$100 Billion Lost Each Year in ``America's Hidden Healthcare Crisis,'' HSS Research Shows.

WASHINGTON -- Payment Errors Are Undermining the Nation's Economy and Eroding the Financial Stability of the Healthcare Industry

The U.S. healthcare industry is losing upwards of $100 billion each year due to payment errors, which increases the cost of care paid by American businesses and consumers and further jeopardizes the solvency of the Medicare Trust Fund. These findings are presented in a report, "America's Hidden Healthcare Crisis," which was released today at the National Managed Health Care Congress' Annual Conference in Washington, D.C. Research for the report was conducted by HSS, Inc., a Hamden, Conn.-based company that specializes in consulting and software solutions for streamlining medical coding, regulatory and reimbursement processes. The report in its entirety can be accessed for free at www.hssweb.com/hiddencrisis.html.

The report documents how the healthcare industry's complex billing practices and confusing regulations have created a business climate where payment errors frequently occur. These payment errors may have totaled nearly $104 billion in 2003, and are projected to total as much as $120 billion in 2005. The majority of these payment errors are the result of hospitals, physician offices and other care providers overbilling private insurance companies and public programs such as Medicare and Medicaid for services that they cover. Besides excess payments, a small percentage of payment errors are the result of healthcare providers underbilling for the services they deliver.

"This crisis has remained 'hidden' because few among the general public -- and even people within the industry -- understand the complexities of the industry's billing, payment and regulatory practices," said Bob Leary, HSS' Chairman and Chief Executive Officer. "Bringing this crisis to the surface is critical because the economic implications of these payment errors are far-reaching. Overpayments cost employers and their employees billions of dollars every year and undermine the financial integrity of the Medicare and Medicaid programs. Underpayments compromise the bottom line of organizations that provide care. These errors increase the cost of care and, ultimately, erode the profitability of American businesses that pay higher insurance premiums for employee health coverage. While there are numerous factors contributing to the increased cost of care, none of them is of the magnitude of this $100 billion a year 'hidden crisis.'"

The report details how the economic impact eventually trickles down to patients in the form of increased premiums that reduce take-home pay and higher deductibles that decrease discretionary spending. American consumers are already feeling the pinch, with half of all Americans who file for bankruptcy stating that increased medical expenses were a major contributor to their financial difficulties, according to a recent study that was published on the Web site of the journal Health Affairs. (D. Himmelstein, E. Warren, D. Thorne, and S. Wooldhandler. "Illness And Injury As Contributors To Bankruptcy," Health Affairs Web Exclusive, Feb. 2, 2005: W5-63 - W5-73.) And more than 75% of those surveyed said they had medical insurance at the onset of their illness, yet still couldn't keep pace with financial demands.

Beginning to understand how these payment errors occur requires some knowledge of medical coding and reimbursement processes. Medical coding is used by provider organizations to bill for the services that they deliver to patients. Three things are happening at the medical coding level that creates the payment errors. First, some providers artificially increase payments that they receive from insurance companies by coding the bill to indicate that more (or more complicated) services were provided than were actually delivered. This practice is sometimes referred to as "upcoding" or "overcoding." Second, many providers include on their bills diagnosis and procedure codes that are not properly supported by documentation in the medical record. When asked subsequently to provide such documentation, they often fail to demonstrate that the services were medically necessary and actually provided. Finally, at the same time, many providers do not bill for all the services that they provide either by "undercoding" diagnoses and procedures or by omitting items from the bill entirely. In many instances, underbilling is a direct result of inadequate coding and billing infrastructure. In some cases, providers may undercode patient visits to avoid scrutiny by regulators and or rejections by insurance companies.

"Although medical coding seems to be the epicenter of where these payment errors begin, one underlying cause is the complex and frequently changing regulations that govern the industry's coding and billing practices. In many cases, health insurers and providers are not given adequate notice before new regulations take effect, which results in confusion and payment errors that are both unintentional and unavoidable," said Dean Farley, Ph.D., HSS' Vice President, Healthcare Policy & Analysis.

The HSS research was based on a study conducted by the Centers for Medicare & Medicaid Services (CMS), the government entity that administers the Medicare and Medicaid programs. The CMS study, "FY 2004 Improper Medicare Fee-for-Service Payment Report," indicated that CMS made $19.3 billion in payment errors in fiscal year 2004. The CMS study documented a medical coding and reimbursement error rate of nearly 10% on payments made by the traditional Medicare program for services covered on a fee-for-service basis. Further review of the study by HSS found that the totals may be larger, with HSS estimating that these errors may have resulted in erroneous Medicare payments totaling $30.4 billion in 2003 -- with nearly $29 billion in the form of overpayments.

The CMS study only addresses the payment errors within the Medicare program and does not address the payment errors made in the private insurance sector, which provides the health coverage for the majority of Americans. Because coding, billing and payment practices within the private insurance sector are generally based on CMS regulations, the CMS study can be extrapolated to estimate industry-wide payment errors. Extrapolating these findings to private insurance and state Medicaid programs suggests that between $77 and $104 billion in payment errors occurred across the entire U.S. healthcare industry in 2003. For 2005, HSS projects that industry payment errors will range between $88 and $120 billion.

"For its part, CMS recognizes that changes are necessary in the Medicare program and has proposed a series of corrective actions," Farley said. "But narrowly focusing on Medicare, and ignoring the industry-wide $100-billion implications of these findings, is dangerously short-sighted and points to a key factor in this crisis."

To begin the process of rectifying this "hidden crisis," some of the HSS recommendations made within the report include:

--CMS needs to revise its regulatory update cycle to give health insurers and providers sufficient time to react and implement new regulations that change dozens of times throughout the year. Hospitals and payers alike simply cannot assimilate the knowledge to effectively operationalize regulatory changes given the current CMS update policy.

--Health insurers should validate and group the medical claims that they receive from health providers to prevent overpayments to providers that make mistakes, or are overly aggressive in their medical coding practices to increase the dollar amount of payments.

--Healthcare information vendors and healthcare providers ought to streamline their own deployment and implementation of updates to regulatory content. Although some emerging technologies, such as Web Services, offer real opportunities to streamline the update process, embracing those new technologies will take a real commitment on the part of vendors and providers alike.

"There continues to be an expectation that technological implementations, such as electronic medical records, electronic prescribing, and computerized physician order entry will go a long way to correct this nation's ailing health system. However, the technologies being considered are complex and expensive systems that will take billions of dollars to purchase and years to implement on a nationwide scale," Leary said. "Even if the above-mentioned technological solutions were implemented in a timely and efficient manner, the industry would still continue to rack up hundreds of billions of dollars in losses each year due to coding and reimbursement errors. Furthermore, these errors ultimately undermine the potential value of these important innovations."

"Medical coding and reimbursement errors are tangible problems that require the practical solutions mentioned in this report. While some of these solutions may be supported by technology, many of the solutions themselves are not technology-driven," Leary continued. "And most importantly, there needs to be incentives for all participants in the process to address these issues. Otherwise, wide-scale changes will not take place, and the financial stability of the health industry will continue to deteriorate."

About HSS

HSS, Inc. (www.hssweb.com) develops solutions that streamline the coding, regulatory and reimbursement processes at provider and payer organizations. HSS' experience with providers and payers enables it to provide the tools and methodologies for organizations to evaluate financial and operational performance, target areas of performance improvement and balance risk-assumption with profit opportunities. These solutions combine technology with HSS' nationally recognized healthcare expertise. HSS solutions are used by more than 900 hospitals and 160 managed-care organizations. They are also embedded in health information management applications offered by 27 of the industry's major software vendors.