Shrinking Margins, Growing Underpayments: What Hospitals Must Do Now

The financial environment facing U.S. hospitals has deteriorated significantly in recent years, with limited near-term relief expected. Operating margins remain thin, labor costs continue to rise, and government reimbursement still falls short of cost. At the same time, payer behavior—particularly among commercial insurers and Medicare Advantage plans—has become more aggressive, increasing underpayment exposure.

These pressures are contributing to a broader rise in healthcare underpayments that many organizations have not yet fully measured.

For finance and revenue integrity leaders, understanding the structural forces driving underpayment growth—and how to respond—has become a strategic priority, not a back-office concern.

The Payer Consolidation Effect

The commercial health insurance market has consolidated substantially. A smaller number of large national payers now control a larger share of covered lives, which shifts negotiating leverage and changes how contracts are structured. Payer agreements at major health systems now routinely include value-based components, bundled payment provisions, stop-loss clauses, and service-line carve-outs.

Each of those provisions creates additional surface area for payment discrepancies. The more conditional a reimbursement calculation, the more opportunities exist for the payer's adjudication system to apply the wrong logic. And the more complex the contract, the harder it is for the hospital's internal team to identify when that's happened.

Many of these discrepancies ultimately result in payment variances that must be evaluated to determine whether they represent true underpayments.

Algorithmic Adjudication at Scale

Payers have invested heavily in automated adjudication systems that process claims at far greater speed and volume than manual review could achieve. Those systems are efficient — but they encode assumptions, policies, and calculation logic that may not match what the contract actually requires. And because they operate automatically, errors propagate across enormous claim volumes before anyone detects a pattern.

Industry data has historically shown claims-processing error rates near 20% commercial payer claims error rate. For hospitals, that error rate translates into payment discrepancies distributed across millions of claims — individually too small to flag, collectively massive in aggregate.

Identifying these discrepancies at scale typically requires a structured healthcare underpayment audit.

Medicare Advantage is where this problem has become most acute. AHA data from 2024 shows MA plans reimbursed only 49% of costs for observation stays, while those stays were 36.9% longer than under Traditional Medicare. That payment gap is not a rounding error; it is a systematic feature of how MA adjudication currently operates.

The Medicare Advantage Volume Growth Problem

Medicare Advantage is now one of the largest drivers of underpayment exposure.

MA enrollment has grown consistently for years and now accounts for more than half of all Medicare beneficiaries nationally. For hospitals, that shift means an increasing share of their Medicare volume is subject to MA contract terms rather than Traditional Medicare payment rates — and MA plans have proven far more likely to generate underpayment exposure.

Many of these discrepancies remain hidden within zero-balance claims that appear resolved but may still be underpaid.

The contractual complexity of MA arrangements, combined with aggressive prior authorization requirements and algorithmic payment logic, creates an underpayment environment that many hospitals have not yet fully measured. Health systems that haven't conducted a systematic MA underpayment analysis in the past 12 months are likely carrying significant undetected exposure.

Regulatory and Policy Complexity

The No Surprises Act, effective since 2022, introduced new requirements around out-of-network billing and independent dispute resolution. Its implementation has generated considerable administrative complexity, and the ongoing regulatory clarifications continue to shift how certain claim types are adjudicated. Revenue cycle teams that haven't mapped the No Surprises Act's implications for their specific payer mix and service lines may be missing underpayments that relate directly to the law's application.

Broader Medicare payment policy changes, including updates to DRG relative weights, MS-DRG reclassifications, and site-neutral payment proposals, create additional reimbursement dynamics that require ongoing monitoring. Payer contracts that reference Medicare rates or methodologies may generate underpayments when those underlying rates change and contract terms aren't updated accordingly.

Without structured processes, healthcare underpayments often go undetected as these regulatory changes take effect.

Staffing Constraints and the Prioritization Gap

Even if hospitals had perfect visibility into underpayment exposure, they'd face a resource problem. Revenue cycle staffing has been strained across the industry. The specialized expertise required for underpayment recovery, including DRG knowledge, payer contract interpretation, and clinical coding review, is difficult to recruit and retain in an environment where that expertise commands a premium.

Internal teams, spread thin across competing priorities, tend to concentrate on the most visible and time-sensitive revenue cycle issues. Active denials get worked. Zero-balance accounts, where most underpayments hide, don't. That prioritization gap is rational given resource constraints, but it has real financial consequences. The AHA's 2026 Costs of Caring report estimates that hospitals spent $43 billion in 2025 trying to collect payments from insurers for care already delivered, a figure that reflects how resource-intensive revenue recovery has become.

This reflects a broader challenge in distinguishing underpayments vs. denials and prioritizing the right recovery efforts.

Why Underpayments Are Increasing Across the Board

Health systems that have made progress in underpayment recovery share several characteristics. They invest in technology that evaluates full claim populations, establish ownership for recovery, and often partner with specialized organizations.

These approaches are often informed by healthcare underpayment benchmarks that quantify the scale of revenue loss across systems (link to Blog #5)

The underpayment opportunity has grown—and the tools to address it have improved. Hospitals that act now will be better positioned to protect revenue they have already earned.

What Hospitals Must Do Now

Hospitals can’t control payer behavior or macroeconomic pressures—but they can control how they identify, recover, and prevent underpayments.

Leading organizations combine recovery efforts with strategies to prevent payer underpayments before they occur.

Addressing this challenge requires a more proactive and scalable approach, combining analytics, contract expertise, and dedicated workflows to ensure revenue is not left behind.

How Revecore Helps Hospitals Navigate Increasing Underpayments

Revecore helps health systems respond to growing underpayment pressure by identifying discrepancies, recovering lost revenue, and providing the insights needed to reduce future exposure.

Learn how Revecore helps hospitals recover and prevent underpayments.