Underpayments: How Payers Pay Less Than Your Contracted Rate

Underpaid claims raise no denial, so they post and close like routine payments. Five ways payers pay below your contracted rate, and how to catch each.

Altair Health 29 September 2026

An underpayment is a claim the payer paid, but for less than your contracted rate. The remittance lists an allowed amount, and the posting step books the gap between your charge and that amount as a contractual adjustment. A denial lands in a worklist with a reason code and a deadline. A short payment reaches no worklist, and its dispute deadline runs unwatched. The shortfall often posts under the same CO-45 adjustment as legitimate fee schedule write-offs, the account closes, and nobody looks at the claim again.

Five common causes are lesser-of clauses, downcoding, rate changes the payer never loaded, silent PPO discounts and recoupments on claims that already paid. Each one leaves a mark at payment posting.

Fewer denials, more takebacks

Kodiak Solutions compared the first half of 2026 with the first half of 2025. Its analysis covered claims and financial data from more than 2,300 hospitals and 375,000 physicians. Across all payers combined, initial and final denial rates both fell. Cash flow did not improve, because payers took back more of what they had already paid. Takebacks rose from 1.38% to 1.57% of accounts receivable, while what providers won back by appealing payments fell from 2.48% to 2.21%. The takeback increase showed up in every payer and patient setting Kodiak analyzed. On commercial claims, the final denial rate rose instead, up 9.1% to 2.89% of accounts receivable.

Those figures blend hospitals and physician practices, so they describe that mix rather than an independent practice. The mechanism carries over anyway. A denial rate measures what a payer refused. It says nothing about the claims a payer paid short, or paid and later reversed.

Lesser-of clauses: when your charge caps the payment

Medicare bases payment on "the lesser of the actual charge or the applicable fee schedule amount," under 42 CFR 414.21. Commercial contracts often use lesser-of terms too. Penny Noyes, president and CEO of Health Business Navigators, spent years on the payer side. She told an MGMA conference in 2018 that reimbursement "is almost always based on 'lesser of'" language.

In its plain form, the clause costs money when your charge falls below the contracted rate. Say your contract prices a visit at $135 and your chargemaster lists $120. The payer allows $120. The remittance shows no contractual adjustment, and the line looks like a clean payment. You are $15 short on that code, on every claim, until someone raises the charge.

The same MGMA article notes that some contracts compare the rate with a percentage of billed charges instead. Under the lesser of $135 or 80% of charges, a $150 charge allows $120. Your charge sits above the rate, and you are still $15 short.

A line where the payer allowed the entire billed charge is the tell. Under a lesser-of clause, it means your charge sits at or below what the contract would pay. Under the percentage version, the tell is an allowed amount equal to that percentage of your charge. Set each charge high enough to clear the highest contracted rate for that code, after any percentage the contract applies. Recheck the chargemaster whenever a payer's fee schedule changes.

Downcoding: a lower payment instead of a denial

Downcoding means the payer pays a claim at a lower level of service than the one billed. Cigna's Evaluation and Management Coding Accuracy policy, known as R49, took effect October 1, 2025. It lets Cigna cut 99204, 99205, 99214, 99215, 99244 and 99245 by one level when the claim information does not support the level billed. A 99215 can pay as a 99214. Cigna says it pays the lower-level code right away instead of holding the claim for records, and marks the change on the explanation of payment. If you send the full encounter record and it supports the original level, Cigna pays that level. It also says the policy applies only to providers with a consistent pattern of coding routine services at a higher E/M level than their peers.

Nothing in that sequence produces a denial. Insurers "don't consider downcoding a denial," the Illinois State Medical Society wrote in its 2026 downcoding report. The society's survey drew responses from more than 330 physicians and healthcare professionals between January 25 and February 25, 2026. In that survey, 72% said their practice had seen automatic downcoding of appropriately documented claims. Only 16% said their remittance advice typically shows when a claim has been downcoded, and 39% said they can rarely or never tell from the remittance.

The AMA's guide to payer downcoding programs describes payers that pay the lower rate without changing the billed code at all. That makes the cut hard to find in a coding audit. The guide lists remittance codes that can signal a downcode. Watch for CO-150, which says the payer deems the information submitted does not support this level of service. CARC 186, a level of care change adjustment, and remark codes M85 and N610 can mark one too. The AMA's advice is to compare the payment for each billed CPT code with the amount you expected.

States have started to act. Indiana's 2026 law requires a plan to tell the physician when it downcodes a claim. The law bars downcoding based on a diagnosis alone, and it bars using an automated tool, AI included, as the sole basis. It also requires an appeals process that lets practices batch downcoded claims. In Maryland, the insurance regulator found that Cigna downcoded E/M claims in violation of state claim payment law, then imposed a penalty and ordered Cigna to stop. The AMA reported both in March 2026.

Rate changes the payer never loaded

A contract amendment raises a rate on paper. The payer still has to load the new rate into the system that prices claims. Until it does, every claim prices at the old rate and the difference posts as a contractual adjustment. Appealing each claim does not fix the rate in the payer's system. UnitedHealthcare says in its 2026 administrative guide that a single-claim reconsideration will not resolve contract configuration errors. The guide points you to a claim research project or your provider advocate instead.

Contracts tied to Medicare carry the same exposure. CMS publishes a new physician fee schedule for each calendar year, and the 2026 rates took effect January 1. A contract that pays a percentage of the current Medicare schedule should move with it, on the date the contract sets. If the allowed amounts did not move, ask the payer why.

Rate changes can also arrive in places staff do not check. Noyes warned that some agreements let payers announce changes through "other generally accepted media," such as newsletters and email, instead of a letter.

Catching a rate that never loaded takes two things. Every contract's current fee schedule has to sit in the billing system by payer, code, modifier and place of service. And the audit cycle has to be short enough to matter. In a February 2025 MGMA Stat poll with 193 responses, 30% of practice leaders said they audit payer payments against contracted rates monthly. Another 18% audit each quarter, and 30% do it once a year. On an annual cycle, a rate the payer never loaded can price a full year of claims before anyone looks.

Silent PPOs: discounts from payers you never signed with

A PPO network can lease your contracted rates to other payers and third-party administrators. The industry calls it a silent PPO when a payer takes that discount without your knowledge. A practice that signed with one network can end up extending its discount to plans it never evaluated. The remittance may not say whose contract set the price.

Some states set conditions. In Louisiana, a PPO's discounted rate does not bind a provider unless the PPO appears on the benefit card presented at the time of care. If the payer does not issue or use a benefit card, the entity using the discount has to give written notice at least 30 days in advance. The discount cannot apply retroactively without the provider's written agreement. An insurer, plan or administrator that breaks the statute is liable to the provider for double the fair market value of the services. The damages are at least $2,000 or $50 per day of noncompliance, whichever is greater, plus attorney fees set by the court. The provider can sue to collect.

At posting, match the payer and network on each payment against your list of contracts and the card on file. Stop on any discount taken by a payer you have no direct contract with, and ask which network agreement it used.

Recoupment: paid is not the same as kept

The takebacks in the Kodiak data are recoupments. A payer reviews a claim it already paid and recovers some or all of the money, often by offsetting it against a later payment. The deposit arrives short, and the shortfall traces back to a claim that closed weeks or months earlier. UnitedHealthcare says in its administrative guide that it may apply an overpayment against future claim payments, unless the agreement or the law says otherwise. The guide's default window to disagree is 30 calendar days from the date you receive the notice.

The law limits when a payer can recoup. A Medicare contractor can reopen a claim for any reason within one year of the initial determination, under 42 CFR 405.980. With good cause it has four years. It has no time limit when reliable evidence shows fraud or similar fault. Medicare also limits recoupment while some overpayments are under appeal. For those, a redetermination request filed within 30 days of the demand letter keeps recoupment from starting on day 41, according to CMS. Interest still accrues from day 31 on any balance unpaid by day 30, appeal or not.

For state-regulated commercial plans, state law can cap the look-back period. California gives insurers and health plans 365 days from payment to send a written overpayment request, under its Insurance Code and managed care regulations. The limit does not apply if fraud or misrepresentation by the provider caused the overpayment, even in part.

Work every recoupment notice the way you would work a denial. Check the look-back limit, the stated reason and the record, and dispute it inside the window when the payer has it wrong. The stronger defense comes before the claim goes out, in a claim built on the payer's current policy and backed by a complete record.

How to catch underpayments at payment posting

Every mechanism above surfaces at the same step. A payment or an offset posts, nothing on the remittance reads as a denial, and the account closes. Posting is the one step every dollar passes through, so that is where the checks belong.

Compare each line's allowed amount with the contracted rate for that payer, code, modifier and place of service. Compare the code paid with the code billed, and the payment with the rate for the level billed. Some payers cut the payment and leave the code alone. Flag any line where the payer allowed the entire charge, or the contract's percentage of it. Stop on discounts from payers you never signed with. Tie every recoupment to the claim it came from and to the deadline for disputing it.

Disputes run on the payer's clock. For a claim paid short, UnitedHealthcare's 2026 guide gives you 12 months from the original remittance to file both the reconsideration and the appeal. The same guide gives you 30 calendar days from a recoupment notice to disagree. The law or your agreement can set a different window. If the same administrative issue affects 20 or more claims and needs no attachments, the guide lets you request the reconsiderations in bulk online. Other payers set their own windows, and an underpayment found in an annual audit can already sit outside some of them. Our payer guides cover appeals payer by payer. Confirm the window in the payer's current manual before you file.

The record of which payer underpays which code tends to live in one biller's head, and it leaves when that person does. We covered what else goes with them in our post on billing staff turnover.

Altair runs the whole revenue cycle, from eligibility to payment posting and reconciliation, and keeps what it learns about each payer in the system rather than in a person. It compares every payment with the contracted and expected amount for that payer and code, and flags each underpayment with the reason. The practice owner sees every claim and every dollar as it moves, not in a monthly report. Altair's in-house billers work the recovery. The practice hires no one and manages no one, and it keeps the EMR and clearinghouse it already uses. Every claim is checked against the payer's current policy before it goes out, so it holds up if the payer reviews it later, and the money stays with the practice. See how Altair finds underpayments.

A short payment never reaches a worklist on its own. Someone has to check it against the contract before the account closes, or the lower amount becomes the rate.

Five ways payers pay less without a denial

Common questions