The cost of inaccurate payment integrity
By Dan Gallagher, Managing Partner, 13point1 Advisors
Most health plans overstate what their payment integrity programs are worth. The recoveries are real, but they are only half of the ledger. When a plan’s audits are frequently wrong, the providers on the receiving end keep track, and they recover that cost from the plan at the next contract negotiation. The plan pays through higher rates or surrendered audit rights, and none of it shows up as a hard cost. We call that cost the Abrasion Invoice.
Payment integrity is the work a plan does after care is delivered to confirm that appropriate services were performed and correct payments were made. An accurate program generates both clarity around health plan policies and real savings. The trouble starts when a plan’s audits are wrong often enough that providers begin pricing them into their contracts.
How a Plan Pays Without Seeing the Bill
A single concession shows how this works. Office visits are billed in levels by complexity, and higher levels pay more. A plan’s contracting team, which is measured on rates, wants to hold a certain level 2 visit at $100. The provider asks for $105. The provider then agrees to $100 if the plan gives up level-of-service review, which means the plan can no longer check whether a visit billed at a higher level was actually that complex.
The contracting team reports a win, since the base rate held. But the plan now pays every level 4 visit at $120 as billed. Each visit that a payment integrity review would have reduced to a level 2 costs the plan an extra $20. The rate sheet shows $100 while the plan’s actual cost per visit rises, and the increase is never booked as a payment integrity cost.
The same thing happens when a plan agrees to a shorter look-back period, a cap on record requests, or a claim category removed from review. Each concession carries real financial costs, but they are only recorded as contracting outcomes.
Why the Plan Never Sees It
Payment integrity programs are measured on recoveries and savings while the provider contracting is measured on rates. No one person owns both numbers. Contract concessions that secure a rate and simultaneously limit the payment integrity program do not appear until much later, when recoveries fall short of projections.
How Inaccuracy Sets the Price
Providers track this more carefully than plans do. A large provider’s revenue integrity team keeps a running record of every takeback, medical record request, and appeal the plan’s program generates, and it brings that record to the renewal.
What the record contains depends on how accurate the plan’s payment integrity program is. The quality of the program is best revealed by measuring the Appeals Rate and the Overturn on Appeals Rate. The latter is the strongest indicator. In our assessment work, the most accurate payment integrity programs run an Overturn on Appeals Rate well under 10 percent. We sometimes see programs above 30 percent. Best in Class payment integrity vendors consistently execute programs with both an Appeals Rate and Overturn on Appeals Rate of less than 3 percent.
When most of a plan’s findings hold up on appeal, the provider has little to argue with. When a third of them are overturned, the provider can document money the plan took and had to return, staff time spent winning it back, and payments delayed in the meantime. Record requests that turn up no overpayment add to the total, because the provider still paid someone to pull every chart. A provider bringing that record to the table is pricing a cost the plan created, and the plan pays it either in the rate or in other concessions.
Steve Palma has written in this newsletter about findings that cannot withstand scrutiny driving appeals and rework, and Karen Weintraub about the cost of mistaking a coding error for fraud. The Abrasion Invoice is where those costs land for the plan.
Measuring It
A plan can measure the invoice with data it already has. The analysis starts with its twenty largest providers by spend. For each one, the plan pulls three years of recoveries, record requests, appeals, and its Overturn on Appeals Rate. It then pulls the last two contracts and lists every term that limits auditing, such as look-back length, caps on record requests, excluded claim categories, and appeal windows, noting which were added or tightened at each renewal.
Pricing those terms is straightforward. The plan knows the value of the overpayments it confirmed with each provider, by audit category and by month. If a contract removed a category from review or cut the look-back from twenty-four months to twelve, that history shows what the plan gave up. Sorting overpayments by the age of the claim adds more detail, though the category view is enough to start.
Subtracting the priced concessions from each provider’s recoveries gives the plan its net payment integrity contribution by provider. For most providers the number will be clearly positive. For a few it may not be, and those relationships are worth examining first. The analysis has limits. Rate concessions have many causes, and audit friction is rarely the largest of them, so the results show a plan where to look rather than proving cause.
Most plans can report gross savings, and net recoveries after vendor fees and appeals, within a week. Very few can say what their program costs them the next time they sit down with the providers they audited. Until a plan can answer that question, the savings figure it reports to its board is incomplete, and the gap is widest where its audits are least accurate.
About the Author
Dan Gallagher is Managing Partner of 13point1 Advisors, a management and strategy consulting firm focused on payment integrity and cost containment. He has spent more than fifteen years on every side of payment integrity program execution. He now advises health plans, TPAs, employers, and investors on program assessment, vendor optimization, and market strategy. 13point1 maintains a proprietary dataset of the payment integrity market, tracking 216 vendors, 509 health plans and TPAs, and 33 private equity firms. The firm draws on it in vendor evaluations for health plans and in due diligence for investors. Readers who want to see the time-phased version of this analysis can reach Dan at 13point1advisors.com.
