History of Medical Billing
Medical billing has been around for almost 500 years. The first outbreak
of bubonic plague in the 1660s is believed to be the first form of
medical coding when officials started using statistics for tracking the
In 1983 a French physician named Jacques Bertillon created a system of
distinguishing diseases and classification of cause of death by
anatomical body parts.
In 1898, the American Public Health Association (APHA) recommended that
the registrars of Canada, Mexico, and the United States also adopt it.
The APHA also recommended revising the system every ten years to ensure
the system remained current with medical practice advances. As a result,
the first international conference to revise the International
Classification of Causes of Death convened in 1900 with the following
revisions occurring nearly every decade thereafter:
• 1908 – The United States government established the first work
compensation program for employees
• 1910 – The first insurance policies were offered
• 1923 – AMA Code of ethics allowed physicians to be "Free to choose
whom he will serve"
• 1940 – The first pre-paid healthcare plan introduced by President
• 1950s – Lyndon Johnson signed Medicare and Medicaid into law
Health insurance in the U.S. has been made available to help offset the
expenses of the treatment of illness and injury. The first "sickness"
clause was inserted in an insurance document in 1847. However, health
insurance did not become established until 1929 when Blue Cross first
started covering schoolteachers in Texas. In 1932, a citywide plan was
initiated in Sacramento, California. As an industry, health insurance
became widespread after World War II.
In 1948, the World Health Organization took over the classification
system and then created International Classification of Diseases that is
still used today. The first coding was the ICD-1, and we are now
currently using ICD-9 coding.
In 1957, the AMA Code of Ethics revised the practice to include that
physician fees "should be commensurate with services rendered and the
patient's ability to pay". American Medical Association created the
first Common Procedural Terminology (CPT) codes in 1966.
Richard Nixon was the first politician to try to change healthcare from
a not for profit business into a for-profit business. In 1973, Congress
passed the Health Maintenance Organization Act, which started the rapid
growth of Health Maintenance Organizations (HMOs), which was the first
form of managed care.
Medical billing claims became automated in the 1980s through the
submission of claims via computer and software. Prior to that, all
medical billing claims were submitted on paper. Also, the only type of
reimbursement for doctors and hospitals were fee for service. The
Diagnosis Related Group (DRG) was introduced as the mechanism how
hospitals were paid, and this opened up new coding trends and efforts on
Health Care Portability Act was made into law in 1997, which forever
changed the landscape of medical billing.
The Affordable Care Act, commonly referred to as Obamacare, is scheduled
for implementation in 2014.
The Justice Department went after another pharmaceutical company that
had to pay back $700 million dollars in criminal fines.
Both cases are financial extremes. However many solo practitioners and
physicians in private practice are experiencing the same pressure from
the Federal Government, and third party insurance companies responsible
for overseeing the physicians.
In order to comprehend the issues facing providers, it is necessary to
explain the medical billing process and explain about the agencies and
regulators who monitor these processes.
The medical billing process is the interaction between the provider
(doctor) and the insurance company, regardless if the insurance company
is owned by a private firm or the government. To understand the process,
it is necessary to identify the key players: the regulators, the payors,
the providers, the billers, and the patients.
Healthcare is ranked 3rd among the most heavily regulated industries in
the United States, and it follows behind nuclear testing facilities and
aviation as the first two most heavily regulated industries. In the
course of a physician's career, he or she will have interactions with
one or all of the regulatory organizations, with their maze of laws,
rules, and guidelines.
The government regulators are controlled under the auspices of either
the State or the Federal Government. Each State is responsible for the
• Licensure of physicians
• Testing and approval of pharmaceuticals and medical devices by the
• Health insurances
• In 2010, the Patient Protection and Affordable Care Act (PPACA) was
passed which includes various new regulations. One of the most notable
being a health insurance mandate which requires all citizens to purchase
• State and county health programs
• State Medical Board
The Federal Government is responsible for the following:
• The United States Department of Health and Human Services (DHHS)
oversees the various federal agencies involved in health care
• Health care agencies are part of the United States Public Health
• The Food and Drug Administration, which certifies the safety of
food, effectiveness of drugs, and medical products
• The Centers for Disease Prevention, which prevents disease,
premature death, and disability, The Agency of Health Care Research and
Quality, and The Agency Toxic Substances and Disease Registry, which
regulates hazardous spills of toxic substances
• National Institutes of Health, which conducts medical research
• JCAHO- Joint Commission on Accreditation of Hospital Organizations
• CMS- Centers for Medicare and Medicaid Services
• EMTALA- Emergency Medical Treatment and Active Labor Act
• National Institute of Health
• AHRQ- Agency Healthcare Research and Quality to improve the safety
• OSHA Occupational Safety and Health Administration
• Department of Veteran's affairs
• Department of Defense
• Department of Agriculture
• HSRA- Health Resources and Service Administration
• CLIA Clinical Laboratory Improvement Amendments
• American Medical Association
American Medical Association
The first meeting was of delegates met on May 7, 1847. Those delegates
formed the AMA. Dr. Nathan Smith Davis served 10 years after getting his
Medical Degree in January 1837. His goal was to elevate the standard of
medical education in the United States. In 1876, Sarah Hackett
Stevenson, MD was the first woman physician to join the AMA.
The above graph represents the expenditures of the percentage of the
Health Care budget is spent on each sector of the Healthcare market. The
total amount of expenditures is 2.6 trillion dollars in 2012. Healthcare
represents 16 % of the Gross National Product. Physicians and Hospitals
account for a little more than half of the total budget. The
Congressional Budget Office estimates that Medicare, Medicaid and the
Social Security Administration will consume 75% of the Federal Budget by
the year 2030.
In order to gain a better understanding of the issues facing health care
providers, it is necessary to review the mechanisms of the healthcare
reimbursement system and the general billing cycles.
By definition, individuals who administer care are referred to as
Providers. Providers includes, physicians, nurses, nurse practitioners
and allied health professionals.
Payors are entities that reimburse the provider for care and are divided
into 3 categories:
• Commercial insurance carriers
• Government payors include Medicare and Medicaid, Tricare and the
• Third party administrators, such as Health Net and American
Some insurance carriers outsource pricing the claims and participate in
provider networks. Medicare outsources their claim processing functions
to an insurance company formally known as a Fiscal Intermediary, and now
a Medicare Administrative Contractors (MAC). The Center for Medicare and
Medicaid oversees the process of payment, claims, and billing rules and
guidelines. The Centers for Medicare Services, referred to as CMS,
govern the Medicare Program.
The Medicare Administrative Contractor's responsibilities include:
• Claim adjudication
• Receipt, Disbursement and accounting of funds paid to providers
• Education to Providers and Patients
• Assistance with technical issues
• Education and Training
• Provider Enrollment
The above graph represents the breakdown of American population by the
percentages covered by each category of insurance.
Reimbursement is the healthcare term that refers to the compensation or
repayment for healthcare services. Reimbursement is being repaid or
compensated for expenses already incurred or, as in the case of
healthcare, for services that have already been provided. In healthcare,
services are often provided before payment is made.
Unlike the car dealership, in which customers pay for a car or arrange a
loan before driving the car off the lot, patients walk out of the
hospital treated but aren't billed until later. Therefore, the
physicians and clinics must seek to be paid back for services that they
have already provided and for expenses, such as supplies, that they have
already incurred. The physicians, clinics, hospitals, and other
healthcare organizations and practitioners are requesting reimbursement
for health services.
The U.S. healthcare system is complex. Multiple methods exist to
reimburse hospitals, physicians, and other health providers for the
healthcare they render to patients.
Providers of healthcare are paid after services are rendered and
expenses, such as supplies, are incurred. The process of obtaining
payment is called reimbursement and physicians are reimbursed in a few
• Discounted fee for services (PPO) A Preferred Provider Organization
• Capitated fixed per capita payment over a period of time, per member
of the health plan (patient), per month, regardless if the patient
presents themselves or receives care
• RBRVS formula calculated based on the cost of providing healthcare
services divided into effort, practice expenses (overhead), and
• DRG – Mostly inpatient and hospitals (some skilled nursing
• Ambulatory Surgery Center – Group rates
• Fee for services
Medicare publishes their fee schedule annually, and it is available on
their website at www.csm.gov. Increasingly, health plans are publishing
their rates of reimbursement on their websites, including Aetna, Cigna,
In the 1950s, a system was established to identify Relative Values of
Medical Services or Units (RVU). The original RVU's were divided into
five sections: medicine, surgery, anesthesia, radiology, and pathology
respectively (it was updated again in 1974). Historically, prior to
1992, visits to a physician's office and the hospital were reimbursed
based solely on time. The relative relationship of each code was
multiplied by a conversion factor to arrive at an allowable payment.
Insurers used the RVU and produced fee schedules based on Usual and
Customary charges from data collected nationwide. In 1992, the Common
Procedural Terminology (CPT) codes were revised and the mechanisms for
reimbursement for Part B services changed dramatically.
Medicare was established in 1965. In the first ten years of its
existence, Medicare paid physicians based on charges and allowed
providers to bill Medicare beneficiaries for more than Medicare's
reimbursement. In 1975, the Medicare Economic Index (MEI) was introduced
in order to limit the amount of annual increases in physician fees. The
MEI was introduced to measure the operating expenses and the costs of
the physician's time. Legislation became involved from 1984 through 1991
as physician fees were rising faster than originally projected.
In 1989, The Omnibus Budget Reconciliation Act was introduced which made
3 significant changes in the Medicare reimbursement system:
1) In 1982, the Act implemented the Medicare Fee Schedule, which took
effect in 1992.
2) It limited the amount Medicare non-providers could balance bill
3) It introduced the Medicare Volume Performance Standards (MVPS) as a
way to control costs.
At present, the physician reimbursements and upcoming budgetary cuts are
at the discretion of Congress. The proposed 26.5% Medicare fee cut has
been postponed until January 1, 2014. This is not the first time that
the proposed cut has been delayed, and one would expect that with the
future uncertainty it could be postponed again as 2014 approaches.
Especially since the physicians and their advocacy groups continue to
lobby against this significant impact to their incomes.
Features of Managed Care
"Managed care defined as the mechanism of an organization to provide
healthcare services with the goal of reducing health care expenditures
and contain costs delivered to the select patient population. The growth
of managed care in the U.S. grew by the introduction of the Health
Maintenance Organization Act of 1973."
The goal of managed care model was to form a health care delivery system
that had a built in incentive for physicians and hospitals to provide
healthcare more efficiently and ultimately cut costs for the health
plan. The integrated delivery system includes a panel of doctors,
hospitals and health care facilities to form a provider network. In
addition to the plan's primary focus of financial incentives to cut
costs, the HMO model introduced case management, wellness incentives,
patient education and utilization management and review.
Common features of managed care include:
• Coordination and planning
• Education of patients and providers
• Assessment of quality
• Control of costs
Purposes of Managed Care
Reducing 3rd party reimbursement to providers and the control of
healthcare costs is the main purpose of Managed Care controls to ensure
quality of care and still save money. Managed care payers have
instituted many means to control the costs and quality of healthcare.
One example of a provision is the requirement that patients obtain prior
authorization for care such as for prior approvals for surgeries.
Another example of managed care, is a mixture of the discounted
fee-based system in which the payer reimburses the provider up to a
percentage of the allowable fee and the insured must pay the remaining
percentage. Having one primary care provider to oversee and coordinate
all aspects of healthcare improves the quality of healthcare.
Forms of Managed Care
There are numerous forms of managed care. These forms include:
• Exclusive provider organizations (EPO)
• Health Maintenance Organizations (HMO)
• Point-of-service plans (POS)
• Preferred provider organizations (PPO)
• Episode-of-care reimbursement is a healthcare payment method in
which providers receive a flat fee for all the services they provide
related to a condition or disease.
• Global Pay Method Block Grant
• Physician Care Groups (PCG)
In the episode-of-care payment method, the unit of payment is the
episode, not each individual health service. Therefore, the
episode-of-care payment method eliminates individual fees or charges.
The episode-of-care payment method is an attempt to correct perceived
faults in the fee-for-service reimbursement method.
The global payment method is when the third party payer makes one
combined payment to cover the services of multiple providers who are
treating a single episode of care. Thus, this payment method
consolidates payments. A block grant is a fixed amount of money given or
allocated for a specific purpose. There will then be a transfer of
governmental funds to cover health services. Also, there is no
additional payment for higher volumes of services or more expensive or
Excerpted from "Medical Billing Horror Stories" by Sharon Hollander. Copyright © 2013 by Sharon Hollander. Excerpted by permission. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher. Excerpts are provided solely for the personal use of visitors to this web site.