Most larger employers hire firms to administer their health plans. These third-party administrators (TPAs) are sometimes health insurers themselves and are cognizant of the costs involved with providing coverage.

While radical changes take time for large corporations, small changes to claims management can reap outsized savings.

Prepayment review of claims

TPAs and payers can take more of a holistic view toward expense management by focusing on one of the most common tasks they perform every day: Paying claims submitted by providers.

That's because billing practices in the insurance sector can be error-prone. Studies have shown that hospital billing errors occur as much as 80% of the time. According to the Centers for Medicare & Medicaid Services, the improper billing rate for the Children's Health Insurance Program was more than 27% in 2020, while improper Medicaid claims occurred more than 21% of the time. Moreover, these error rates have been rising in recent years.

Payers and providers also regularly face lawsuits and huge federal fines for overbilling. The U.S. Justice Department reported that settlements and judgments related to false health care claims totaled $5 billion in the last fiscal year.

In such an environment, payment reviews are a critical function of TPAs and health care payers. Yet, virtually all reviews for errors, overcharges, or other issues take place after the claim has long been paid, sometimes months or even years after the fact.

That's partly because TPAs and payers are under significant pressure to settle claims as quickly as possible. Many states mandate financial penalties if they do not pay claims within a specific time period after submission, usually 45 days. Late payments often require a hefty interest payment. As a result, plans and TPAs often pay upfront and ask questions later.

Post-payment reviews can be costly for insurers and TPAs beyond the actual expense. Asking for a payment back months after it has been made can create friction within a medical practice, hospital, or even an entire provider network. The process can take months longer if a provider appeals the audit decision.

In contrast, undertaking prepayment reviews provides the following advantages to TPAs and payers:

• The provider experience is much improved without potential friction around requests to return payment.
• Appeals tend to decline in a prepayment review environment, as providers are less proactive in appealing claims than being asked to return payment.
• If an appeal is mounted, the prepayment review process is often easier for insurers and TPAs to defend their decision.
• Prepayment reviews may spot suspicious billing patterns early, possibly staving off lawsuits and fines from state and federal regulators.
• Success with a prepayment review program means bending the cost curve for employees, who might avoid higher annual premiums and out-of-pocket increases.

Focusing on these prepayment reviews improves the overall efficiency of any TPA or health insurer while possibly saving millions of dollars a year in overpayments.

An alternative to cutbacks?

With its promise to create efficiencies and reduce costs, switching to prepayment review could save employer groups from truly painful cost cuts.

Related: The future of employer-sponsored health care: strategic responses and cost containment opportunities

Prepayment reviews save money and increase an organization's efficiency by reducing the workload and friction involved with conducting payment reviews retrospectively. It is a potential way to economize during recessionary times without resorting to layoffs or other cost cuts.

Mark Johnson is senior vice president of product management for CERIS, a division of CorVel Healthcare, and a leading national provider of payment integrity and prospective claims review for health care payers.