Coding Related Denials Surge in Newly Released Benchmark Study

External audit volume more than doubled in 2024 over 2023 while total at-risk dollars increased fivefold to $11.2 million, impacting healthcare provider organizations’ cash flow and exposing them to potentially higher denial rates, according to a newly released benchmark study prepared by MDaudit.

While revenues and operating margins improved throughout 2024, the gains were tempered by higher denial rates, including an increase in coding-related denials of more than 125 percent and medical necessity-related denials of 75 percent for outpatient claims and 140 percent for inpatient claims. Additionally, cyber security and timely payer reimbursement are the two biggest risks seen in 2024, threatening the financial stability of healthcare providers.

This backdrop of challenges is among the key findings of the newly released 2024 MDaudit Annual Benchmark Report. This report’s findings elevate the transformation of revenue cycle management (RCM) into a strategic imperative for health systems in 2025. They highlight the pressing need to continuously monitor financial risk to proactively mitigate issues before they impact operations.

Prevailing Headwinds Remain Unchanged

The Benchmark Report includes a comprehensive examination of real-world data representing the first three quarters of 2024 collected from a network of over 650,000 providers and more than 2,200 facilities that provide data to MDaudit for auditing, charge analysis, and denial assessment. It encompasses insights from more than $8 billion in audited professional and hospital claims and more than $150 billion in denials by commercial and government payers. More than 5 billion claims and remits were used for benchmarking.

In 2023, the annual report forecast that strong volumes for healthcare organizations would provide tailwinds for the healthcare industry, while headwinds would include challenges related to controlling costs, improving margins, and seizing opportunities to generate new revenue streams.  The 2023 findings foreshadowed the need for operational excellence to improve bottom lines and greater adoption of artificial intelligence (AI) and automation to boost productivity and costs.

These predictions held true as operating margins improved by more than four percent against a surge in audits and denials in 2024. Looking ahead to 2025, the 2024 report finds that those same headwinds remain. This time, they are strengthened by new risks around timely reimbursement and cybersecurity costs, which will impede ongoing progress toward financial stability for healthcare organizations that don’t take action to transform their approach to RCM.

Audits and Denials Surge

The latest Benchmark Report found a more than twofold increase in external payer audit volumes over 2023 levels and a fivefold increase in “at-risk” dollars. A driving force behind the rise in external audits—which led to an increase in the average denied amount per claim across professional (~4%), hospital outpatient (~5%), and hospital inpatient (~7%) settings—was an increase in pre-payment audits, which expose health systems to potential denials and cash flow issues.

Additionally, coding-related denials surged by 126 percent in 2024, one of the largest increases in the last three years despite billions of dollars spent across the healthcare industry outsourcing coding operations and automated coding technologies. The average denied amount also increased across all care settings, led by hospital inpatient-related denial (~200 percent). As such, coding remains one of the biggest revenue capture and margin expansion improvement opportunities.

Payers also stepped-up clinical documentation scrutiny, sending audits surging by 100 percent over 2023 levels and contributing to a three-year increase in clinical denials of 51 percent. Medicare and commercial payers denied more claim dollars in 2024 due to a lack of information submitted for the service and medical necessity, sending final denial dollars surging across professional (34%), hospital outpatient (84%), and hospital inpatient (148%)—numbers driven by a 122% increase in commercial payers’ request for information (RFI) denials.

To counter these audit and denial trends, providers must focus on driving healthy operating margins, which are enabled by high-value outpatient services like elective surgeries and some inpatient services. In addition to pinpointing what those services are, an organization should:

• Scrutinize complex services, including complication or comorbidity (CC), major complication or comorbidity (MCC), and hierarchical condition category (HCC) with risk adjustment payment models.
• Implement clinical documentation improvement (CDI) programs that drive outcomes tied to RCM and denial management metrics.
• Ensure CDI, billing, coding, and RCM programs are tightly coupled to implement a closed feedback loop from the backend to the mid-cycle to drive efficiencies.
• Automate coding operations and increase utilization of AI-powered systems that amplify errors at scale while keeping “humans in the loop.”

Medicare Advantage Under the Microscope

Medicare Advantage (MA) plans played a prominent role in the 2024 Benchmark Report as scrutiny by the Centers for Medicare and Medicaid Services (CMS) intensifies as part of its ongoing initiative to ferret out fraud and abuse—efforts CMS anticipates will ultimately recover $4.7 billion from MA plans by 2032.

MDaudit data found that HCC and Medicare Risk Adjustment Data Validation (RADV) audits increased by 72 percent over 2023, leading to a 51 percent increase in total denial amounts for MA plans in 2024. The findings of those RADV audits revealed a high risk of overpayments that, coupled with reports that those overpayments totaled nearly $50 billion, are fueling even more audits focused on instances of overcoding.

This heightened scrutiny, along with more strident authorization requirements and higher denial rates, has many providers rethinking participation in MA plans. At a minimum, billing compliance and coding teams should be focused on eliminating improper practices that could lead to heavy fines and penalties.

This is particularly critical considering the MDaudit findings that more than 25 percent of providers, on average, failed audits across both professional (33%) and hospital (23%) care settings.

Leveraging Data, AI for Enhanced Billing Compliance

Many healthcare organizations are working to proactively identify and address billing issues by leveraging data and AI to unlock insights and patterns from their historical data. Overall, retrospective audits in MDaudit increased by 10 percent, and prospective audits increased by 275 percent in 2024 over 2023. 

In addition to generating a clear snapshot of problem areas—led by medical coding (39%) and secondary diagnosis documented but not billed (37%) in hospital billings and diagnosis documented but not billed (58%) in professional billing—MDaudit data revealed the revenue opportunities when claims are billed correctly. For professional billings, the revenue opportunity of eliminating diagnosis undercoding was $202, followed by CT/HCPCS ($55), and modifiers ($13). For hospital billing, opportunities from accurate codes are:

• $4,901 for DRGs
• $3,922 for diagnosis
• $1,980 for drug units
• $212 for CT/HCPCS
• $191 for modifiers

The story these findings tell is that a hybrid auditing strategy with both retrospective and prospective audits will result in organizations catching and correcting more errors before payment, resulting in cleaner claims and higher first-pass payment rates. That, in turn, translates into higher cash flows and margins.

The Path Forward

As the 2024 MDaudit Benchmark Report clearly indicates, the difference between winners and losers in the healthcare margin race will essentially be determined by investments in technology, data, and analytics to enable real-time and continuous monitoring of billing risks. Those who cling to spreadsheets, random data samples, and manual processes will ultimately be left behind in the race toward financial stability and operational excellence.

EDITOR’S NOTE:

Ritesh Ramesh is CEO of MDaudit, a cloud-based continuous risk monitoring platform for revenue cycle management (RCM).