Chapter 3. Medical Billing
Medical billing in the United States ranks, in our experience, with nuclear physics and rocket design in challenges to mastery. These fields all have incredibly steep learning curves and require years of study, patience, and experience. We are not joking about this. Medical billing is one of the most difficult tasks that can be undertaken, and performing it successfully is an extraordinary feat. The United States generates more than $3 trillion of medical spending per year, which leaves the payers (insurance, government, patients) in an all-out war to avoid paying as much as they can to the recipients such as facilities, providers, and other servicers. To put that $3 trillion number in perspective for a moment, realize that the entire federal government across all operations, including defense, spends just a little more than $3 trillion per year. Healthcare is the largest pie out there, but it is exceptionally hard to get a slice.
Between terminology, legal issues, coding, and the mechanics of claims, this chapter has an enormous amount of material to cover, so be prepared to stick around for a while. We will provide a good overview of medical billing workflows as well as a Rosetta stone for the jargon you are likely to encounter. Understand, however, that even with this chapter’s length we can only begin to scratch the surface of all that medical billing entails. Medicare alone, the federal government insurer, has more than 2 million pages of documentation describing the rules, regulations, and mechanics of billing only that organization. We don’t want to dishearten you further, but there are more than 2,000 payer organizations in the United States, each with voluminous and conflicting sets of regulations.
Starting off, it is important to identify a couple of quick terms that will make explaining a lot of workflow steps more concise. First, we use the system to refer to healthcare as a whole: all activities where patients see medical or administrative personnel for any kind of diagnosis, treatment, or interaction. Next, let’s define the basic actors in the system: the patient is on the receiving end of some kind of medical intervention, the provider offers or performs the intervention, and the payer is responsible for the financial cost for that intervention. With that out of the way, we can lead into the details that make this all so complicated.
Who Pays, and How
Fundamentally, medical billing is about other people’s money. Anything that happens to patients in the system is expensive—very, very expensive. We will look into why that is often the case later in this chapter, but take our word for it: if you haven’t already had an outrageously high medical bill or two, you probably will. As a result of that high expense, the overwhelming majority of patients are not able to directly pay for the services they incur when they enter the system and this is where the payers step in. What might first come to mind is the traditional medical insurance company; they are definitely in the payer category. However, thousands of other organizations pay for some or all of the services for different and specialized parts of the population:
Large companies that directly pay for medical services, acting as their own insurance company for their employees
Workers’ compensation systems that pool funds and pay for medical services in specific cases
Government funds such as Feca/Black Lung, which pay only for treatment of a specific diagnosis
Other government funds that are disease-specific, such as Ryan White, which pays for most care but only for HIV/AIDS patients
And there are easily thousands of other unique payers who defy categories. Finally, patients themselves are burdened with some amount of individual financial responsibility in most transactions.
Claims
Now that we have defined the large number of potential payers of all shapes and sizes, we need to discuss the fundamental transaction of medical billing: the claim. The claim can be thought of a bit like an invoice in other industries, with one vital difference: you almost never get the amount you ask for on the claim.
Many people might be surprised to learn that even now, a large number of medical claims are completely paper transactions from end to end. Although not terribly important to the overall workflow, we’ll mention here the CMS1500 and CMS1450 physical paper forms so that you are familiar with the terms. The CMS1500, also sometimes still called the HCFA1500, is the name of the paper form used to communicate a claim for a patient who was seen in an outpatient interaction. CMS1450, or sometimes still called the UB-04, is the equivalent paper form for a patient seen in an inpatient interaction. The forms are rarely but diligently filled out in pen, more commonly printed on a laser printer, or somewhat unbelievably still printed with dot-matrix printers.
The purpose of the medical claim document, whether the paper form just mentioned or in an electronic format discussed next in this chapter, is to communicate the precise actions, tools, and supplies that were provided or used in the patient interaction with the provider. Each of those is itemized and priced. Alongside that is information about the facility, the provider, and the patient. Those details include national identification numbers, tax identifiers, specialized codes for the actions performed called procedure codes, specialized codes for the diagnoses or reasons justifying those actions, special codes for supplies, and finally itemized prices associated with each of the specialized procedure codes.
Paper forms were the standard medical claim in several different versions since the inception of Medicare in the 1960s, and as we mentioned continue to be used today in a surprisingly large number of instances. When HIPAA was passed in 1996, it attempted to standardize a new electronic format for medical billing. That format leveraged electronic data interchange technology originally invented in the 1970s known as ANSI 837. Although the format was still somewhat contemporary at the start of its adoption in the 1990s, it is terribly antiquated today, but deeply entrenched efforts to modernize again have fallen flat. So today medical billing claims exist as either very antiquated paper documents or a very antiquated electronic format.
Now that the terminology bounding the medical workflow has been discussed, we can look at the workflow in more detail.
Eligibility
The first element of medical billing occurs before the patient has actually been seen by the provider and when he or she first enters into the facility to receive services. This first step can be categorically called eligibility and is a determination about the patient’s ability to pay for the services to be received. If the patient has insurance, several questions come into play, such as whether the information provided by the patient corresponds with the insurer’s records, whether the insurance is up to date, whether the insurance will cover the provider(s) to be involved in the care, and to what financial extent the services will be covered. In emergency situations, this eligibility step does not generally occur until after treatment has begun. However, in almost all other scenarios, eligibility has a profound effect on the availability, type, means, and service level of treatment. Many medical personnel might object to this last statement, seeing it as controversial or even offensive, but in the authors’ opinion based on more than 20 years of collective experience in managing medical workflows, it is incontrovertible.
The ability of patients to meet potential financial obligations dramatically affects their path through the system. The hoops that many facilities must jump through to receive remuneration from payers increases significantly in inverse correlation to the patient’s generosity of insurance and ability to self-pay.
The completion of the eligibility step ends with one of three general conclusions:
The patient seems to have the insurance coverage or personal wealth to cover the care she is likely to receive.
The patient has most of the insurance coverage for the care she’ll receive and will be personally responsible for the remainder owed.
The patient does not have sufficient insurance coverage or personal wealth to cover the likely care.
The patient might or might not owe an installment payment before she receives care, called a copayment or copay. This payment could be a fixed fee or a percentage of likely fees paid by the patient and serves two purposes. The first is a concept serving the payers that this fee is a disincentive to receive care that is not absolutely required. There is not a lot of evidence to either support or discount this concept. The second aspect of the copay is a compromise between facilities and payers that provides the facility with some amount of cash flow before the medical claims are resolved and paid, which can often take weeks or even months. Without copays, many types of facilities would need significant additional financial reserves to function while waiting for claims to be paid.
After tendering the copayment, the patient continues on to the care workflow described in Chapter 2. We will focus on some specific parts of that workflow that relate to billing after reviewing the other two eligibility determinations a patient might fall under. If the patient has only partial insurance coverage for the care she is likely to receive, the patient has to provide some financial guarantees for the remainder of charges that might occur. This is usually done in the form of a contract between the patient and the facility. The facility will attempt to collect as much remuneration as is authorized by the patient’s payers, and the remaining balance will be billed to the patient directly. Involving multiple payers to cover a single patient’s potential bills, and then possibly billing the patient directly, adds significant layers of complexity to the claims process.
The third determination on eligibility, that the patient has no insurance or is otherwise unlikely to be able to cover the planned services, is also very complicated. Depending on the type of provider services needed, the facility might choose to turn the patient away, alter the type of care to fit within the confines of the available payers, or attempt to supplement the available payers with additional government, charitable, or other programs. A few types of facilities treat patients regardless of their ability to pay or have payers cover services. One notable, long-term, and successful endeavor operated by the federal government is the Federally Qualified Health Center (FQHC) and Community Health Center (CHC) program, which offers higher payments for certain Medicare-insured patients in exchange for an agreement by the facility to treat all patients regardless of their coverage or personal ability to pay.
We end this discussion with new requirements introduced by meaningful use. The guidelines require a health facility to have electronic eligibility verification available, but it does not necessarily have to be used. Many large commercial (nongovernmental) payers can conduct a computerized inquiry sending the patient’s information and receiving a response that confirms the patient’s participation in that program and defines coverage levels. If electronic eligibility verification is not available, the information is typically input into a payer-provided website or a telephone call is made to make the determination.
Treatment
With the eligibility determination completed, the stage is set for the patient to see the provider. Chapter 2 points out several additional clinical steps that can occur, but for the purposes of the billing workflow, we can jump to the interaction between the provider and the patient. A delicate question exists about how much a patient’s eligibility determination and coverage levels affect the clinical decision-making process. We don’t claim a direct relationship, but the eligibility determination generally colors the range of available treatment options and patients typically must make decisions among the treatments financially accessible to them.
This takes us to a very important question that hangs over medical billing: How much does a particular interaction or treatment cost? This seems like an obvious question to many patients, but the answer, like almost everything else in medical billing, is very complicated. We can start clarifying the question further by rephrasing it: How much is the treating facility going to bill for the codes in this particular interaction? And that is a nice segue for us to talk about the fundamental unit of medical billing, the code. These codes have been mentioned a few times in this book so far, but it is important here that we break down the particular codes of importance to medical billing. These are:
- Procedure codes
These come from the Current Procedure Terminology (CPT) list, updated each year by the American Medical Association. This set of codes can be differentiated from the others we will discuss next by thinking of them as a reference for what providers do. CPT codes identify, in little pieces, the entire set of actions by providers for which some kind of remuneration is available. For example, the code 99214 describes an “office or other outpatient visit for the evaluation and management of an established patient, which requires at least two of these three key components: a detailed history, a detailed examination and medical decision making of moderate complexity.” A visit of that type is intended to take approximately 25 minutes. The provider may perform many activities with the patient, but unless a CPT code exists for it, there is no financial remuneration available to the provider. (Famously, there is no code for answering a patient’s email.) At this time there are roughly 17,000 CPT codes.
- Diagnosis codes
These come from a set of codes with the name ICD-9, for International Classification of Diseases. A myriad of entities are involved with the creation and maintenance of ICD-9 (see International Classification of Diseases (ICD) for details), but medical billing makes use of an adapted set of the codes called the ICD9-CM (where the CM stands for “clinical modifications”). The ICD9-CM is maintained by the National Center for Health Statistics and the Centers for Medicare and Medicaid, both of which are part of the federal government. To understand the role of diagnosis codes, you can think of them as the why that provides justification for a particular act that the provider performed. Again, the provider can perform many acts, even those that have CPT procedure codes associated with them, but unless she also provides a sufficient “why” in the form of diagnosis codes, there will be no remuneration.
- Supply, nonprovider, and drug codes
These come from the HCPCS (pronounced hick-picks) set of codes and identify specific supplies, physical goods, drugs, and a catch-all assortment of acts done by nonproviders (such as ambulance services). HCPCS stands for Healthcare Common Procedure Coding System. These codes are also maintained by the Centers for Medicare and Medicaid. The codes can be thought of as a supplement to CPT codes, and for practical purposes are used interchangeably on billing forms.
Note
There is more information on these codes and the relationships between code sets in Chapter 10.
Now let’s return to the question of what the facility charges for a particular intervention represents. That stems first from the facility’s assessment of its own costs: overhead, salaries, and so on. Then they look at what other facilities in their region charge and what payers pay for that action on average. They do some cost shifting from activities that might need to be done but for which no code exists, and finally include some kind of weighted factor to cover nonpayments, underpayments, and bad debt.
Bringing the various parts together, each facility assigns a distinct price to a specific code from the CPT or HCPCS list. That table of prices or fees is commonly referred to as a fee schedule. For accounting purposes, a facility is required to define a base or default fee schedule, although in practice some facilities might have different fee schedules that apply to cash-only patients or other specialized circumstances. It is not legal in all jurisdictions for a facility to employ multiple fee schedules.
Yet another twist is the notion of discounted fees. Many facilities participate in a variety of payer programs or incentives that apply per-interaction or per-code discounts. The most common application of discounts is for patients who are near or below the federal poverty level. Those patients might receive a flat rate pricing model, a percentage discount, or other more complex schemes. The discounts present several complicated accounting problems, especially when combined with facilities that employ multiple fee schedules for different payers.
Returning to the provider interaction with the patient, we come upon yet another complexity in answering the “how much does it cost” question. There are many more codes than a provider can possibly know off the cuff, each of which can have a distinct price. Even keeping track of the correct code for a particular action, beyond those performed routinely, is an all but impossible feat for most people. To help organize the code selection process, facilities compile a list of their most commonly employed procedure and diagnosis codes into a document or screen commonly called a superbill. The provider pulls up the superbill, ticks off the appropriate codes, and attempts to provide additional information about acts for which no quick pick code was present. That additional information will later be consulted by the medical billing staff to try to determine codes that might be applicable, if any.
A simple visit to check out a patient’s persistent cough can quickly become something much more complex due to the breath sounds found when using the stethoscope. That could lead to X-rays, blood tests, and a referral to a specialist. The prevalence of chronic diseases such as diabetes also greatly complicates care and coding such that what might be a routine visit for a relatively minor cut with stitches can veer off into treatment and diagnosis of numerous complications. Maybe the cut was caused by the patient losing balance due to poorly controlled blood sugar. Because of the layers of details in those instances it can be very difficult for a provider during the interaction to capture all of the nuances of the interaction with codes. That can be done much more deliberately by a biller reviewing the free-form notes.
If the superbill is a paper form, data entry will need to be done into the billing system at a later point. Use of an electronic system by the provider means that some review might be done by billing staff, but the data entry step can be avoided.
At the point the patient has completed treatment and is being discharged or otherwise leaving a facility, a facility typically tries to collect any balance that it is certain will not be covered by a payer.
Billing
With the encounter information in hand, the heart of the medical billing workflow really begins. The staff of the medical billing department first perform an audit to make sure they have all the records for all treatments and interactions that might have occurred. The easiest place to surrender money in a medical workflow is to lose track of services, supplies, and treatments that were provided. For paper-based facilities, this process can be particularly arduous as physical paper needs to be rounded up. For electronic systems, the process might be a little easier but there are still plenty of possibilities for misrecorded or conflicting entries.
The Billing Process
Now that all the information about what has been done reaches the billing staff, their job is to coalesce that information into medical claims. For simple interactions, when the providers were able to select mainly from the predefined pick lists, a claim can be generated pretty easily. When providers delivered nonroutine treatment, a superficial review of notes might be sufficient to identify the proper codes. However, a detailed review of the entire medical record could be needed to properly assess what is appropriate to bill on the claim.
Now is a good point to talk about billing staff in general and whether they are part of the providing organization. Two cottage industries have developed within the system to facilitate medical billing: billing services and clearinghouses.
A billing service is really an outsourced billing department that receives either the paper or the electronic data about interactions and performs the billing activities on behalf of the facility. Billing services most commonly take a percentage of claim revenue recovered as payment for services. As providers install EHRs and do more electronic claims processing from start to finish, billing services are seeing declines in business. Once you have a mostly electronic workflow, billing services are usually a poor value, because historically their value proposition has been based on the outsourcing of data entry functions in addition to claims processing.
Clearinghouses act as a go-between from the provider’s billing systems to the payers’ electronic claims systems. As we discussed, there are many hurdles and steps in sending electronic claims, and clearinghouses have experience addressing the more common problems that payers might introduce. Some even have very elaborate preprocessing systems that conduct their own review of claims before they reach payers and can often be set up to automatically fix certain problems before final transmittal of the claims data to the payer.
One other very popular service many clearinghouses provide is called combined ERA. We discuss ERA claim responses later in this chapter, but suffice it to say that combined ERAs are a lot like having a copier that collates printed copies for you. Without a combined ERA, a facility has to do a lot of manual organizing and sorting of claim payment information. Clearinghouses typically charge a flat monthly fee per provider or a flat fee for each claim they transmit. The return on investment of using a clearinghouse varies widely, and most specialize in particular medical areas, so there are no good generalizations about whether a particular clearinghouse is appropriate for a specific provider. More often than not, smaller organizations employ clearinghouses until they are large enough to command direct and favorable attention from the highest volume payers they work with.
The claims themselves are a snapshot of patient demographic details, payer information, facility information, and the coding that was done by the provider and updated by the billing staff. For each procedure code, the biller constructs a claim line that consists of, at a minimum, the procedure code, one or more justifying diagnosis codes, and the billed amount based on the facility’s fee schedule. For paper claims, the information is placed onto the forms and mailed or faxed. Thankfully, paper claims are beginning to be the exception rather than the rule. Electronic claims are finalized and transmitted directly to a payer or intermediary via a modem over dial-up (still common for governmental payers) or over the Internet.
Complexities in Billing
The justification of procedures presents several challenges for practices. For each individual procedure, one or more diagnosis codes must be used to justify the procedure, taking into account the order of the diagnoses. The first listed diagnosis is considered the primary justification, with the additional ones considered supplementary. It is uncommon, but not unheard of, to use more than four diagnoses to justify a single procedure. Where the justification becomes tricky is that, in most workflows, the provider has neither the time nor inclination to make the extremely detailed and nuanced decisions that are necessary to qualify a procedure to make sure that it’s expressed in a way that will be paid. Many smaller facilities think that adopting an EHR will eliminate or reduce the need for specialized billing staff (either outsourced or direct employees). Unfortunately, this is not true for several reasons, one of them being the complexity of claim justification.
When the billing staff finalizes the claim, we arrive at the first time in the workflow that there really is some indication of what the patient could potentially owe. However, that amount is only a theoretical calculation of the amount the practice will ultimately receive because of possible denial or underpayment by the provider, and because of the difficulties in recouping 100% of remaining costs from the patients or others who are financially responsible for the services that were provided.
Finalization takes many forms, but one consistent step is the application of edits. These are errata or addenda, based on experience or a computer system, that make small adjustments to the coding to account for peculiarities of individual payers and coding situations. The computer software can be purchased or contracted out. In some cases, edits trigger a warning on a claim. In other cases, they automatically translate coding data from the values originally entered into an altered form that will appear on the claim. Edits can save a lot of time by avoiding refusals or denials for procedural rather than clinical or contractual reasons. Medicare is the pinnacle of complexity in this regard, and an entire subagency with a staff of several hundred people is employed to produce two very large data sets that can be used in electronic edits systems and by other payers in their back-end processing.
Facilities that have been operating for a while begin to construct their own unique list of edits based on experience with claims for their unique line of care and patient population. A good feature for electronic billing systems is some type of claim rules engine (CRE) that automatically applies relevant edits to each claim that is created.
Medicare, which maintains its own comprehensive set of coding guidance, produces enormous data sets for automated computer checking that are collectively referred to as the National Correct Coding Initiative (NCCI). The NCCI consists of two very large data sets:
- Mutually Exclusive Codes list
Procedure codes that cannot or should not appear on the same claim. A simple example might be the application of both the 99213 and 99214 procedure codes on a single claim. Each of those codes represents an established patient visit with different length and complexity, so there is no realistic way that both codes could be applicable on a single claim.
- Medically Unlikely Edits list
Combinations that, for clinical reasons, are very unlikely to occur on the same claim and will receive the maximum level of scrutiny by the payer.
If one spins out all the combinations possible with these lists, they cover more than 2 billion (yes, billion) coding possibilities.
Just for the sake of completeness, there is also a third secret data set colloquially referred to as the Fraud Watch list. It is disseminated only within CMS and to its contractors and is protected with a large amount of secrecy. This list encompasses coding combinations that Medicare believes, or has evidence to show, are being exploited for the purposes of fraud. A facility that frequently submits claims with large numbers of hits on the fraud list is flagged for auditing by Medicare. The list is kept secret so as not to alert the fraud perpetrators and to prevent its use as a dictionary for committing fraud. Private payers have similar, if less sophisticated, systems in place.
Adjudication
Adjudication is the payer’s process for resolving a claim and—if it is deemed valid—determining a payment. Usually, facilities get paid much less than the face value of the claims. Paper claims can undergo incredibly long volleys of resubmitting a claim and receiving a written response. Electronic claims generally pass through several specific adjudication steps:
The format of the claim is validated. The intricacy of the 837 technology leaves plenty of room for problems in formatting. An electronic claim can be refused by the receiving systems immediately on submission, or more commonly after some kind of processing delay caused by the need for parsing and format checking. These refusals have nothing to do with the merits of the claim, but simply mean that the receiving system could not digest the document. Every payer and program has subtle and distinct rules and parameters about the electronic format they will accept. Attempts by HIPAA to define a rigid, standard claim format have not unified the marketplace. Part of the difficulty is technological, because different payers employ difference processing systems with unique properties. But part of the barrier is intentional, to make sending claims as cumbersome as possible. Several cottage industries have popped up to address the opaque process required simply to prevent a claim from being refused electronically by payers’ systems. When a claim is refused electronically, the biller or their agent can make corrections and retransmit it, so a loop can occur as many times as necessary to get the claim’s transmission accepted.
Once an electronic claim has been successfully transmitted, the payer’s system evaluates the enclosed demographic, policy, and coding information. This could take hours or even days to complete. It is routine for claims to be denied at this point for very minor problems, including subtle mismatches of name, address, and policy information. Denial, which is the name for rejection at this point, is different from refusal, which the electronic system could generate at the previous stage. Depending on the specific reason for the denial, the facility can revise the claim and resubmit it with the correct information. This can sometimes require follow-up with the provider or patient. Claims submissions are typically limited by the payer to a set number of denials (after which they will not pay) as part of the contract between the facility and the paying organization.
Should a claim successfully complete validation, it is then reviewed on clinical and contractual grounds, taking into account the type of care, the patient’s policy and contract with the paying organization, the facility’s contracts, and so forth. Not all services a provider might deliver are covered by all payers in their arrangements with the provider. Some services might not be covered at all, or the patient might have some type of deductible amount or coverage ceiling that places the service outside the boundaries for compensation from the payer. This final review is the actual adjudication of the claim, and most often results in partial payment for some of the codes that were billed.
At this stage, payments are made on a procedure code by procedure code basis. For each line in the claim, the payer defines an amount of payment and gives a reason for any amount that is not being paid. The collective feedback on a particular claim is called an explanation of benefits (EOB) when it is delivered by paper. When it is returned electronically, it is more frequently called electronic remittance advice (ERA). In many cases, payers make errors with respect to adjudication and the facility or patient must then engage in an appeal or re-review process to resolve underpayments or denials of payment that might be unwarranted.
Already you can begin to see the enormous undertaking involved in getting payment for even a single claim. On average, it takes three attempts and resubmissions to have a claim adjudicated to the fullest extent that the provider or patient can achieve. We have to travel even further down the rabbit hole for patients whose services are potentially covered by multiple payers. Payers must be contacted in the correct order, and a claim that was partially covered by one payer must be recompiled to take into account payments to date and then sent on to the next payer, including the complete array of reviews and hurdles.
Having transmitted claims and received responses, denials, and adjudications, a facility will eventually receive payment for the services provided. For claims sent via paper, the timeline to actual payment can be very long, in the worst cases stretching out to almost a year from the date the services were provided to the patient. For electronic claims the timeline is significantly better most of the time, with the actual delivery of payment in 7 to 30 days.
The Patient’s Burden
It might seem as though the billing workflow is close to completion with the reception of payment from the payer, but unfortunately that is far from the truth. Having received the EOB or ERA, a facility must reconcile the information provided with the balances they billed out on the claim and figure out the patient’s responsibility for any remaining amount owed. Once payment is received from one payer, a claim might then need additional rebilling to one or even two more payers. After exhausting third-party payers, the billing staff must then begin a patient billing process, sending out statements and following up with patients to receive final remuneration on the services that were provided. There is no end to the complexity here. For instance, patients who are billed about a remaining balance might choose to engage in appeals and processes for resolution with their responsible payers.
The final statistics on dollars in and dollars out are pretty grim for healthcare facilities. It is uncommon that they receive more than 85 cents from payers for each dollar billed on claims and another 5 cents from patients for the remaining amount owed. Some specialties fare much better than average, whereas some specialties and particularly general practice medicine tend to fare worse.
The steps by which a billing staff follows up with patients and payers in collecting amounts owed is not all that different from those steps performed by any business that collects money for services already delivered, simply the handling of accounts receivable. The involvement of third-party payers certainly makes it more difficult in the healthcare system, along with the life impacts of medical treatment. Treatment can represent the most stressful time for people and families, and they could perceive the activities to collect money that might be owed as insult on top of literal injury.
The long potential delay between when an interaction occurs and when a facility might receive payments from a payer can also present a further hurdle for the facility ultimately collecting a balance from the patient. Many months after the fact, patients might have forgotten the details of the interaction, failed to budget for the charges, or had other significant life changes including moving jobs and insurance, or just plain moving. Dollars outstanding to patients typically take at least 30 days and as long as 18 months to collect. At that point, the bills are either sent to a collection agency or forgone as irrecoverable debt.
In concluding this discussion about medical billing, it is worthwhile to ignore the sometimes overwhelming complexity of it and to take away the crucial elements, which are these: