Medicare and Medicaid underpaid U.S. hospitals by $130 billion in 2023 alone, and Medicare reimbursement now covers just 83 cents for every dollar spent on care. Providers separately lose an estimated 1% to 3% of net revenue annually to underpayments from commercial payers, with some studies putting the figure as high as 11%. None of that shows up as a red flag on a standard reconciliation report at a skilled nursing facility (SNF) or assisted living facility (ALF). Here’s exactly why.
By: Paul Mason, Director of Strategic Partnerships at LTCPro
For: SNF and ALF administrators and CFOs across the United States who reconcile their books every month and want to know what standard reconciliation actually misses.
What Your Ledger Shows vs. What’s Actually True
A claim gets billed, a payer responds, a portion gets paid, and the remaining balance gets written off as a “contractual adjustment.” The account nets to zero. On a standard reconciliation report, that account looks identical whether the write-off was legitimate or whether the payer simply paid less than the contract actually required (Payment Variance vs. Underpayment, Revecore). This is the exact spot where reconciliation, as most facilities practice it, stops asking questions.
What the ledger shows:
| Line | Amount |
|---|---|
| Billed | $1,240 |
| Paid | $890 |
| Contractual adjustment | $350 |
| Balance | $0.00 |
Reconciled. Clean. Nothing here triggers a follow-up.
What’s actually true, if anyone checked the contract:
| Line | Amount |
|---|---|
| Billed | $1,240 |
| Contracted allowable | $1,020 |
| Paid | $890 |
| Legitimate adjustment | $220 |
| Unverified underpayment, written off as if legitimate | $130 |
The zero balance never distinguishes between an account paid correctly and one paid short (Revecore). A $130 gap on one claim looks trivial. Multiplied across hundreds of claims a month, it’s the difference between a facility’s real financial position and the one its reconciliation report shows.
Find out if this gap exists in your own AR. LTCPro will run a sample of recent zero-balance accounts against your actual payer contracts to check for unverified underpayments.
Get My Payment Variance Check →Why Standard Reconciliation Never Catches This
Reconciliation, in its usual form, confirms that cash received matches what the ledger recorded as received. That’s a real and necessary check, it just answers a different question than “was this account paid correctly.” A payer’s system calculates an adjustment, the provider’s system accepts it, and both sides agree on a number that was never actually verified against the contract terms. Both sides of that agreement can be wrong in exactly the same direction, and nothing in the reconciliation process itself would ever surface that.
The scale of this gap varies by facility type and automation level. Large health systems see 2% to 3% of claims underpaid due to payer edits or technical variances; smaller, less automated operations often see 5% to 7%. A specific, common trigger is coding-related contractual provisions, like reduced reimbursement for multiple procedures billed on the same date, that get applied incorrectly or inconsistently by a payer’s system. A facility that only reconciles cash against AR never sees this, because the account already closed at zero before anyone asked whether the adjustment matched the contract.
What Actually Catches It
Payment variance review compares actual payment not against the original claim, but against what the payer contract specifically allows for that service. That’s a genuinely different check than standard reconciliation, and it requires the contracted rate to actually be built into the review process, not just the claim and the remittance.
A review that only compares the claim to the remittance is still asking “did the numbers match each other,” the same limited question standard reconciliation already asks. The contract has to be the third document in the comparison, not an afterthought consulted only when something already looks wrong.
Worth being direct about the other side of this too: a facility that identifies an overpayment during this same review has a real compliance obligation, not just a financial choice. Overpayments must generally be reported and returned within 60 days of identification, with real exposure under the False Claims Act for facilities that don’t.
A genuine payment variance process isn’t just a revenue recovery tool, it’s a two-way check that protects a facility on both sides of the ledger, catching money owed to the facility and money the facility owes back, using the same review.
Build a real payment variance review into your monthly close. LTCPro will show you what this looks like against your facility’s actual payer mix.
Get My Variance Review Setup →Where LTCPro Fits, and Where to Push Us on Specifics
LTCPro provides revenue cycle management, billing and accounts receivable, and general ledger support for SNFs and ALFs across the United States, with reconciliation built to check contracted rates, not just cash against claims.
Contract-aware reconciliation, comparing actual payment against contracted allowables for Medicare, Medicaid, and Medicare Advantage, not just confirming the ledger and the bank statement agree.
Variance flagging by payer and procedure, surfacing recurring underpayment patterns tied to a specific payer’s claims processing, not just isolated one-off discrepancies.
General ledger integration, so a confirmed underpayment routes into AR follow-up automatically, rather than sitting in a spreadsheet nobody revisits.
Documentation discipline that supports the 60-day overpayment reporting obligation as readily as it supports underpayment recovery.
FAQ
What is payment variance in healthcare?
Payment variance is the gap between what a payer contract specifies as the allowable reimbursement for a service and what the payer actually paid. It’s a broader category than “underpayment,” since a variance can also reflect a legitimate contractual adjustment, not every gap is money owed.
Why doesn’t standard month-end reconciliation catch underpayments?
Standard reconciliation confirms that cash received matches the ledger, which is a real check, but a different one than confirming payment matched the contract. An account can reconcile perfectly, cash matches the ledger, while still having accepted a contractual adjustment that was never actually verified against contract terms.
How much revenue do underpayments actually represent?
Estimates put commercial payer underpayments at 1% to 3% of net revenue annually for providers broadly, with some studies as high as 11%. At the claim level, 2% to 3% of claims are underpaid in large, automated systems, rising to 5% to 7% in smaller or less automated operations.
What should a facility do if a payment variance review finds it was actually overpaid?
Report and return the overpayment, generally within 60 days of identification. This carries real compliance exposure, including under the False Claims Act, if it isn’t handled promptly.
Do payment variance risks differ across U.S. states?
The federal Medicare variance mechanisms apply nationwide. State Medicaid programs set their own contracted rates and adjustment rules, so a multi-state operator needs payment variance review built around each state’s specific Medicaid contract terms, not one national assumption.
Ready to see what your own reconciled accounts might actually be hiding? Send us a sample of recent zero-balance claims and we’ll check them against your actual payer contracts.
Get My Reconciliation Audit →LTCPro provides revenue cycle management, billing, payroll, bookkeeping, and general ledger support for skilled nursing and assisted living facilities across the United States, pairing proprietary software with hands-on staffing support.
