Published: Apr 10, 2023
Updated: Feb 14, 2025
Revenue Cycle Management

Revenue Leakage in Healthcare: Sources, Impact, and Fixes

Rex H.
Rex H.
15 minute read
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What if just one of your CPT codes was costing you hundreds of thousands in revenue leakage? 

That was the case for an urgent care management services organization with 290 providers in 7 states. It took dedication and intentional management to recoup their first $160,000, but they got it back in just three months. Better yet, the payers involved adjusted their work so that accounts using this CPT code would be paid correctly going forward. 

What if you found evidence that your biller wasn’t finding the payer underpayments they promised? When Radiology Imaging Associates got wise and added a more accurate healthcare contract management software tool to examine underpayments, they identified $1.1 million from just one payer. 

Healthcare organizations lose billions of dollars annually due to uncollected, underpaid, and denied payments. Understanding the causes, impacts, and prevention strategies associated with revenue leakage becomes crucial. To that end, here's an overview of revenue leakage in the healthcare industry and some strategies to counter it.

What is revenue leakage in healthcare?

Revenue leakage is any loss of revenue that has been legally earned but cannot be collected. Both payers and patients fail to pay agreed-upon rates for a myriad of reasons. It takes high-level revenue cycle efficiency to – if not stop – at least limit revenue leakage. 

Revenue leakage can amount to tens of billions of dollars annually across the industry, affecting providers' ability to invest in new technologies, hire, deliver optimal patient care, and – most importantly – grow. Revenue leakage often isn't a sudden event. Instead, it's a subtle, persistent leak, seeping away revenue through countless inefficiencies and oversights in the healthcare system.

6 sources of healthcare revenue leakage and their fixes

Explore the primary sources of revenue leakage in healthcare and practical solutions to plug these financial gaps.

Revenue leakage source #1: coding and billing errors

Practices that use manual data and billing entries are the most prone to inaccurate coding, especially when they have a large patient base. Manual processes are prone to human error, so healthcare organizations should consider investing in data automation tools to avoid mistakes in coding and billing procedures. Data entry errors can reach 4%, leading to significant financial consequences. According to a recent National Library of Medicine study, titled "Impact of Inaccurate Clinical Coding on Financial Outcome" 26.8% of the primary diagnoses they examined were incorrectly coded. (It’s interesting to note that incorrect medical coding was more prevalent in emergency departments, operating rooms, and obstetrics and gynecology facilities.)

The Fix: training, outsourcing, software

Educate staff on proper coding, billing, and documentation

Missing data and invalid codes are documentation mistakes often caused by human error. Educate your staff on the proper coding and billing processes, even if you intend to automate most processes. The training should be ongoing to keep your employees updated about current issues and how to prevent them.

Outsourcing

Still, medical coding trips up even your top coders. Some healthcare organizations have good results outsourcing this onerous job to expert medical billers and coders. In addition to knowing all long-standing codes, these professionals must stay current with the yearly changes. Just last year, the AMA made 230 additions, 49 deletions, and 70 revisions to ICD and CPT codes. 

In addition, specialty coders can alleviate headaches. Certain medical specialties like cardiology, nephrology, orthopedics, radiology, and pediatrics can be tough to code. In these cases, the specialized experience outsourced coders bring can be invaluable. 

Software 

While experienced coding specialists bring meaningful expertise and experience, so, too, does software. Proper coding conventions and guidance in complex cases are engineered into advanced coding software. Serving as a real-time guide, an intelligent system reduces mistakes.

The intricacies of medical coding extend beyond simple data entry. Challenges include:

  • Upcoding and downcoding: selecting codes that either overstate or understate the level of service provided.
  • Bundling: combining multiple procedures or services under a single code when they should be billed separately.
  • Modifier usage: Applying appropriate modifiers to codes to provide additional information about the service rendered.

It takes a nuanced application of codes and modifiers to represent treatments in a manner that payers can comprehend and approve. Robust coding and billing software can bring these advantages. 

Revenue leakage source #2: bad debt

Recently, the rate of patient collections fell from 54.8% to 47.8%. For the first time, patients are paying less than half of what they owe their healthcare organizations. 

Sound exaggerated? 

This revenue cycle benchmarking report is based on an analysis of 3 million fully resolved claims from patients with commercial insurance.

Research from Crowe LLP’s study, “Hospital collection rates for self-pay patient accounts” reveals:

  • the number of patients who owe more than $7,500 has more than tripled
  • The number of patients who owe more than $14,000 quadrupled 
  • Providers collected just 32% of claims between $5,000 and $7,501  
  • Providers collected just 17% of claims between $7,501 and $10,000  

Bad debt at healthcare organizations is rising. A Kaufmann Hall National Hospital Flash Report reveals a 14% increase in bad debt and charity care just last year. The industry standard benchmark for Bad Debt Percentage should remain around 2-3% of net patient revenue. 

Bad debt occurs when patients are unable or unwilling to pay their outstanding medical bills. This issue is often exacerbated by factors such as:

  • Inadequate insurance coverage
  • High-deductible health plans
  • Rising out-of-pocket costs

Healthcare organizations are frequently left with the challenging task of collecting unpaid balances, which can be time-consuming and resource-intensive.  

The fix: upfront collections, patient estimate software, patient-centric financing

Upfront collections

Collecting payments from patients for services at the time of their visit or even before the service is rendered is becoming more widespread. Aim to collect as much as possible at or before the point of service, as the likelihood of collecting payments decreases once the patient leaves the facility. 

Patients are increasingly proactive about understanding their financial responsibilities in healthcare. A study by InstaMed found that 80% of patients desire to know their payment obligations before receiving care. This trend reflects the growing consumer mindset in healthcare, where patients, facing larger portions of their medical expenses, seek transparency to better manage their finances.

For healthcare providers, this shift presents an opportunity to improve their revenue cycle. By offering pre-service estimates, they can:

  • meet patient expectations for financial clarity.
  • reduce the likelihood of post-service payment issues.
  • improve overall patient satisfaction.

Importantly, providers are realizing that upfront discussions about costs can be approached as a service to patients rather than an aggressive collection tactic. This perspective allows for more open and constructive financial conversations, benefiting both the patient and the provider.

Benefits of Pre-Service Estimates

  • Improved patient experience: patients appreciate knowing costs in advance, which can reduce anxiety and improve overall satisfaction.
  • Better financial planning: patients can prepare for expenses, potentially reducing the risk of default or delayed payments.
  • Increased collections: providers may see improved collection rates when patients are informed and prepared for their financial responsibilities.
  • Enhanced trust: transparency in pricing can build trust between patients and healthcare providers.

By embracing patient payment estimates, healthcare organizations can align their practices with patient preferences while potentially improving their financial outcomes.

Patient payment estimate software

To generate accurate upfront patient payment estimates (a.k.a. good faith estimates) healthcare providers are turning to advanced technological solutions. Innovative platforms can accurately calculate patient financial responsibility and optimize the collection process. These cutting-edge systems offer several key benefits:

  • precision in cost estimation: they provide patients with accurate, timely estimates of their out-of-pocket expenses.
  • streamlined workflows: they simplify the collection process for both patients and healthcare staff.
  • enhanced patient experience: By offering clear financial information upfront, these systems help reduce anxiety and uncertainty for patients.

When combined with a compassionate and well-informed approach from healthcare providers, these technological solutions can significantly improve the overall patient experience. Patients gain the financial clarity they seek, while providers benefit from improved collection rates and patient satisfaction.

Take a quick tour of how you can simplify upfront collections and estimate generation here:

Patient-centric payment plans and methods

Patients today expect the following features in their healthcare payment experience:

Flexible payment plans which:

  •   accommodate higher out-of-pocket costs
  •   prevent credit damage
  •   foster patient loyalty
  •   utilize automated solutions for efficient management

Diverse payment methods:

  • include digital wallets (Apple Pay, Google Pay, PayPal, Venmo)
  • offer competitive advantage through payment flexibility

User-friendly interfaces:

  •  provide 24/7 online portals for payments
  •  ensure intuitive design with easy access to provider contact information
  •  encourage timely payments through ease of use

Price transparency:

  •  offer clear, upfront cost estimates
  •  reduce billing confusion and dissatisfaction
  •  address the 41% of patients dissatisfied with current billing practices

These features align with modern patient expectations, improving satisfaction and payment rates.

Revenue leakage source #3: denied claims

Recent data reveals a concerning trend in healthcare claim denials:

A recent survey of 516 hospitals across 36 states found that the denial rate has increased to 15%. Only a year ago, Optum found the average private payer denial rate was 12%. This rise aligns with industry sentiment, as 75% of healthcare organization executives reported denials increasing, according to research published in Revenue Cycle Intelligence.

Denials can consume up to 5% of net patient revenue, resulting in losses amounting to hundreds of thousands and even millions of dollars for healthcare providers. Consequently, addressing claim denials has become a top priority for revenue cycle executives in managed service organizations (MSOs) and physician groups.

This escalating issue underscores the critical need for healthcare organizations to implement effective strategies to mitigate denials and protect their financial health.

The fix: denial management and prevention systems

We go into depth on the six critical steps for proactive denial management here. Start by conducting a comprehensive analysis of denial patterns. Identify the most frequent types of denials, understanding which payers are more likely to deny specific procedures. Examine denial rates across different facilities and providers. By gathering and analyzing this data, organizations can uncover both internal errors and potential payer mistakes. 

This detailed insight allows for targeted interventions, enabling staff to address root causes, improve billing practices, and challenge inappropriate denials. Ultimately, this data-driven approach leads to more efficient revenue cycle management and reduced financial losses due to denials.

Of course, the best way to manage denials is by preventing them in the first place. A high first-pass clean claims rate limits denials, but it’s not always easy to achieve. You can improve your revenue by delegating the staff to examine root causes, thereby avoiding denials issue by issue. Short on staff? Use software to manage denials

Revenue leakage source #4: underpayments

Razor-thin provider margins have pushed CFOs and revenue cycle leaders to pursue earned revenue once ignored. Where denials deny the whole amount – prompting action – underpayments return something. And for too long healthcare organizations have not had the staff or bandwidth to counter sub-par payments. 

But attitudes are changing:

  • Alabama hospitals cried foul when Blue Cross Blue Shield paid them less than amounts agreed to in contracts. Recently, a judge approved a settlement stipulating BCBS pay $2.8 billion in underpayments to Alabama hospitals and healthcare organizations. This record-setting amount (and hopefully precedent-setting ruling) mandates BCBS adopt new business practices to resolve claims more fairly. A win for providers!  
  • When Envision Healthcare refused to settle an underpayments case, an arbitration panel ordered UnitedHealthcare to pay them $91.2 million. The panel proved UnitedHealthcare violated their reimbursement agreement.
  • When a 120+ physician orthopedics group with 30 locations and two ambulatory surgery centers adopted an automated underpayment identification and contract management solution, they found $10 million in underpayments

Many more examples exist. Healthcare organizations are no longer taking underpayments sitting down. 

Healthcare underpayments occur when providers receive less reimbursement than contracted or eligible amounts for services rendered. These partial payments, distinct from outright denials, can significantly impact a provider's financial health. Common causes include contract misinterpretation, coding errors, and incomplete documentation.

The fix: underpayment systems or software

Traditional methods like payment variance reports often fail to catch all discrepancies. In response, providers are increasingly adopting advanced revenue cycle management systems. 

These solutions digitize contract terms and fee schedules, automatically comparing them against incoming payments. By leveraging these tools, providers can identify underpayments across various dimensions - payer, CPT code, location, or physician - through comprehensive visual dashboards. This technology-driven approach enables more accurate detection and resolution of underpayments, ultimately safeguarding provider revenue.

Take a quick, self-guided tour through a powerful underpayments identification tool that automatically alerts you to payment variances:

Revenue leakage source #5: improper documentation

Improper documentation causes revenue leakage in the healthcare industry through several channels. Inaccurate or incomplete documentation leads to billing and coding errors, which may result in denied or underpaid claims.

Improper documentation also creates difficulties in tracking and monitoring patients' accounts. This makes it challenging to collect payments and manage accounts receivable efficiently. 

The fix: verification, eligibility checks, your EMR

Documentation errors can originate from various sources, including outdated patient information on IDs and insurance cards. Regardless of the error's origin, healthcare providers ultimately bear the financial burden.

To minimize documentation errors and improve claim acceptance:

  1. Verify patient information meticulously:
    • Double-check name spelling using multiple forms of ID
    • Confirm date of birth, a critical identifier for insurers
    • Update patient address at each visit
    • Explain to patients that thorough verification prevents unexpected bills
  2. Conduct thorough insurance eligibility checks:
    • Verify coverage 1-2 days before appointments
    • Allow time for updates or alternative payment arrangements
  3. Ensure accurate insurer details:
    • Verify correct payment addresses, especially for large carriers
  4. Leverage EMR system features:
    • Utilize built-in error detection capabilities

By implementing these strategies, healthcare providers can significantly reduce documentation errors, improve claim acceptance rates, and enhance their revenue cycle management.

Revenue leakage source #6: compliance breaches

Federal healthcare contract compliance violations can lead to severe financial consequences for healthcare organizations. Two notable examples illustrate the gravity of compliance breaches:

Montefiore Medical Center Case Study

In a significant breach of patient privacy:

Outcome:

  • HHS pursued action against the medical center due to the employee's limited financial capacity.
  • Significant HIPAA Security Rule violations were uncovered.
  • The case concluded with a $4.75 million settlement in penalties.

This case underscores the critical importance of robust compliance measures and the potential for substantial financial repercussions when these measures fail.

Heritage Valley Health System 

Another illustrative case involved Heritage Valley Health System:

  • A ransomware attack prompted an investigation by the HHS Office for Civil Rights (OCR)
  • The incident resulted in a $950,000 fine and a formal reprimand from the OCR

These examples highlight the serious consequences of compliance failures in healthcare, emphasizing the need for stringent security measures and adherence to federal regulations.

Noncompliance with industry regulations and standards can expose healthcare organizations to legal and financial penalties, such as fines and reimbursement reductions. These penalties can significantly affect your organization's revenue stream. Compliance issues may also damage your reputation, potentially leading to a loss of patients and contracts with insurance companies or other partners.

The fix: contract management software

Healthcare contract management software plays a crucial role in mitigating compliance risks and potential penalties in healthcare organizations. These advanced tools offer several key benefits:

  • Process automation: streamlines complex compliance procedures, reducing human error.
  • Enhanced tracking: provides comprehensive monitoring of contractual obligations and deadlines.
  • Regulatory compliance: Ensures adherence to critical regulations like HIPAA.
  • Payer agreement management: Simplifies the handling of complex payer contracts.

This technology-driven approach strengthens the organization's ability to maintain regulatory compliance in an increasingly complex healthcare environment. Read more about healthcare contract compliance here. 

How To Prevent Revenue Leakage in Healthcare

You can't afford to neglect revenue leakage, whether you are a small practice or an established hospital. Once you know where the leaks are happening, you should take action to stop them.

Here are practical preventative strategies to consider.

Implement a robust revenue cycle management (RCM) system

RCM is the process of tracking patient revenue from their initial interaction with the hospital to the time they pay the final balance. Since manually managing the revenue cycle process is challenging, RCM software was created to automate and streamline many workflows. The system tracks the revenue cycle of every patient and identifies any billing issues that could result in revenue leakage.

A good RCM system should be able to:

  • verify insurance
  • create patient bills
  • manage claims submission and denials
  • Report payments

Invest in robust RCM software to minimize human errors and increase the efficiency of patient revenue management in your organization.

Conduct regular audits and monitoring

Most coding, documentation, and data entry errors remain unnoticed because of irregular auditing and system monitoring. If you go too long without checking your systems for accuracy and compliance, you may risk revenue leakage through minor mistakes.

A thorough audit of coding, documentation, and data entry practices is crucial to minimize revenue leakage caused by errors or omissions. This helps identify mistakes before they cause any financial impact, allowing healthcare organizations to improve overall revenue cycle management. While an in-house team can conduct the audit, external auditors can also be hired to achieve the best results.

If your organization has experienced a revenue leakage before, conduct an audit to determine the damage. A complete audit will help you identify the problem and what you can do to prevent it from recurring.

Create a revenue leakage audit checklist to identify all areas with a higher chance of causing revenue leakage. Is it in your charge capture, documentation and compliance, or insurance claims? If possible, automate your systems for better auditing.

Negotiate favorable contracts with payers and providers

Payer contracts are integral in increasing a healthcare facility's revenue and patient volume. Negotiating for a more favorable contract can improve your revenue potential, allowing your patients to enjoy better care and reducing the risk of revenue leakage.

Where once providers simply accepted payer changes in rates, with contract modeling software you can:

  • model rate changes: simulate the financial impact of proposed rate adjustments on overall revenue.
  • evaluate payer proposals: quickly assess whether suggested changes will positively or negatively affect the bottom line.
  • explore preferred terms: analyze the potential revenue impact of ideal rates and contract terms.
  • enhance negotiations: leverage data-driven insights to strengthen the team's position during contract discussions.
  • stop unfavorable rates and terms: identify and avoid contract changes that could adversely affect revenue.

 Take a quick tour of efficient contract modeling in action here: 

Plug healthcare revenue leakage with RevFind

Revenue leakages can go unnoticed and create a huge loss of revenue over time. Don't allow those leaks to affect your facility or patient relationships. Integrate MD Clarity's RevFind software to automatically track payer underpayments, analyze them, and appeal on time to increase revenue recovery. Book a demo today to get started.

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