A denial is at least legible. It arrives with a reason code, a date, and a right to appeal — the practice knows it lost something and can decide whether to fight. The harder loss is quieter: a claim marked paid that paid less than the contract required. No denial notice, no reason code, no clock. The remittance posts, the balance zeroes out, and the difference between what the payer owed and what it sent is simply gone — unless someone checks.
Checking is the exception. In an MGMA Stat poll from February 11, 2025, only about half of medical-group leaders — 48% — said they audit payer payments against contracted rates monthly or quarterly; 30% audit only annually, and the rest less often or not on a set schedule.1One respondent put the experience plainly: “It’s ridiculous how often [payer] payments are incorrect.”1The practices that look, find variance. The ones that don’t, don’t.
What we can and cannot say about size
It is tempting to attach a national number here. We will not, because a defensible one for contractual variance at the small-practice leveldoes not exist in the public record. The figures that circulate measure different things. The American Hospital Association reports that Medicare paid hospitals about 83 cents on the dollar in 2024, an underpayment it totals at more than $100 billion — but that is a statement about a government program’s payment adequacy relative to hospital cost, at hospital scale.2 It is not the phenomenon on this page: a commercial payer paying below its own contracted rate on a specific claim.
Those are different failures with different remedies, and merging them would manufacture a magnitude no source supports. The honest position is narrower and more useful: contractual variance is real, it is documented as a recurring problem by the trade bodies that survey practices,1 and it is systematically unmeasured at the small-practice level precisely because measuring it requires an audit most small practices never run. The measurement gap is not a footnote to the story. It is the story.
Where the money hides
Underpayment is rarely a single wrong number. It is a set of specific mechanisms, each of which produces a payment that looks plausible on the remittance and is wrong against the contract. Five recur.
- 01
Stale fee schedules
A contract grants a rate increase; the payer’s adjudication system keeps loading last year’s schedule. Every claim in the affected code range pays at the old, lower allowed amount. Nothing looks anomalous on any one claim — you only see it by holding the remittance against the current fee schedule you actually signed.
- 02
Lesser-of clauses
A common contract term pays the lesser of your billed charge or the contracted rate. If your charge master has drifted below the negotiated rate — because charges were never raised while the contract rate rose — the payer correctly, and quietly, pays your charge instead of the higher rate you bargained for.3 The underpayment is authored by your own stale charges, which is why it survives a casual review: the payment matches something you submitted.
- 03
Bundling downgrades
Claims editing folds one code into another, or reprices a line to a lower-valued code, and pays the bundled result. Some of this is legitimate; some is an edit the contract or the coding rules do not support. Either way the paid amount is smaller than the line-item expectation, and the change is buried in adjustment codes rather than announced as a denial.
- 04
Sequestration
For Medicare, a 2% reduction applies to claim payments under the Budget Control Act of 2011 — in effect for dates of service on or after April 1, 2013, and extended for Medicare benefit payments through fiscal year 2032.45 This one is not an error and not appealable; it is the law, and it is disclosed on the remittance. It belongs on the list for the opposite reason: it is the known systematic reduction, the baseline a practice must model before it can tell a legitimate variance from an expected one.
- 05
Silent-PPO repricing
A discount you negotiated with one network gets rented to a payer you never contracted with, which applies your lowest agreed rate to a claim it had no direct right to discount.6The remittance shows a “network” adjustment that looks routine; the practice often cannot tell, without tracing the repricer, that the discount was accessed without authorization. Roughly a dozen states regulate the practice, which is itself evidence that it happens.6
The audit is one subtraction
The method that catches all five is unglamorous and identical in each case: compute the expected allowed amount from the contract, compare it to the amount actually paid, and treat any negative gap the contract does not explain as a variance to work. The difficulty is never the arithmetic. It is holding the current, correct fee schedule in one hand — the thing stale-schedule and lesser-of failures depend on you not having — and reading the adjustment codes closely enough to separate a contractual write-off (a CO-45 you agreed to) from an underpayment you did not.
The worksheet below walks one fictional in-network claim through the subtraction. The numbers are invented and labeled as such; the sequence is the point.
| Billed charge | What the practice charged for the service line. Not what any payer owes — the ceiling, not the expectation. | $420.00 |
| Contracted rate | The rate the current, signed fee schedule specifies for this code — the expected allowed amount for an in-network claim. | $310.00 |
| Sequestration | For a Medicare claim, the mandatory 2% reduction on the payable portion. Expected, disclosed, not appealable. | −$6.20 |
| Expected paid | Contracted rate less the known reduction. This is the number the remittance should reconcile to. | $303.80 |
| Amount paid | What the remittance actually posted — the payer loaded last year's schedule at $274 and reduced from there. | $268.52 |
| Variance | Expected paid minus amount paid. The contract does not explain this gap — it is a stale-schedule underpayment, not a write-off you agreed to. | −$35.28 |
A worked example with invented numbers. The method — expected allowed amount minus amount paid — is the audit; the dollars are not a claim about any real payer.
A $35 gap on one claim is easy to ignore, which is exactly the design that keeps it unaudited. But a stale schedule does not miss one claim; it misses every claim in the affected code range until someone loads the right schedule. The unit is small and the pattern is large, and only the practice that runs the subtraction ever converts the pattern into a recoverable number.
Why the honest answer is a method, not a figure
The trade bodies that survey practices treat routine payment auditing as a basic control, not an optimization. MGMA’s guidance is procedural: keep every payer’s current fee schedule in one place, update it when the contract changes, assign an owner, and reconcile payments against it on a fixed cadence.1 The reason the guidance is procedural is that the loss is procedural — it comes from schedules no one refreshed and adjustment codes no one read, not from a headline that can be totaled nationally.
“An allowed-amount appeal works when the rate is wrong (in-network) or the methodology is unsupported (out-of-network) — never simply because the billed charge was higher.”7
Merits glossary — Allowed amount
That line marks the boundary of a legitimate variance claim, and it is worth stating plainly because it is where over-reaching appeals fail. Underpayment recovery is not an argument that the payer should have honored your charge; a contracted practice already agreed the charge is not the number. It is an argument that the payer did not honor its own contracted rate— a factual, checkable claim that lives or dies on the schedule you can produce. For a payer’s baseline reference, see the Medicare Physician Fee Schedule; for the commercial case, it is the schedule attached to your own contract.
Sources
- 1MGMA Stat — Amid inflated expenses, make sure you're regularly auditing payments against contracted rates (Feb 11, 2025 poll: 48% audit monthly/quarterly, 30% annually; n=193) · Feb 2025
- 2American Hospital Association — The Cost of Caring, 2025 report (Medicare paid ~83¢ on the dollar in 2024; >$100B in Medicare underpayments — hospital-scale payment adequacy, not commercial contractual variance) · Mar 2026
- 3CodeToolz — The "lesser of billed charges" clause in payer contracts (mechanics of lesser-of reimbursement) · accessed Jul 2026
- 4American Hospital Association — Medicare Sequestration Payment Reductions (2% reduction for dates of service on/after April 1, 2013; Budget Control Act of 2011) · accessed Jul 2026
- 5American College of Physicians — Physician claims under the sequestration rules for Medicare (2% claim-payment reduction; extended for Medicare benefit payments through FY2032) · accessed Jul 2026
- 6AAPC Knowledge Center — Mitigate the impact of silent PPOs (repricing of contracted discounts by non-contracted payers; state regulation) · accessed Jul 2026
- 7Merits — Glossary: Allowed amount (boundary of a legitimate allowed-amount appeal) · accessed Jul 2026