Hospital Billing Process

Chapter 5

Hospital Billing Process

Key Terms

Accept assignment

Accounts receivable (A/R) management

Ambulatory Payment Classifications (APC)

Ambulatory surgery

Billing process


Case mix

Case rate

Charge Description Master (CDM)

Claims process

Clean claim


CMS-1450 (UB-04)



Contract rate

Detailed itemized statement

Dirty claim

Electronic data interchange (EDI)

Electronic media claim (EMC)


Facility charges


Fee schedule

Flat rate

Form locator (FL)


Inpatient Prospective Payment System (IPPS)

Medicare Severity-Diagnosis Related Groups (MS-DRG)

Outpatient Prospective Payment System (OPPS)

Participating provider agreement

Patient invoice

Patient statement

Per diem

Percentage of accrued charges

Professional charges

Prospective Payment Systems (PPS)


Relative value scale (RVS)

Remittance advice (RA)

Resource-Based Relative Value Scale (RBRVS)

Revenue code

Third-party payer

Timely filing

Usual, customary, and reasonable (UCR)

Acronyms and Abbreviations


American National Standards Institute


Ambulatory Payment Classifications


Accounts receivable


Ambulatory Surgery Center


Charge Description Master


Conversion factor


Centers for Medicare and Medicaid Services


Diagnosis Related Groups


Emergency Department


Electronic data interchange


Electronic media claim


Emergency room


Form locator


Geographic adjustment factor


Health Care Financing Administration


Health Care Common Procedure Coding System


Health Insurance Portability and Accountability Act


International Classification of Diseases, 10th Revision, Clinical Modification


International Classification of Diseases, 10th Revision, Procedure Coding System


Inpatient Prospective Payment System


Medicare Severity-Diagnosis Related Groups


National Drug Code


National Uniform Billing Committee


Outpatient Prospective Payment System


Prospective Payment Systems


Remittance advice


Resource Based Relative Value Scale


Relative value scale


Relative value unit


Uniform Bill, CMS-1450


Usual, customary, and reasonable


Utilization management

The purpose of this chapter is to provide a basic understanding of the hospital billing process. The billing process includes submitting charges to third-party payers and patients, posting patient transactions, and following-up on outstanding accounts. As discussed in previous chapters, information collected during the patient visit is used to complete the tasks required to bill for services rendered. A review of the billing process will provide an understanding of how vital billing functions are for the hospital to maintain a sound financial base.

The role of hospital billing and coding professionals is complicated because of the ever-changing health insurance environment and variations in payer guidelines. It is essential for billing and coding professionals to understand payer guidelines to ensure that accurate reimbursement is obtained and to ensure compliance with payer guidelines. A review of several provisions of the participating provider agreement (PAR) “payer contract” will illustrate how payer guidelines vary and the significant impact they have on the billing process. A discussion of how charges are captured, coding systems, and claim forms will provide a basis for understanding the billing process. The chapter will close with an overview of the hospital revenue cycle from patient admission to collections. Many of the concepts presented in this chapter are presented to provide an overview of the hospital billing process. These concepts will be expanded upon in future chapters.

Purpose of the Billing Process

The purpose of the hospital billing process is to obtain reimbursement for services and items rendered by the hospital. Reimbursement is received from patients, insurance carriers, and government programs. The hospital billing process begins when a patient arrives at the hospital for diagnosis and treatment of an injury, illness, disease, or condition. The billing process involves all the functions required to prepare charges for submission to patients and third-party payers to obtain reimbursement for hospital services. The term claims process refers to the portion of billing that involves preparing claims for submission to payers. An extension of the billing process is collections, also known as accounts receivable (A/R) management, which involves monitoring accounts that are outstanding and pursuing payment of those balances from patients and third-party payers.

The complexity of the hospital billing process is a result of the health care industry’s evolution. Health insurance and government-funded health care benefit programs were born. Regulation of the health care industry was enhanced. Contracts between providers and payers were initiated. The process of submitting charges became more involved. It now involves authorizations and certifications, medical record documentation, coding, participating provider agreements, various payer guidelines, and different reimbursement systems (Figure 5-1). The complexity of this system makes it essential for hospital billing and coding professionals to have knowledge of key elements of the billing process to ensure that appropriate reimbursement is obtained and compliance with payer guidelines. This section will discuss key elements: payer guidelines, Charge Description Master, coding systems, and universally accepted claims forms.

Payer Guidelines

Variations in payer guidelines contribute significantly to the complexity of the billing process. Guidelines for the provision of patient care services, claim submission, and reimbursement vary from payer to payer. Hospitals are required to comply with all provisions in the participating provider agreement. Compliance with these guidelines is a condition for receiving reimbursement, and legal consequences may result from non-compliance. A review of some common provisions in a participating provider agreement will highlight the relationship between the agreement and the billing process.

Participating Provider Agreement (PAR)

The hospital’s payer mix includes various payers that provide coverage to patients seen at the hospital. Medicare, Medicaid, TRICARE, Blue Cross/Blue Shield, Worker’s Compensation, and various managed care plans are generally part of the hospital’s payer mix. Hospitals and other providers may elect to enter into a written agreement to participate with payers, known as the participating provider agreement. A participating provider agreement (PAR) is a written agreement between the hospital and a payer that outlines the terms and conditions of participation for the hospital and the payer. Figures 5-2 and 5-3 highlight common provisions related to patient care services, patient financial responsibility, billing requirements, and reimbursement as outlined below.

Patient Care Services

The participating provider agreement outlines the services that are covered for plan members. Participating providers are encouraged to refer patients to providers within the plan’s network. All payers include provisions regarding medical necessity and utilization management protocols that must be followed to ensure that the appropriate reimbursement is received.

Patient Financial Responsibility

Participating provider agreements include information regarding the patient’s financial responsibility under the plan. The patient’s responsibility is the amount that the patient is required to pay in accordance with his or her health care plan. All health care plans require the patient to pay some portion of the charges for services rendered. As outlined in the patient’s plan, the patient’s responsibility amount may represent a deductible, coinsurance, or copayment amount. The agreement further specifies the participating provider’s contractual obligation to collect deductible, coinsurance, or copayment amounts from the patient. It also outlines the consequences if the provider does not make every attempt to collect the patient’s share.

Participating provider agreements generally include a provision stating the hospital must accept assignment, which means the hospital will accept the approved amount or prospective payment rate as payment in full. In accordance with this provision the hospital cannot balance bill the patient for the balance over the approved or prospective payment amount.

Billing Requirements

Billing requirements are outlined in the participating provider agreement. Billing requirements vary according to plan. Most plans outline provisions in the participating provider agreement regarding documentation, coding, claim form requirements, timely filing, and the appeals process.


Participating provider agreements also contain provisions regarding timely processing of claims and reimbursement. Reimbursement is provided for services covered under the patient’s plan that are medically necessary. The agreement also explains how payment determinations are made and what reimbursement method will be used to calculate payment for covered services.

It is important to remember that reimbursement for services provided to plan members is contingent on the provider’s compliance with plan terms and specifications. It is critical for hospital personnel involved in the billing process to have an understanding of the terms in the provider agreement to ensure compliance with program specifications and to optimize reimbursement. Participating provider agreements will be discussed further in the Health Care Payers chapter. Variations in claim requirements and reimbursement methods outlined in participating provider agreements contribute to the complexity of the billing process. It important to understand these provisions to ensure appropriate reimbursement is obtained.

Charge Submission Requirements

The purpose of the claim form is to submit charges to third-party payers. A third-party payer is an organization or other entity that provides coverage for medical services, such as insurance companies, managed care plans, Medicare, and other government programs. All the information collected and recorded on the patient account and in the patient’s medical record is used to complete the claim form.

There are two universally accepted claim forms used for submission of charges to various payers: the CMS-1500 and the CMS-1450 (UB-04). The CMS-1500 is the claim form used by noninstitutional providers to submit professional charges for physician and outpatient services to payers for reimbursement. The CMS-1450 (UB-04) is the uniform claim form used by institutional providers to submit hospital facility charges for services, procedures, and items to payers for reimbursement. These forms were formerly called the HCFA-1500 and the HCFA-1450 (UB-92). The Health Care Financing Administration (HCFA) changed its name to the Centers for Medicare and Medicaid Services (CMS) in 2003 and the name of the claim forms were changed to CMS-1500 and the CMS-1450. The CMS-1450 (UB-04) replaced the CMS-1450 (UB-92) in May 2007.

Claim form requirements vary by payer, and the participating provider agreement defines what claim form should be used to submit charges. Some payers define claim form requirements based on the part of the plan that covers specific services. For example, the CMS-1450 (UB-04) is used to submit charges covered under Medicare Part A. The CMS-1500 is used to submit charges covered under Medicare Part B. Durable medical equipment is covered under Medicare Part B; therefore, charges for these items are generally submitted on the CMS-1500. Claim form submission requirements also vary based on the following service categories: outpatient, inpatient, and non-patient. The following section provides an overview of the claim form required for these service categories, as shown in Table 5-1. Claim forms will be discussed further in the Claim Forms chapter.


Outpatient is the term used to describe procedures or services that are performed in which the patient is released from the hospital within 24 hours. Hospital outpatient services are generally submitted to payers on the CMS-1450 (UB-04); however, some payers may require the CMS-1500 for specified services. Outpatient services include ambulatory surgery, emergency room, clinic, and other outpatient department services.

Emergency Department (ED)

Facility charges for Emergency Department (ED) visits are generally submitted on the CMS-1450 (UB-04). Again, some payers may require the CMS-1500. Emergency room (ER) physician charges are not billed by the hospital unless the physician is employed by the hospital. The ER physician will submit charges for services provided on the CMS-1500. Emergency Department charges are included on the inpatient claim when the patient is admitted as an inpatient from the ER. In accordance with Medicare’s 3-day and 1-day payment window policy, outpatient services provided as outlined below are included on the inpatient claim, and therefore, paid under Inpatient Prospective Payment System (IPPS):

Electronic Claims

Payer guidelines also dictate required methods of submission and claim completion requirements. Historically, claims were submitted manually by sending a paper claim. Today, most payers require electronic claim submission. However, there may be circumstances when submission of a paper claim is necessary.

In accordance with HIPAA regulations, standard formats for electronic transactions, including submission of claims, have been adopted. The standard formats adopted were developed by the American National Standards Institute (ANSI). The standard transaction format for the CMS-1500 is the ANSI X12 837 and the format for the CMS-1450 (UB-04) is the ANSI X12 837I. The standard transaction formats contain elements found on the CMS-1500 and CMS-1450 (UB-04) paper claims. The current standard format, Version 5010, was adopted and the compliance date for all HIPAA covered entities to transition to Version 5010 was January 1, 2012. Details regarding Version 5010 can be viewed on the CMS Web site at

Reimbursement Methods

Reimbursement is the term used to describe the amount paid to the hospital for services rendered, by patients and third-party payers. The purpose of the billing process is to obtain the appropriate reimbursement within a reasonable period after the services are rendered. Most reimbursement for hospital services is received from third-party payers. Payers use various reimbursement methods to determine the payment amount for a service or item. Reimbursement methods can be categorized as traditional payment methods, fixed payment methods, and Prospective Payment System (PPS) methods.

Traditional Payment Methods

Historically, payments for health care services were primarily based on charges submitted. Insurance companies and government programs process payments for services based on one of the following reimbursement methods: fee-for-service, fee schedule, percentage of accrued charges, and usual, customary, and reasonable.

• Fee-for-Service is a reimbursement method that provides payment for hospital services based on an established fee schedule for each service.

• Fee Schedule is a listing of established, allowed amounts for specific medical services and procedures.

• Percentage of Accrued Charges is a reimbursement method that calculates payment for charges accrued during a hospital stay based on a percentage of accrued charges.

• Usual, Customary, and Reasonable (UCR) is based on a review of the usual and customary fee to determine the fee that is considered reasonable.

Figure 5-4 illustrates examples of payment calculations using traditional payment methods—fee-for-service, percentage of accrued charges, fee schedule, and usual, customary, and reasonable (UCR).

Fixed Payment Methods

Efforts to control the rising costs of health care changed reimbursement methods to systems involving predetermined amounts paid to hospitals. The advent of managed care also brought with it fixed payment methods. The following reimbursement methods provide a fixed payment amount: capitation, case rate, contract rate, flat rate, per diem, and relative value scale.

Capitation is a reimbursement method that provides payment of a fixed amount, paid per member per month. Capitation methods are generally used to provide reimbursement for primary care physician services and other specified outpatient services provided to managed care plan members.

Case Rate is a set payment rate paid to the hospital for the case. The payment rate is based on the type of case and resources required to treat the patient.

Contract Rate is a set payment rate as agreed to in a contract between the hospital and the payer.

Flat Rate is a set payment rate for the hospital admission regardless of charges accrued.

Per Diem is a set payment rate per day rather than payment based on the total of accrued charges.

Relative Value Scale (RVS) assigns a relative value that represents work, practice expense, and the cost of malpractice insurance to each professional service code.

Figure 5-5 illustrates examples of some of the most common fixed payment methods used to reimburse hospitals for services (case rate, contract rate, flat rate, and per diem).

Prospective Payment Systems (PPS)

The government became one of the largest payers of health care services with the establishment of the Medicare and Medicaid programs in 1965. Over the following 30 years, due to the continued growth in the aged population and the rising cost of health care, the government found it necessary to devise reimbursement methods that provided fixed payment amounts for health care services. Prospective Payment Systems (PPS) are reimbursement methods for services provided to Medicare beneficiaries where payment is based on a predetermined, fixed amount. Several reimbursement methods have been implemented under PPS including IPPS and OPPS. The Inpatient Prospective Payment System (IPPS) is a reimbursement system, implemented in 1983, as mandated under TEFRA for inpatient services provided to Medicare beneficiaries that provides a predetermined payment based on the patient’s diagnosis and procedures performed. The Outpatient Prospective Payment System (OPPS) was implemented in August 2000 by CMS to provide reimbursement for hospital outpatient services. Today, services provided by hospitals to members of government-sponsored plans are paid based on the following reimbursement methods.

Ambulatory Payment Classifications (APC)

Ambulatory Payment Classifications (APC) is the OPPS reimbursement method used by Medicare and other government programs to provide reimbursement for hospital outpatient services. Under the APC system, the hospital is paid a fixed fee based on the procedure(s) performed. Services reimbursed under APC include ambulatory surgical procedures, chemotherapy, clinic visits, diagnostic services and tests, emergency room services, implants, and other outpatient services.

PPS methods were implemented to provide pre-established payment amounts for reimbursement to providers for services rendered to members of government health care programs. Figure 5-6 illustrates payment determination based on the MS-DRG and APC reimbursement systems. PPS will be discussed further in the Prospective Payment Systems (PPS) chapter.

Reimbursement Method Variations

Hospitals provide various services including outpatient, inpatient, non-patient, and professional services. Reimbursement methods vary based on many factors, such as payer type and the type of service provided. Hospital billing professionals strive to achieve an understanding of the various reimbursement methods to ensure that appropriate payment is provided for services rendered.

It is also important to understand guidelines relating to each of the different payment methods by payer type. Three major categories of third-party payers are government programs, commercial payers, and managed care plans. Each of the payer types listed uses various methods of reimbursement for outpatient, inpatient, non-patient, and professional services. Some of the most common reimbursement methods used by government programs, commercial payers, and managed care plans are outlined in Table 5-2 for outpatient, inpatient, non-patient, and professional services. It is important to note that many commercial and managed care payers are adopting prospective payment reimbursement methods, such as APC and MS-DRG, as a part of their contract rates. Reimbursement methods will be discussed further as they relate to each of the payer categories later in this text.


Reimbursement Method Variations

Payer Outpatient Services Inpatient Services Professional and Non-patient Services
Government Programs Medicare, TRICARE, Medicaid (implemented under Prospective Payment System) Ambulatory Payment Classifications (APC) Medicare Severity-Diagnosis Related Groups (MS-DRG) Resource-Based Relative Value Scale (RBRVS)
PPS method basis Hospital is reimbursed a set fee based on the APC payment rate for the procedure performed. Hospital is reimbursed a set fee based on the MS-DRG payment rate for the patient’s condition and related treatment. A relative value is assigned to each CPT code, which represents physician time, skill, and overhead.
 Commercial and Other Third-Party Payers Case rate
Contract rate
Case rate
Contract rate
Fee schedule
Blue Cross/Blue Shield, Aetna, Humana, workers’ compensation Fee-for-service
Fee schedule
Percentage of accrued charges
Flat rate
Percentage of accrued charges
Per diem
Relative value scale (RVU)
Usual, customary, and reasonable (UCR)
 Managed Care Plans Case rate
Contract rate
Case rate
Contract rate
Fee schedule


Mar 24, 2017 | Posted by in NURSING | Comments Off on Hospital Billing Process
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