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.

BOX 5-1 CONCEPT REVIEW
Purpose of the Hospital Billing Process

Obtain Reimbursement for services rendered

• Reimbursement is received from patients, insurance companies, and government programs.

Claim Process

• Preparing claims for submission

Accounts Receivable (A/R) Management

• Monitor and follow-up on outstanding accounts

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.

TABLE 5-1

Claim Form Variations

Hospital Service Categories Facility Charges	CMS-1500	CMS-1450 (UB-04)	Variations
Outpatient
Ambulatory surgery—performed in a hospital outpatient Surgery Department		X	Some payers require ambulatory surgery charges to be submitted on the CMS-1500
Ambulatory surgery—performed in a certified Ambulatory Surgery Center (ASC)	X
Emergency Department		X	Some payers require outpatient department charges to be submitted on the CMS-1500
Ancillary departments: Radiology; Laboratory; Physical, Occupational, and Speech Therapy		X	Some payers require outpatient department charges to be submitted on the CMS-1500
Other outpatient services: infusion therapy and observation		X	Some payers require outpatient department charges to be submitted on the CMS-1500
Hospital-based primary care office	X		Physician services may be billed by the hospital when the physician is employed by the hospital
Other hospital-based clinic	X
Inpatient
All services and items provided by the hospital during the inpatient stay		X	Emergency Department charges are included on the inpatient claim when the patient is admitted from the ER
Non-patient
A specimen received and processed; the patient is not present		X	Some payers require outpatient department charges to be submitted on the CMS-1500

CMS-1450 (UB-04) is used to submit charges to Medicare Part A.

CMS-1500 is used to submit charges to Medicare Part B.

Outpatient

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.

Ambulatory Surgery

Ambulatory surgery is surgery that is performed on the same day the patient is discharged. Ambulatory surgery may be performed in a freestanding or hospital-based Ambulatory Surgery Center (ASC). Ambulatory surgery is considered an outpatient service because the patient is released the same day the procedure is performed. Hospital-based ambulatory surgery services are generally submitted on the CMS-1450 (UB-04). Some payers may require ambulatory surgery services performed in a certified ASC to be submitted on a CMS-1500.

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):

• Services provided on the date of admission

• Services provided 3 days prior to admission

• Services provide 1 day after admission

Ancillary Departments

Charges for services provided by ancillary departments such as Radiology, Laboratory, or Physical, Occupational, and Speech Therapy on an outpatient basis are generally submitted using the CMS-1450 (UB-04). Infusion therapy and observation services are also submitted on the CMS-1450 (UB-04).

Hospital-Based Primary Care Office or Hospital-Based Clinic

Charges for services provided in a hospital-based primary care office are generally submitted on the CMS-1500. These charges will include the physician services if the physician is employed by the hospital. Charges for services provided in a hospital-based clinic are generally submitted on the CMS-1450 (UB-04). Clinic charges do not include the physician services unless the physician is an employee of the hospital.

Inpatient

Inpatient charges are submitted on a CMS-1450 (UB-04). Claims for hospital inpatient services are generally submitted after the patient is discharged. It is important to remember that if the patient is seen in the emergency room and later admitted to the hospital as an inpatient, the Emergency Department charges will be included on the CMS-1450 (UB-04) for the inpatient claim.

Non-patient

Non-patient care is provided when the Pathology/Laboratory Department receives a specimen for processing. The specimen can be delivered from somewhere within the hospital, such as the operating room, or it can be received from an outside physician’s office. The specimen is processed and the patient is not present. The results are forwarded to the requesting physician.

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 www.cms.gov/ICD10/11a_Version_5010.asp#TopOfPage.

BOX 5-4 CONCEPT REVIEW
Charge Submission Requirements

Universally Accepted Claim Forms

• CMS-1500

• CMS-1450 (UB-04)

Variations Based on Service Category

• Outpatient, inpatient, and non-patient

Electronic Claims

• HIPAA Transaction Standard Version 5010

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.

Usual fee—the fee usually submitted by the provider for a service or item

Customary fee—the fee that providers of the same specialty in the same geographic area charge for a service or item

Reasonable fee—determined by the payer, generally the lower of the two fees

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).

BOX 5-5 CONCEPT REVIEW
Traditional Payment Methods

• Fee-for-service

• Fee schedule

• Percentage of accrued charges

• Usual, customary, and reasonable (UCR)

BOX 5-6 CONCEPT REVIEW
Fixed Payment Methods

• Relative value scale (RVS)

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.

Medicare Severity-Diagnosis Related Groups (MS-DRG)

Medicare Severity-Diagnosis Related Groups (MS-DRG) is the IPPS reimbursement method used by Medicare and other government programs to provide reimbursement for hospital inpatient services. MS-DRG replaced DRG in 2007. Under the MS-DRG system, the hospital is paid a fixed fee based on the severity of the patient’s condition and related treatment. MS-DRG assignment is determined based on the principal diagnosis, secondary diagnosis, complications and co-morbidities, significant procedures, sex of the patient, and discharge status of the patient.

Resource-Based Relative Value Scale (RBRVS)

Resource-Based Relative Value Scale (RBRVS) is the payment method used by Medicare and other government programs to provide reimbursement for physician and some outpatient services. This reimbursement method was implemented over a 5-year period beginning January 1992. The RBRVS system consists of a fee schedule of approved amounts calculated based on relative values. A relative value unit (RVU) is assigned to each procedure. The RVU represents physician time and skill, practice overhead, and malpractice insurance. The RVU is used in a formula that multiplies the RVU by a geographic adjustment factor (GAF) and a monetary conversion factor (CF).

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.

BOX 5-7 CONCEPT REVIEW
Prospective Payment Systems (PPS)

Inpatient Prospective Payment System (IPPS)

• Medicare Severity-Diagnosis Related Groups (MS-DRG)

Outpatient Prospective Payment System (OPPS)

• Ambulatory Payment Classifications (APC)

Other Prospective Payment Systems (PPS)

• Resource-Based Relative Value Scale (RBRVS)

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.

TABLE 5-2

Reimbursement Method Variations

SERVICE LEVEL
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-for-service Fee schedule
Blue Cross/Blue Shield, Aetna, Humana, workers’ compensation	Fee-for-service Fee schedule Percentage of accrued charges	Fee-for-service 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	Capitation Contract Fee schedule

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