Improper spending is an enormous problem in healthcare. According to the Centers for Medicare and Medicaid Services (CMS), Americans spent $4.1 trillion on healthcare in 2020, of which an estimated $1.2 trillion can be attributed to overpayments due to incorrect billing, non-compliance to clinical/reimbursement policies, wasteful, abusive and fraudulent practices that leads to overcharges. One initiative healthcare payers can use to reduce overpayments due to incorrect, wasteful, or abusive billing practices is to implement effective payment integrity programs and solutions.
In three articles, CoverSelf will explore 1) Symptoms of issues health plans face today. 2) How do you identify underlying problems from the above symptoms at health plans? 3) What are the key traits of solutions that address the above problems?
Inaccurate and improper medical claim billing can significantly impact health insurance companies' top and bottom-line revenue in the following ways:
1. Increased Claim Costs: Inaccurate and improper claims result in health insurers paying more than they should. This directly affects the top-line revenue as a higher portion of the premiums collected is disbursed to cover these improper claims. For the health plan finance group, the increased claim cost results in lowering of the Medical Loss Ratio (MLR).
The following questions will help you identify symptoms of “Increased Claim Cost”:
- Are you noticing a consistent increase in the overall cost of medical claims paid out?
- Have you identified claims patterns that seem unusually high or suspect compared to industry benchmarks or your competitors?
- Are you regularly exceeding your budget for claim payments?
Industry Fact: According to the Affordable Care Act (ACA) implemented in 2010, the Medical Loss Ratio (MLR) is a transparency measure for health insurance companies. MLR aims to ensure health insurance companies spend most of the money they collect from premiums on actual healthcare costs and improving quality. MLR is the share of total healthcare premiums spent on medical claims and efforts to improve the quality of healthcare. The remainder of the share is spent on administrative costs, fees, and profits earned. The ACA says they must pay at least 80% (individual & small groups) or 85% (large groups) of those premiums on actual medical care for quality healthcare improvements. If a commercial plan does not meet the MLR required threshold, the plan is required to submit a prorated rebate to all enrolled consumers in the amount equal to the difference between the plan’s actual MLR and the required MLR. Medicare Advantage (MA) and Medicare Part D plans have additional penalties for non-compliance, including the prohibition of new enrollment and termination of the CMS contract. 
2. Loss of Profit Margin: The payouts for improper claims often come directly from the insurer's profit margin, reducing the bottom-line revenue. This can lead to a decrease in the profitability of the insurance company.
The following questions will help you identify symptoms of “loss of profit margin”:
- Is there a decline in your Line of Business (LOB) profit margin despite consistent revenue streams?
- Have you observed a correlation between high claim payouts and reduced profitability?
- Are you struggling to maintain competitive pricing for your insurance products?
Industry Fact: A study by the CMS found that improper Medicare payments accounted for approximately $46.25 billion in losses in 2019. 
3. Higher Premiums: Insurers may need to raise premiums to compensate for overpayments due to incorrect billing, non-compliance to reimbursement policy, fraudulent practices, etc. When premiums rise, policyholders may seek more affordable alternatives, or fewer individuals opting for insurance, affecting the top-line revenue by potentially reducing the number of insured individuals.
The following situations may lead you to develop “Higher Premium” symptoms:
- Are you facing pressure to increase premium rates to cover rising claim costs?
- Have you noticed a drop in the number of policyholders or an increase in policy cancellations?
- Are you losing market share to competitors offering lower premiums?
Industry Fact: An annual report by KFF indicates that an average annual premium for family health coverage in the U.S. reached $23,968 in 2023, about 7% higher than the previous year. A significant financial burden for many families. 
4. Reduced Competitiveness: If an insurance company gains a reputation for not effectively combating inaccurate and improper payments, it may lose customers to competitors with more robust payment integrity measures. This can impact both top and bottom-line revenues.
The questions below will help you figure out if your health plan is getting symptoms of “Reduced Competitiveness:
- Are you aware of competitors gaining market share due to their reputation for robust payment integrity programs?
- Have you conducted a competitive analysis to identify areas where your payment integrity efforts lag behind rivals?
- Are you experiencing challenges in retaining and attracting new customers?
Industry Fact: Payers with advanced payment integrity and prevention systems increasingly use that expertise as a competitive advantage. This way, they are more likely to attract businesses and individuals looking for reliable and cost-effective healthcare coverage. 
5. Regulatory Penalties: Insurers may face regulatory fines and penalties for failing to address improper payments and not adhering to policies adequately. These costs affect the bottom-line revenue and can lead to reputational damage.
Below are some ways that can develop into symptoms of “regulatory penalties”:
- Have you received notices of regulatory violations related to claim processing and fraud detection?
- Are you aware of ongoing investigations by regulatory authorities into your claims handling practices?
- Have you been subject to fines or penalties for non-compliance by regulatory bodies like HHS, OIG, CMS, RAC, etc. regulations?
Industry Fact: Beginning in August 2018, the New York State conducted a comprehensive review of root cause analysis of the Managed Care Organizations’(MCOs’) monthly claims reports starting from 2017 and forward to address the high denial rates for specialty behavioral health services. The State then pursued enforcement action with varying penalties against the five noted MCOs due to persistent non-compliance. 
6. Increased Administrative Costs: Detecting and dealing with improper and fraudulent claims requires additional administrative and investigative resources. These costs can lead to reduced overall profitability.
Below are some ways to look for symptoms of “increased administrative costs”:
- Have you noticed a rise in staff dedicated to payment integrity, recovery process, and claims investigation?
- Are your administrative costs outpacing the growth of your organization?
- Are you struggling to keep up with reviewing and verifying claims?
Industry Fact: According to the Journal of American Medical Association (JAMA) article in 2019, the administrative complexities in healthcare account for $265 Billion in waste. 
7. Reinsurance Costs: Insurance companies often have reinsurance arrangements to protect against catastrophic losses. If improper or excessive claims lead to the activation of reinsurance contracts, the company may face increased reinsurance premiums or additional costs. These costs affect the bottom line.
Reinsurance Costs symptoms could be explored in the following ways.
- Have you observed an increase in your reinsurance premiums or additional costs related to reinsurance arrangements?
- Are there specific claims or patterns that have triggered the activation of reinsurance contracts?
- Are your reinsurance costs exceeding the expected budget?
Industry Fact: Reinsurance costs can be a significant financial burden for insurance companies. Improper payments can increase reinsurance premiums and additional expenses, impacting the company's bottom line. 
8. Loss of Customer Trust: Improper payments and abuse can erode trust between the insurer and policyholders. Broken trust can lead to customer churn and affect top and bottom-line revenues.
How do you look for “loss of customer trust” symptoms in your health plan?
- Are you receiving more customer complaints about claims processing, billing, or payment disputes?
- Have you noticed an increase in customer churn or a decrease in customer retention rates?
- Are online reviews and customer feedback indicating a decline in trust and satisfaction with your insurance services?
Industry Fact: Trust is a critical factor in customer retention. According to the Edelman Trust Barometer, trust in healthcare organizations is vital for patient engagement and loyalty. Loss of customer trust leads to a decline in the customer base, affecting top and bottom-line revenues. 
9. High PI vendor fee: Working with many PI vendors will increase workload and eventually high administrative work dealing with multiple vendors and spending a high percentage of the savings.
To identify symptoms of "High PI Vendor Fee," consider these questions:
- Are you incurring substantial fees for multiple or specific PI vendor(s), reducing the net savings achieved?
- Are you regularly evaluating your PI vendors' performance and return on investment (ROI) to ensure their services are cost-effective and add value beyond their fees
- Have you noticed increased internal processing time or resource allocation for coordinating and reconciling data between multiple PI vendors?
Industry Fact: A significant portion of healthcare industry waste, to the tune of ~$100B or 10% of total healthcare waste, comes from improper claims payouts as well as deep administrative costs across the eligibility, coding, submission, and rework cycles on the insurance front. Of the ~$100B lost as a result of this, $15B comes from administrative waste resulting from outdated payment integrity solutions. 
In summary, inaccurate and improper medical claim billing, waste, and abuse can impact health insurance companies' top-line revenue by increasing claim costs and potentially reducing the number of insured individuals due to higher premiums. It affects the bottom-line revenue by decreasing profitability, increasing administrative costs, and potentially leading to regulatory penalties or reinsurance-related costs. Therefore, addressing these issues is crucial for maintaining a healthy financial position for health insurance companies.
Want to learn more? Stay tuned for future posts exploring specific challenges and potential solutions in the payment integrity industry!