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How does the medical billing process actually work?

The process of deciding what needs to be done, then deciding how much to charge for it, and how much to pay regardless of how much was charged, is unlike anything else we have in our economy. What follows is a brief attempt at explaining why.

Historically, neither the patient nor the provider was all that concerned about knowing up front how much an office visit, hospital stay, or any other service or product was going to cost.   The patient’s out of pocket costs were usually limited to a small co-pay and a low deductible, so the patient didn’t consider it important to know. The doctor not only didn’t know, but didn’t want to know; part of the culture in the traditional physician community was that money was a dirty subject. They were totally focused on doing ‘the right thing’ – whatever procedures were medically indicated as best for the patient – regardless of how much they were paid for a given procedure or whether they were even paid at all.

So historically the patient would go to see the doctor, the doctor did what they had to do, and made some notes about the patient’s chief complaint, their patient interview, their physical exam, all findings and diagnosis, then any treatments, procedures, plans or prescribed medications. These are often called ‘Visit’ or ‘Encounter’ notes, and their primary purpose is to communicate with other physicians or to remind themselves later when they next saw the patient. Unfortunately, notes sometimes weren’t done during the patient visit. Sometimes they weren’t done until the next day or even several days later, and then were based on the doctor’s memory. Once complete, the doc gave the notes to a billing clerk, the clerk transcribed what they thought was done (based on their understanding of the notes) into diagnosis codes, office visit codes, and procedure/diagnostic related group codes. Those codes were matched against the Charge Master, and the bill, which included all the codes and the Provider Charges for those codes, was sent to the insurance company.   Even if the physician finished their notes the same day as they saw the patient, the billing process often took days or even weeks.   And at this stage, the billing clerk could sum up all of the Provider Charges, but would have no idea what the Fee Schedule held for Allowed Amount, so they really only had the most general idea about how much they might actually collect. The doctor didn’t know, the patient didn’t know, and not even the accounts receivable person for the doctor knew. If you asked one of the accounts receivable managers, you’d get something like ‘Ah, well … hmmm. For all of our commercial insurers combined we get about 30 to 33 cents on the dollar billed. But for that particular insurer, I have no idea’.

Once the claim arrived at the insurance company, it was again queued for processing. In some cases, routine claims submitted electronically are automatically adjudicated to confirm that the procedures done by the provider were consistent with what’s appropriate for the documented diagnosis. If so, the claim might be queued for payment or EOB creation within hours at the fee schedule rates. But in many other cases, the claim is queued for review by a human claims adjudicator. Often, claims wait for weeks before being seen by human eyes. When the adjudicator reviews, they can decide to either pay the claim at Fee Schedule rates for that provider (usually called ‘Allowed Amount‘); partially pay and partially deny the claim; deny the whole claim; or send the whole claim back to the provider with requests for additional information.   It’s not unusual for it to take 30-45 days or even longer before the claim is approved.   Once approved, the Allowed Amount is compared to the patient’s deductible, co-pay, or co-insurance and either the patient receives an Explanation of Benefits notifying them to pay the provider the Allowed Amount, or a check is cut to the provider from the insurance company, or some combination of both. It isn’t until this stage that the patient knows how much they are supposed to pay, and the provider knows how much they should expect to collect from the insurance company and patient combined, and how much to write off to bad debt. But there’s one final strange twist. Although the providers negotiated or signed on for the insurance plans’ fee schedule, providers typically have over 150 insurance plans that they do business with and they generally do a very poor job at matching Allowed Amounts to actual payments. So underpayment errors on the part of the insurer generally go unnoticed.

Today, there has been some application of technology to improve the billing process, but usually not enough to allow the patient to have a accurate estimate of what their out of pocket expenses are likely to be.   The exceptions are some routine primary care services that the provider might do enough of with one particular insurance plan that they went to the effort to check the fee schedule or monitor actual payments. Another exception is when the patient routinely uses the same services, and has monitored their own EOB’s enough to forecast. And not to be forgotten, if the patient visits an urgent care or other similar walk in clinic, the prices are posted and the patient pays up front.

The only meaningful changes that providers have made have been in pursuit of their own self interest. For example, it’s very common now for providers to confirm your actual valid participation in the health plan you claim to be a member of, then, if you’re confirmed, check to see how much of your deductible has been met and whether you have a co-pay. They will then often ask to collect money up front knowing that the insurer won’t be paying the full amount. Unfortunately, in some instances (this is particularly bad for hospital stays), the provider won’t actually check the Allowed Amount for the anticipated stay (from the fee schedule); they’ll base their up front collections on the Provider Charge (from the Charge Master), collect too much money from the patient, then cut them a check for the difference a month or more later after they’ve finished settlement with the insurer.

And in addition to the antiquated process described above, there are still substantial cultural impediments to getting that information to the patient, even though the trend to high deductibles makes that information much more meaningful – even decisive.   Patients generally only talk to front desk staff, who have no involvement in the billing process and no idea what their charges will be. Even if they call the billing department to ask, all the billers can tell them is what the Provider Charge will be; they’ll almost never go to the trouble of looking up the anticipated procedures in the Fee Schedule for that insurer.

Doctors still cringe at the thought of considering pricing when discussing alternatives with patients. This is gradually changing, however, especially when it comes to brand name vs equivalent generic medications.

And there is at least an acknowledgement on the part of HHS that the results of the process above – the patient’s bill(s) – can be very difficult for us normal folks to understand.  So they started a contest to redesign the medical bill for patients, and include efforts to revisit the process itself.  We’ll see.


Next:  What makes the Cost Beast and the Quality of Life Serpent really angry?  When you avoid unnecessary or harmful tests, medications, and procedures all together.


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