Feb 27
2025
Surging Audit and Denial Rates Signal Need to Prioritize Continuous Financial Risk Monitoring in 2025
By Ritesh Ramesh, CEO, MDaudit.
Amid a 125% rise in coding-related denials and a 140% increase in inpatient medical necessity denials, 2025 will see healthcare providers deploying real-time financial risk monitoring as a cornerstone of stability.
Adding to the urgency around overhauling revenue cycle management (RCM) strategies to prioritize revenue optimization and risk mitigation is a fivefold increase in total “at risk” dollars to $11.2 million and a doubling of external audit volume in 2024 over 2023—including a sizable increase in pre-payment audits and their propensity to exacerbate cash flow issues and expose providers to potentially higher denial rates.
These headwinds, coupled with slower reimbursement timeframes, tempered any gains from improved revenues and operating margins in 2024 and threatened healthcare providers’ financial stability—a backdrop of challenges that are among the key findings of the recently released 2024 MDaudit Annual Benchmark Report.
The annual report’s findings elevate the transformation of 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.
Impending Financial Risks
The Benchmark Report is a comprehensive examination of real-world data representing the first three quarters of 2024 collected from a network of more than 650,000 providers and over 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. Over 5 billion claims and remits were used for benchmarking.
In 2023, the annual report forecast that strong volumes for healthcare organizations would be moderated by challenges related to controlling costs, improving margins, and seizing opportunities to generate new revenue streams. These 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 4% against a surge in audits and denials in 2024. Looking ahead to 2025, the latest report finds that those same challenges remain. However, this time they will be strengthened by new risks around timely reimbursement and cybersecurity costs, which will impede any forward momentum toward financial stability for healthcare organizations that don’t take action to transform their approach to RCM.
Surging Audit and Denial Rates
The Benchmark Report identified an increase in pre-payment audits as a driving force behind the rise in external audits. The latter resulting in an increased average denied amount per claim across professional (~4%), hospital outpatient (~5%), and hospital inpatient (~7%) settings.
Additionally, the 126% increase in coding-related denials represented one of the largest increases in the last three years despite billions of dollars invested in outsourcing coding operations and automated coding technologies. The average denied amount also increased across all care settings, led by hospital inpatient-related denials (~200%). As such, coding remains one of the biggest revenue capture and margin expansion improvement opportunities.
Payers also intensified their scrutiny of clinical documentation as audits surged by 100% over 2023 levels, contributing to a 3-year increase in clinical denials of 51%. More claims dollars were denied in 2024 by Medicare and commercial payers 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. They should also:
- 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.”
MA Scrutiny Intensifies
Scrutiny of Medicare Advantage (MA) plans by the Centers for Medicare and Medicaid Services (CMS) intensified in 2024 as part of its ongoing initiative to ferret out fraud and abuse—efforts CMS expects to continue as it seeks to recover an estimated $4.7 billion from MA plans by 2032.
HCC and Medicare Risk Adjustment Data Validation (RADV) audits increased by 72% over 2023, leading to a 51% increase in total denial amounts for MA plans in 2024. The high risk of overpayments identified by those audit findings, 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% of providers, on average, failed audits across both professional (33%) and hospital (23%) care settings.
Enhancing Billing Compliance with AI
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. This focus led to an increase in retrospective audits in MDaudit of 10% in 2024 over 2023 while prospective audits increased by 275%.
MDaudit data also generated a clear snapshot of problem areas, including medical coding (39%) and secondary diagnosis documented but not billed (37%) in hospital billings and diagnosis documented but not billed (58%) in professional billing. It also revealed 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, 2025 winners and losers in the healthcare margin race will be determined by investments in technology, data, and analytics to enable real-time and continuous monitoring of billing risks. By investing in technologies that bridge mid-cycle and back-end functions, healthcare organizations can drive more substantial margins and cash flow while mitigating risks tied to payer-driven policies and denials.