Decoding Denials, Measuring Performance, and Calculating the True Cost
In Part 1 and 2 of our series, we examined the alarming trends in claim denials and the significant financial impact they have on cash flow, administrative costs, and patient satisfaction. Now, in Part 3, it’s time to get into the mechanics. To truly “Turn Data Into Dollars,” you need a playbook for understanding, measuring, and analyzing your denial problem.
1. Decoding Denials: CARCs vs. RARCs
Every denied claim comes back with a coded explanation, but to understand what went wrong and how to fix it, you need to know the difference between the two key code types.
- Claim Adjustment Reason Codes (CARCs) – The “Why”
- CARCs explain the primary reason a claim was paid differently than billed. They provide the core reason for any financial adjustment, including the denial itself.
- Common CARC Examples:
- CO-197: Precertification/authorization/notification absent.
- CO-50: Non-covered service; not a medical necessity.
- CO-29: The time limit for filing has expired.
- Remittance Advice Remark Codes (RARCs) – The “Details”
- RARCs provide supplemental details or clarifications about the adjustment already described by the CARC.
- Common RARC Examples:
- N130: Additional documentation required for claim processing.
- M31: Missing required documentation (e.g., radiology report).
- N71: Adjustment due to timely filing limit.
Understanding both codes is crucial for follow-up, as the RARC often gives the specific administrative context needed for a successful appeal or correction.
2. The Core Problem: Most Frequent Denial Reasons
A denial is rarely an isolated incident—it’s usually a symptom of a systemic breakdown. By frequency, the most common denial reasons indicate where your revenue cycle’s weak points lie. Examples might be:
- Duplicate Claims / Duplicate Service
- Eligibility/Insurance Coverage Issues (including expired coverage)
- Lack of Prior Authorization or Pre-Certification
- Authorization Number Missing or Invalid
- Timely Filing Limit Exceeded (Late Submission)
- Missing or Incorrect Patient Information (demographics, ID)
- Medical Necessity Not Met
3. What Gets Measured Gets Managed: Denial KPIs
As Peter Drucker famously stated, “If you can’t measure it, you can’t improve it.” The most critical Key Performance Indicator (KPI) for denial management is the Denial Rate.
Benchmarking Your Denial Rate
You should measure both the Initial and Final Denial Rates:
| KPI | Definition | Industry Benchmark |
| Initial Denial Rate | Percentage of claims denied by payers upon first submission. | 16–20% |
| Final Denial Rate | Percentage of claims that remain denied after all appeals have been exhausted. | 2–5% |
The Calculation
The Initial Denial Rate gives you the most immediate picture of your process health:
Initial Denial Rate = Total Number Denied Claims / Total Number of Claims Submitted
For instance, if your practice submitted 7,013 claims in a month and 562 were denied, your Initial Denial Rate would be 8.01% (562 / 7,013).
The Final Denial Rate measures how much money you ultimately lose:
Final Denial Rate = Number of Denied Claims After Appeals / Total Number of Claims Submitted
Example: If your Initial Denial Rate was 14% (1,400 claims out of 10,000) and you successfully overturn 65% of those denials, the remaining 3.9% (540 claims) would be your Final Denial Rate. The industry benchmark for this final, hard-loss rate is typically 2-5%.
4. The Real Price Tag: Calculating the Cost of Denials
A denied claim isn’t just lost revenue; it’s an administrative expense that eats into your profit margins. On average, the cost to work a single denied claim is $43.84 (though it can range from $25 to $118).
To understand the true impact of denials on your practice, you must calculate both the cost to work them and the net value of recovering them.
Formula 1: Cost to Work Denials
This simple formula reveals the annual administrative expense caused by claim rework:
Cost to Work Denials = Total Annual Encounters X Denial Rate X Cost to Work a Denial X $44
Formula 2: Net Value of Working Denials In-House (Complete)
This comprehensive formula calculates the financial return on your denial management efforts by balancing the expected recovery against the cost of the labor required to appeal the claims.
(Note: The industry average Denial Recovery Rate—the percentage of appealed denials that are overturned—is 54%).
Net Value = Total Encounters X Denial Rate X [Average Reimbursement X 54% Recovery Rate – $44 Cost to Work a Denial]
A Real-World Example
Consider a Primary Care Clinic with the following metrics:
| Practice Metric | Value |
| Total Annual Encounters | 57,600 |
| Average Revenue Per Encounter (ARE) | $131 |
| Initial Denial Rate | 14% |
| Denial Recovery Rate | 54% |
| Cost to Work Per Denial | $43.84 |
The Resulting Financial Impact:
| Calculation | Value |
| Total Cost to Work Denials | $353,525.76 |
| Expected Recovery (Value of recovered appeals) | $570,447.36 |
| Net Gain Working Denials In-House | $216,921.60 |
Up Next: In Part 4, we will shift our focus from analysis to action. We’ll explore the “People, Process, and Technology” strategies needed to prevent denials at the source and maximize your operational effectiveness, even “With Half the Staff.”
Learn How to Improve Denials with UnisLink
Ready to tackle your medical billing denial challenges? Download our free denial management whitepaper to gain a deeper understanding of these issues and learn actionable strategies to improve your practice’s financial health.
Download your free copy of “Navigating Denial Management: An Essential Guide for Physicians” to gain actionable insights and proven strategies for building a healthier, more profitable revenue cycle.
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