The Risk of Declining Reimbursement

One of my favorite resources is Insights, distributed by Kodiak. Let me begin by noting that I do not have any affiliation with Kodiak. I cannot even recall how I first became familiar with their reports and blogs, but as someone who monitors hospital revenue cycle trends, I highly recommend checking out their offerings.

The most recent Kodiak Insight, titled Top Risks 2025, discusses the top 10 risk areas for healthcare provider organizations, as compiled by their risk and compliance team, from client audits. Among the highest-risk areas are finance/accounting and the hospital revenue cycle.

Unfortunately, many hospital leaders and revenue cycle leaders continue to use a legacy approach to clinical documentation integrity (CDI) and coding, one that is dependent upon case mix index (CMI) and complication and comorbidity (CC) and major CC (MCC) capture rates.

Yes, hospital reimbursement remains tethered to definitions and ideas established in the 1980s, when healthcare looked very different, but many payers, including Medicare, are updating their payment policies to reflect an ever-changing healthcare regulatory environment and patient population, where both payers and providers are seeing declining profits.

The top risks include declining reimbursement within the finance/accounting risk domain. As discussed in some of my recent articles, it is unlikely that payments from private insurance companies will be enough to offset the potential shortfalls from government-funded healthcare programs, which already have reimbursement rates that are typically below hospital costs.

One healthcare analyst predicts that the One Big Beautiful Bill Act (OBBBA) will further erode federal payments in the years to come, at a time when healthcare insurance is on the brink of becoming unaffordable for millions of Americans.

I have always loved the concept of CDI as the Swiss Army Knife of the hospital revenue cycle. CDI staff identify and address issues related to provider documentation and payment regulations. These days, most hospitals have at least one CDI resource, but how they function within the organization differs across health systems and hospitals.

One thing that has been slow to change is transitioning from the “improvement” paradigm to the “integrity” paradigm. The “I” in CDI originally represented “improvement,” but was changed to “integrity” to avoid the negative connotations associated with a revenue focus – and the expansion of CDI efforts into other areas, like supporting hospital performance on quality-of-care metrics. Most CDI professionals have a variety of tools that can be used in many different clinical revenue cycle situations, as evidenced by the growth of CDI professionals in denials management.

The initial focus of CDI efforts was finding incremental revenue within the Medicare Fee-for-Service (FFS) population. Implementation of the MS-DRG reimbursement mechanism allowed patients to be differentiated in up to three distinct groups by adding the concept of MCCs. Hence, the success of CDI was measured by increases in CMI and CC/MCC capture rates. CDI programs had to demonstrate a return on investment: a type of proof of concept, if you will. In the early days of MS-DRGs, there were many opportunities for improved documentation and coding practices, but fewer in hospitals with mature CDI departments.

CDI departments may find modest financial gains with annual ICD-10-CM code and MS-DRG updates, but the reality is that most hospitals already accurately reflect the acuity of their populations. It is also important to remember that MS-DRG reimbursement reflected the acuity of the Medicare FFS population, which was also used to determine Medicare Part C (Medicare Advantage, or MA) risk adjustment methodology.

As the MA population exceeds that of the FFS population, Medicare plans need to start incorporating MA negotiated rates into MS-DRG updates and include the MA population in quality programs. As discussed in prior articles, MA plans are already under scrutiny for practices that may inflate the acuity of their enrolled populations, as evidenced by the high rate of chronic conditions being reported within this population.

The bottom line is that a “high” CMI does not guarantee profitability. As healthcare costs outpace reimbursement, hospitals can have a “high” CMI, but struggle to be profitable due to low operating margins. Hence, another top risk identified by Kodiak is denials management, which is included in the risk domain of the hospital revenue cycle. This domain also includes payer contracts/expected reimbursement.

One of the biggest contributions to increasing healthcare costs is labor. The American Hospital Association (AHA) reports that “hospitals have seen significant growth in administrative costs due to inappropriate practices by certain commercial health insurers, including Medicare Advantage (MA) and Medicaid managed care plans.”

Commercial payers “overburden hospitals with time-consuming and labor-intensive practices.” According to Premier, the administrative costs associated with claim adjudication was $57.23 in 2023, a total of 90 percent of which is attributable to associated labor costs. This same report also cited an overturn rate of 70 percent. A 2023 U.S. Department of Health and Human Services (HHS) Office of Inspector General (OIG) report found the overturn rate for MA denials to be closer to 75 percent. Hospitals are expending an exorbitant number of resources for healthcare services that were already rendered to the payer’s beneficiary.

A recent article by Becker’s Hospital Review references a hospital leader who stated that his biggest concern is the erosion of healthcare policies and practices based on clinical judgment. It is payers, not clinicians, who “shape how diagnoses are validated, how long patients should remain in the hospital, and what constitutes medical necessity.”

Denials also contribute to cash flow disruptions and employee turnover. Many healthcare organizations report difficulties finding qualified staff to support the denials management process, which is often complicated by clinical revenue cycle departments that work in silos, rather than through coordinated efforts. For example, inpatient medical necessity denials are often a coding issue, especially when the claim is billed with a symptom as the principal diagnosis.

Collaboration among utilization review, CDI, and coding can ensure that the principal diagnosis reflects an acute condition with a standard of practice that requires two or more days of hospital services for Medicare beneficiaries (or inpatient services, for other payers). Not all diagnoses are equal when it comes to determining the condition that occasioned the admission.

As the healthcare industry changes, CDI and coding practices must adapt to meet the associated challenges. CDI staff cannot control hospital costs, which are rising, but they can play a significant role in reducing the administrative burden of appeal denials.

Hospitals need to implement processes so they can efficiently track when members of the clinical revenue cycle, like utilization review, CDI, and coding staff, miss opportunities to reduce payer denials and promote data integrity.