The healthcare claims oversight gap refers to medical claims, usually between $5,000 and $25,000, that often receive little or no review. They are too small to trigger a stop-loss review and too large to be treated as routine low-cost claims.
Together, these claims make up a large share of plan spending, and payment errors in this range are estimated to cost self-funded plans 2% to 5% of their annual claims spend.
A self-funded employer spendizng $15 million on healthcare claims each year could be losing $150,000 to $450,000 annually to payment errors without ever receiving a report that identifies those mistakes.
The Oversight Gap Most Plans Don't Know They Have
Mid-range claims are the most common and least-reviewed category in most self-funded health plans. Most plan sponsors believe their TPA handles auditing. That assumption is expensive. A standard TPA audit reviews a random sample of 250 to 400 claims and uses the results to generate an overall accuracy score. That score becomes the plan's reported error rate.
The claims oversight gap exists because no one routinely reviews a large portion of healthcare claims. Stop-loss carriers focus on very high-cost claims, while low-cost claims are often processed automatically. The claims in between receive the least attention, even though they make up a significant share of healthcare spending.
This middle band, typically claims between $5,000 and $25,000, accounts for a significant share of a typical plan's annual healthcare spending. It includes orthopedic surgeries, outpatient procedures, emergency room visits with facility fees, and specialty infusion claims that quietly add up across hundreds of members. For most self-funded plans, these claims are processed and paid without independent review.
Why the Problem Exists
This oversight gap exists for three main reasons. First, TPAs are paid to process claims, not to find mistakes in their own work. Second, many audits review only a sample of claims instead of every claim. Third, employers often have limited access to detailed claims data. Many plan sponsors also don't realize that the "audit" included in their TPA contract is usually an internal review by the TPA, not an independent claims audit.
Most claims audits review only a small sample of claims. For example, if a health plan processes 40,000 claims in a year and the audit reviews only 350, more than 39,000 claims are never checked. If the same billing mistake appears on hundreds of claims that aren't part of the sample, the audit may never find it.
Data access has historically made the situation worse. Many TPA contracts included gag clauses that restricted employers from accessing detailed claims data or from hiring independent auditors outside the TPA's approved list. Section 201 of the Consolidated Appropriations Act of 2021 (CAA 2021) explicitly prohibited these clauses and required plan sponsors to attest annually to the DOL that their contracts do not contain them. Despite the law, some plan sponsors still face delays and partial disclosures when requesting their own data.
The Real Cost
The financial impact of unreviewed claims is significant. Industry estimates put claims payment error rates at 2% to 5% of annual healthcare spending, even among well-performing TPAs. According to Withum, overpayment recoveries typically represent 1% to 1.5% of paid claims.
For a health plan spending $20 million a year, that could mean $200,000 to $300,000 in recoverable overpayments that go unnoticed.
The risk is not only financial. ERISA Section 404 requires plan fiduciaries to manage plan assets with care and prudence. Regular claims oversight helps demonstrate that the plan sponsor is actively monitoring healthcare spending.
Without documented oversight, employers may face greater legal and fiduciary risk if their claims administration is questioned. Recent litigation has also placed increased attention on whether plan sponsors are adequately monitoring healthcare plan expenses and service providers.
What's Actually Happening Behind the Scenes
Four specific error categories drive the majority of recoverable overpayments in mid-range claims, and none of them require fraud to occur.
Duplicate Payments
Duplicate claims occur when the same medical service is billed more than once. Although TPAs have duplicate detection systems, small differences in billing details can prevent the claims from being flagged, allowing the same service to be paid twice.
Coordination of Benefits Failures
When a member has more than one health plan, one plan should pay first and the other should pay only the remaining balance. COB errors occur when the wrong plan pays first or the TPA doesn't recognize other coverage, causing the employer's plan to overpay.
Medical Coding Errors and Upcoding
Procedure codes determine how much a health plan pays for a service. Upcoding happens when a provider bills for a more complex service than was performed, resulting in a higher payment. These errors are often caused by coding or documentation issues and can go unnoticed without an independent review.
Eligibility Errors
Eligibility errors occur when a health plan pays claims for people who are no longer covered, such as former employees or dependents who have lost eligibility. If these records are not updated on time, the plan can pay claims that should never have been covered.
Why Current Approaches Are Not Enough
The typical audit model was designed for compliance documentation, not financial recovery. The table below illustrates the structural difference between what most plans do and what an independent claims oversight program actually requires.
How to Fix It
Fixing the oversight gap requires six specific actions, not a single vendor change.
Red Flags That Signal This Problem Applies to Your Plan
The ROI of Doing It Right
An independent claims oversight program can pay for itself. First-time audits often recover 1% to 3% of annual claims spend. For a $10 million health plan, that could mean $100,000 to $300,000 in recoveries, while audit fees are typically much lower.
The benefits continue beyond the first audit. Regular claims monitoring helps reduce recurring errors because TPAs know their work is being reviewed. Over time, this can improve claims accuracy and reduce unnecessary spending.
There is also a fiduciary benefit. A documented claims oversight program shows that the plan sponsor is actively monitoring healthcare spending. If the plan is ever reviewed by regulators or challenged by participants, those records can help demonstrate prudent oversight.
Conclusion and Next Steps
Many mid-range healthcare claims are paid without an independent review, leaving plans exposed to unnecessary costs and risk. The good news is that employers now have better access to claims data, making independent oversight easier than before.
Start by requesting complete claims data from your TPA under your CAA 2021 rights. Then conduct an independent 100% claims audit to identify errors and establish a baseline. Use the results to strengthen your TPA agreement and implement regular claims monitoring to prevent future overpayments.
Frequently Asked Questions
What is the healthcare claims oversight gap?
The claims oversight gap is the portion of claims that are paid without an independent review. Most self-funded plans audit only a small sample of claims, leaving many payment errors undetected.
What percentage of health plan claims contain errors?
Industry estimates suggest that 2% to 5% of annual claims costs contain payment errors, including duplicate payments, coding mistakes, COB failures, and eligibility errors.
Who is responsible for claims accuracy under ERISA?
The plan sponsor is responsible for overseeing claims payments. While a TPA processes claims, the employer remains responsible for monitoring the plan.
What does the CAA 2021 require regarding claims data access?
The CAA 2021 prohibits contract clauses that prevent employers from accessing claims data or using independent auditors. Plans must annually attest that their contracts comply.
How much can an independent claims audit recover?
A first-time independent audit typically recovers 1% to 3% of annual claims spend. On a $20 million plan, that could equal $200,000 to $600,000 in recoverable overpayments.
How is a 100% claims review different from a sample audit?
A sample audit reviews only a small number of claims. A 100% review examines every claim, helping identify specific overpayments and recurring billing errors.
How often should a self-funded plan conduct an independent claims audit?
Most plans should perform an independent audit at least once a year and monitor claims regularly throughout the year.
What should I look for in an independent claims audit firm?
Choose a firm that is independent of your TPA, reviews 100% of claims, has medical coding expertise, and offers a transparent fee structure.
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