Financial Sustainability

Denials management: An underrated tool for optimizing value-based revenue

March 1, 2021 8:24 pm

Denials management is a mainstay of traditional revenue cycle management. For that reason, it tends to be undervalued by strategic finance leaders who are focused on the shift from volume to value. This is a mistake, because managing denials is as relevant today as it was decades ago. Effective denials management not only supports a strong revenue stream under existing fee-for-service (FFS) payment, but also is a key tool for managing the full range of value-based payment (VBP) contracts.

Historically, denials have provided opportunities to improve coding, ensure sound front-end business processes and support payer contract negotiations. Today, a strong DM program also can provide valuable insights into clinical operations, contract design, the patient experience and other key factors for optimizing financial results under VBP.

The role of denials management in the VBP ecosystem

The role of denials management in the traditional revenue cycle is well known. An effective program enables provider organizations to quickly correct rejected claims and maintain cash flow.

What is not well known, however, is the important role denials play in newer VBP models. Under value-based contracts, organizations benchmark their services based on the cost of care. The calculation for cost of care is essentially allowable paid dollars over attributed patients. This calculation applies to both bundled payment arrangements (patients in a covered episode) and full-risk contracts (attributed lives).

But the devil is in the details. If a provider performs a service that is then rejected by the payer, those rejected claim dollars are not included in the cost-of-care calculation. The impact can be complex. If a cost-of-care calculation is based on a high denial rate, the contractual cost target will be artificially low. As a result, the provider organization will have a harder time hitting the cost performance target, which will reduce or eliminate shared savings.

Conversely, if a cost-of-care calculation is based on a low denial rate, the provider has a better starting point, because the contractual savings target will be based on actual costs.

Keeping the denial rate low, however, will not occur automatically. It requires denials management, and if that effort is uneven, the provider risks seeing a rising denials rate, resulting not only in lost revenue, but also internal expenses that undercut any shared savings.

In some instances, claim rejections can also lead to an otherwise eligible patient not being attributed to the VBP contract. Again, the result is lost revenue and lost shared savings opportunities.

Everyone in healthcare finance should be able to appreciate the irony of this situation. Part of the appeal of VBP contracting is that it promises to free provider organizations from the complexities of FFS payment. In reality, however, the mechanics of claims and denials are still baked into the VBP system. The bottom line is that denials management will remain a critical function in healthcare financial management for the foreseeable future.

Using denials management to build value: A case example

Organizations participating in VBP contracts have many opportunities to use denials management to optimize organizational performance and revenue under those contracts.

First, a strong denials management program can guide the operational improvements that are imperative under value-based care. Consider the following common scenario.

A hospital acquires a physician group practice that encompasses several surgical specialties. The underlying strategy is sound because surgeon employment enables the organization to:

  • Capture OR surgical volume
  • Increase surgical revenue
  • Control costs and optimize patient outcomes by coordinating the perioperative continuum of care

However, one year into the employment arrangement, the organization begins to experience significant denied claims for surgery patients. Closer analysis shows that a large portion of the denials are coming from provider-side billing. This situation is not uncommon, because many health systems that have acquired physician practices in recent years have yet to integrate clinic and hospital operations and have neglected the provider revenue cycle. In fact, many organizations have maintained separate revenue cycle management systems for providers and hospitals.

Drilling down, finance leaders find that these denials are tied to several “disconnects” across the continuum of care. When a patient becomes a candidate for elective surgery, their first contact with the system is to see a surgeon as a consultant. During this visit, the surgeon’s office captures the patient’s demographic and insurance information. Once the patient is scheduled for surgery, hospital staff re-capture the same information to obtain pre-authorization for the procedure.

This redundant process has implications for four areas.

1. Revenue. Redundant data capture essentially doubles the number of opportunities for a claim to be rejected. Depending on how patient data is captured, information discrepancies can creep in that further increase the risk of rejection.

2. Cash flow. An inflated rejection rate increases accounts receivable and could raise the organization’s bad debt ratio and impact cash available on hand.

3. Costs. Duplicated revenue cycle processes increase staff costs and could indicate spending on technology has been inefficient.

4. Patient satisfaction. Patients undergoing surgery have to go through redundant office processes. They are also at greater risk of having to deal with a rejected claim or authorization. Both experiences undercut patient satisfaction and can lead to lower HCAHPS scores for the entire organization.

These repercussions affect financial performance under both old and new payment models. The good news is that resolving denials problems can help improve results under both FFS and VBP contracts.

A recommended solution

In the above scenario, the solution is to redesign processes so one surgical encounter drives both provider and hospital billing. An effective system would feature three key elements:

  1. A common technology platform for managing the surgery patient revenue cycle
  2. Hard-coded patient registration and electronic health record (EHR) fields to support verification
  3. An integrated approach to communicating patient financial responsibilities and pre-surgical instructions

These improvements would not only increase collections, but also improve the organization’s ability to manage the continuum of care.

For example, an integrated patient communication approach would help ensure patients are fully prepared for their procedure from both the physician and hospital perspective, thereby reducing expensive delays on the day of surgery. It would also be a key tool for integrating COVID-19 screening and vaccination protocols into preoperative processes.

Benefits under bundled payment

A strong denials management program can be especially effective for optimizing performance under bundled payment models. For instance, most bundled payment contracts for joint replacement encompass both the hospital and its orthopedic surgeon partners. Finance leaders can use denial trends to identify areas where hospital and provider processes are misaligned and identify opportunities to reduce clinical variation. Resolving these issues can help ensure the efficiency and coordination that are key under bundled payment.

Benefits for VBP contracting

Denials management can also set the stage for effective negotiations for VBP contracts. As described above, a strong program is critical to calculating accurate cost-of-care benchmarks and therefore ensuring the best chance of hitting cost targets and securing shared savings incentives.

An effective denials management program also supports the following elements of VBP contracting.

Contract design. Finance staff can use the denials management program to identify trends in rejected services. The trend information can then be provided to the managed care contracting team to help them negotiate important provisions around medical necessity, place of service, allowable amounts, coordinated provider-facility services and other elements of a well-designed VBP contract.

Contract details. A clear view of denials also can help the managed care team strengthen contractual language that covers issues such as verification and authorization processes, provider credentialing, medical documentation and coding, site-of-service billing and particular services that should be carved out as a separate payment schedule.

Contract execution. Integrated management of denials across the continuum of care helps ensure equitable allocation of funds and incentive payments between hospitals and participating providers within a bundled payment program.

How to build state-of-the-art denials management capabilities

As healthcare organizations transition to value-based care, finance leaders should continue to make smart investments in denials management, with the goal of ensuring patients are efficiently managed through the entire revenue cycle process. Two steps are essential for getting started.

1. Create an effective denials management team. Assigning clear responsibility for managing denials organizationwide is a clear priority. Centralizing denials-management functions will help ensure results. Organizations that choose to outsource denials should establish strong reporting systems and in-house accountabilities. They should make sure to incorporate key performance indicators for denials into management dashboards, including:

  • Denial rate
  • Percentage of first-time claim rejections
  • Claim rejection percentages due to missing information, missing referral or preauthorization, and eligibility/registration.

Such an approach will help finance leaders make data-informed decisions about value-based contracting strategy. In addition, finance leaders should consider adopting a technological solution that uses artificial intelligence to streamline denials management.

2. Make sure the denials management program emphasizes an effective improvement cycle. Staff should use payer response codes to create reports on denied claims. These reports can help identify trends in technical, clinical and underpayment denials and locate specific claim rejection problems. Program leaders can then use report details to address the root causes of high denials in any specific area (e.g., registration, verification, preauthorization/precertification, documentation and coding, provider credentialing) and attend to special requirements around complex or high-cost services.

For example, consider that trending reports show a significant portion of denials are related to improper coding for evaluation and management (E&M) services or surgical procedures. Medicare recently changed its approach to these services, so organizations that employ physicians (or coordinate services with them) could see an uptick in E&M-related denials and procedure denials. To respond effectively, business office coding representatives should provide feedback and education to physicians and their office staff. This issue might also call for a clinical documentation improvement (CDI) program to address provider documentation compliance.

Other functions of a denials management program might include:

  • Focusing on critical care coding
  • Documenting Hierarchical Condition Categories (HCCs) to support Medicare Advantage reimbursement
  • Optimizing ICD-10 coding to support risk stratification, care management and overall quality improvement

A balanced approach to financial strategy

As the healthcare industry transitions to value-based care, denials management will prove to be a valuable tool for understanding and managing all the costs that go into value-based contracts. For many organizations, effectively managing denials will be the difference between a financially successful contract and one that loses money once all the elements of patient care are accounted for.

Healthcare finance leaders should continue to invest in denials management capabilities and emphasize the role of denials management in overall financial strategy. An effective program will provide short-term ROI and position the organization to benefit from long-term payment trends. 

Denial management and value-based care: A stakeholder analysis


Needs and priorities

How denial management supports

Vice president of managed care

  • Accurate cost-of-care benchmarks
  • Stability in attributed population

Helps ensure benchmarks reflect actual services and covered lives include all eligible patients

Revenue cycle director

  • High first-pass claims rate
  • Low AR days and bad debt

Helps reduce rejected claims, speeding up and maximizing collections from third-party payers

Healthcare providers

  • Ability to deliver coordinated care
  • Ability to engage patients in care

Helps identify “disconnects” in the continuum of care and design strong patient communication system


  • Convenience and transparency
  • “Frictionless” payment experience

Helps organization design a fully integrated patient pathway that reduces payment frustrations


  • Low operating costs
  • Strong total margin

Helps streamline staffing, optimize patient satisfaction and increase fee-for-service and value-based-payment  revenue

Source: Lumina Health Partners, 2021



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