in, often there’s no time to dig up whether the amount received matches agreed to in the contract. Billers may feel satisfied to get something. 

More providers are demanding the revenue they’ve earned

Healthcare organizations are becoming intolerant of this revenue hit. Recently, physician group TeamHealth won $10.8 million dollars in their underpayments case against UnitedHealthcare. In a similar underpayments case, an arbitration panel of three judges awarded nationwide medical group, Envision Health $92 million, from UnitedHealthcare Group.

When one large orthopedics group with 30 locations unleashed a contract management software solution that identified underpayments, it recouped $10 million dollars. 

In the south, a Louisiana civil court jury ordered Blue Cross to pay $421 million to the St. Charles Surgical Hospital and Center for Restorative Breast Surgery on appeal. In neighboring state Alabama, over 100 hospitals are now suing Blue Cross, claiming a $5 billion loss due to underpayments.  

Providers are done tolerating underpayments in the millions and billions.

Options for underpayment identification

Use your EMR, third-party partners, or contract management software to find and analyze your underpayments. 

EMR underpayment capabilities

Even if your EMR claims to handle underpayment identification, most MSOs and physician groups find they fall far short. In fact, their deficiencies keep us in business. 

Electronic medical record (EMR) systems excel at managing patient health information, while practice management systems (PMS) efficiently handle day-to-day operational tasks. These systems were built to to perfect document handling, and yearly improvements focus on those tasks. EMR engineers have only recently begun incorporating contract management capabilities – a function traditionally associated with revenue cycle management. 

Contract management solutions

Sophisticated contract management software is purpose-built to perform comprehensive analyses of healthcare contracts and fee schedules. These advanced tools handle the complexities of underpayment scenarios and intricate contract details, including annual rate escalations, procedure bundling, exclusions, and account aggregations. By automatically routing payment discrepancies and underpayments to the appropriate staff, these systems streamline the resolution process, eliminating the need for manual reviews or cumbersome spreadsheet management.

A case in point is a five-location ophthalmology group in Minnesota that suspected their EMR was inadequate in detecting underpayments. Upon implementing contract management software, they uncovered that underpayments frequently occurred when payers reimbursed for unilateral treatments despite physicians performing bilateral procedures. It also identified an algorithmic error in the payer's system that affected reimbursements for specific codes or code groups. Furthermore, the software detected instances where payers were using incorrect fee schedules.

By pinpointing these root causes, the ophthalmology group recovered significant revenue and contained labor costs by avoiding additional hires. The software enabled them to identify specific payers, codes, and combinations thereof responsible for underpayments. Through root cause analysis, they implemented permanent solutions to prevent future underpayments.

Contract management software handles a wide range of tasks throughout all stages of healthcare contract lifecycle management, including underpayment identification, analysis and recovery tracking. It also provides contract storage, new templates, renewal alerts, payer performance monitoring and more. 

 These features help organizations streamline their contract processes, achieve a strong negotiation stance, and find revenue recovery opportunities.

Take a quick, self-guided tour through a powerful contract management solution that automatically identifies underpayments and lists them for easy access:

A third-party partner or specialist

Third-party partners or specialists in underpayment recovery use staff with knowledge of complex payer contracts, reimbursement practices, and healthcare regulations. They also unleash proprietary software and advanced analytics. With both, they conduct comprehensive audits of paid claims, meticulously comparing payments received against contracted rates to uncover potential discrepancies.

They conduct thorough claims analyses, identify payment variance trends, manage the complex appeals process with payers, and generate reports that illuminate underpayment patterns. While these critical tasks give MSOs a complete picture of their underpayment, contract management software can carry them all out at a fraction of the price. 

Underpayment recovery services can be expensive, consuming a substantial portion of the recovered net revenue. Moreover, outsourcing this critical financial function can lead to reduced organizational transparency and control over the recovery process.

A third-party partner also risks creating a dependency that may ultimately hinder the MSO’s internal expertise and recovery protocols. It takes a rigorous cost-benefit analysis to determine whether the potential financial gains justify the investment and potential operational challenges involved in hiring from outside.

5 steps to showcase revenue locked up in underpayments 

Prepare to make your underpayment recovery a key draw during your recapitalization. The following steps help you make your case: 

1. Adopt an MSO underpayments entitlement mindset

Get ready to demand your underpayments from payers. They are typically the ones in the wrong. Ground yourself in the idea that you’re doing good work for your practices and for their patients. Serving both is your reason for being. 

While PE-backed MSO involvement with healthcare is sometimes criticized as too profit-driven, solid research reveals that MSOs benefit both providers and patients. 

For instance, a comprehensive JAMA Health Forum study examined the impact of private equity acquisitions on healthcare practices. The research compared 578 PE-acquired practices in dermatology, gastroenterology, and ophthalmology with over 2,800 independent practices in the same specialties. The findings, covering the period from 2016 to 2020, revealed significant improvements in several key areas for PE-acquired practices:

• internal investments, such as new equipment purchases, saw a substantial increase.
• reimbursement rates improved “notably.”
• the number of new and unique patients served grew, as did patient encounters.

Even the Commonwealth Fund concludes that PE-back managed services increase patient volume. 

These results suggest that PE ownership not only enhances the profitability of these practices but also expands their capacity to provide care. Patients benefit from increased access to medical services and a wider range of healthcare options.

This shift not only benefits MSOs and their private equity partners, it will help healthcare organizations make progress modernizing for the digital era, ease staff burdens and provide better, more convenient patient care.

2. Estimate the total underpayment exposure based on historical data and industry benchmarks.

Carrying this task out manually in-house will take significant time.  Emphasize enhanced profitability and increased cash flow. 

You can start with your variance report, but keep in mind that false variances like registration issues, late charges, posting errors, and denials can make your numbers inaccurate. Some areas where the payment variance report misses are: 

• missing charges
• implant and supply definition errors
• pharmacy multipliers
• new/deleted codes
• missing diagnosis
• inaccurate procedure order
• transfer errors
• modifiers
• revenue code alternate logic
• payor-specific edits

Your buyer or investor doesn’t want to learn about these inaccuracies after the deal closes. Investing in software, a specialist, or a partner helps ensure you deliver the accurate data that maintains a positive relationship with them. 

3. Share successful underpayment recovery strategies

Show how these enhance cash flow by ensuring timely and accurate reimbursements. Explain that the healthcare organization’s inability to tackle underpayments is a factor of market conditions (staffing shortage, inexperience with technology.) Develop and highlight opportunities for process reengineering in underpayment recovery  Showcase potential for implementing advanced underpayments analytics tools and revenue cycle management software to enhance efficiency.

4. Calculate future revenue gains based

Base these on improved underpayment identification and recovery processes. A third-party partner or healthcare contract modeling software (often part of your contract management software) can render reliable figures. Most EMRs cannot complete this important task. Make the case that strong underpayment recovery potential supports ongoing financial improvement. 

5. Demonstrate your underpayment recovery system and highlight its scalability

If you don’t have a software system or a partner, consider arranging one to sweeten the deal. Be ready to demonstrate how the software works or share what the software or partner estimates is your underpayment recoupment opportunity. Explain how it can be applied across multiple practices or expanded operations.

By effectively presenting these aspects, MSOs can position underpayment recoupment as a significant value creation lever during the recapitalization process, potentially increasing your attractiveness to investors and boosting your valuation.

Make your underpayment recovery potential a competitive advantage

Showcasing your underpayments can put you over the top in a competitive M&A landscape. By leveraging advanced analytics and robust processes to unlock hidden revenue, you position your organization as more valuable and efficient than competitors, potentially attracting higher valuations and more favorable terms during recapitalization.

Contract management software provides an efficient and economical approach to demonstrating underpayment potential. MD Clarity's RevFind, an automated contract management system, meticulously analyzes payer payments against contracted terms, flagging discrepancies for staff review. Providers can identify and quantify underpayments across multiple dimensions, including payers, CPT codes, locations, and physicians. Furthermore, the system helps detect subtle payment trends and patterns that add up to significant amounts. Additionally, providers use RevFind to track underpayment recovery progress. By uncovering systemic issues, RevFind helps prevent future revenue leakage while centralizing contract management. 

MSOs and physician groups also unleash RevFind’s contract modeling features on proposed payer rate and term changes. Imagine having concrete numbers revealing just how much that percent or two change impacts your revenue. Go into negotiations with confidence once you have this data. 

Schedule a demo to see how RevFind can find and list the amounts payers still owe you. For many of our clients, these sums have been in the millions of dollars.   

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