Reducing health care costs using claims adjudication software.

The attack on administrative costs is common to all parties in the health care reform debate, from proponents of national health insurance to managed competition enthusiasts. By administrative costs, most participants refer to the cost of processing and paying claims. But there is a related area of costs that spans administrative and physician fee costs and that already has been shown to yield dear savings: appropriate coding of physician claims.

The use of CPT-4 codes for physician fees has become standard for providers. Most payers would agree that CPT coding accuracy has improved remarkably over the past five years. However, even the most accurate coding does not necessarily produce correct coding. Despite continued refinements of CPT-4 coding, there are many opportunities for incorrect coding. There are also numerous "gray areas" where available codes do not exactly describe the services rendered. Careful adjudication of these coding issues can result in substantial savings for payers and, by extension, consumers.

A taxonomy of common coding problems would include:

Unbundling. The use of both the appropriate global service code (e.g., for surgery) and the component parts of the procedure (e.g., total hysterectomy code with separate codes for oophorectomy, salpingectomy, etc.).

Fragmentation. Similar to unbundling, except the component parts are used without the global procedure (e.g., separate codes for left and fight heart catheterizations, dye injection, etc., instead of the appropriate global catheterization code).

Upcoding. The use of higher intensity service codes, either for visits (evaluation and management services) or for procedures (e.g., flail chest instead of rib fracture etc.).

There are related problems that combine coding and utilization management issues:

Assistant Surgeon. Billing for assistant surgeon where an assistant is not warranted.

Procedures Inappropriate for Age or Sex. Use of specific pediatric codes where adult codes are present (e.g., for tonsillectomy).

Among the first individuals to recognize coding problems was Robert Hertenstein, MD, a general surgeon and Medical Director for Group Insurance at Caterpillar, the heavy equipment manufacturer in Peoria, Ill. While reviewing physician claims in the early 1980s, Dr. Hertenstein noticed a substantial number of coding errors. He discussed his findings with fellow medical directors and at meetings of the American College of Surgeons and became convinced that such errors were widespread. However, his attempts to address this problem were limited by the effort and expense involved in manual review of claims.

In an effort to detect and correct a higher percentage of coding errors, Dr. Hertenstein turned to expert system software. In the late 1980s, in collaboration with physicians and software engineers from the Boston University Health Policy Institute, he developed a software system that incorporated the coding "rules" applied during manual review. The result of this effort was CodeReview, an expert software system marketed and maintained by

Health Payment Review, Inc. CodeReview has since been joined by several other software programs with similar goals: to apply coding rules that ensure consistent and appropriate billing for physician services. Not surprisingly, use of CodeReview on large numbers of claims revealed that the vast majority of coding errors resulted in higher, rather than lower, fees. Furthermore, the software revealed the extent of these coding errors. In most samples, at least 20 percent and as much as 40 percent of claims had at least one such error, usually unbundling. This software has thus become a critical part of the payer's armamentarium. Although it is the physician's responsibility to code correctly, it is the payer's responsibility to correct coding errors.

Because of the savings code adjudication systems achieve, their acceptance has been rapid. Most payers achieve reductions of at least 5 percent of total physician fees, or more than one percent of total health costs. It is estimated that the systems are now used to review claims from 4050 million Americans. Extrapolated to a national scale, these systems could achieve savings of $6-8 billion per year at present health care costs.

Since CodeReview was introduced in 1988, several interesting trends have emerged:

* Rather than gradually disappear, unbundling and similar coding errors have persisted at approximately the same rate. These systems have not made themselves obsolete, perhaps because of the presence of an "unbundling industry" that promulgates questionable coding to physician office staffs.

* The distribution of coding errors has changed. Initially, a substantial majority of coding errors involved surgical procedures. Now, 30-40 percent involve medical procedures or visits, and radiology procedures and laboratory tests constitute a significant portion.

* New areas of unbundling have emerged. Initially, few coding errors were observed in anesthesia claims. In the past year, 5-10 percent of reviewed anesthesia claims have been unbundled (e.g., separate billing for monitoring codes).

* Unbundling has occurred across claims; that is, in some cases, services performed at the same time are submitted across claims to avoid correction by claims adjudication systems.

To respond to these developments, the systems have entered their third generation. CodeReview, for example, now includes extensive coding rules in medicine, radiology, laboratory, and anesthesia--more than 70,000 rules in all. In addition, CodeReview is able to combine separate claims submitted for the same procedure and make the appropriate coding decision, even if the claims are submitted weeks or months apart.

How have physicians responded to claims adjudication systems? Most physicians are unaffected. Review of CodeReview data indicates that the substantial majority of errors are made by less than 10 percent of physicians. And the vast majority of physicians who have claims corrected understand the rationale and agree with the changes. To enhance physician acceptance, CodeReview incorporates detailed rationales for any changes recommended. Indeed, many payers send the CodeReview rationales directly to physicians to explain coding changes.

It is likely that the use of claims adjudication systems will expand with the increased pressure on payers to reduce costs and to remain competitive in a changing marketplace. It is also likely that the use of these systems will extend to. groups beyond the traditional range of payers: to physician groups or to hospitals that manage coordinated care systems. Such payers will find, as have current users of the systems, that the savings far outweigh the costs. It is also likely that, with wide adoption of electronic claims processing, the use of claims adjudication software will expand further. These systems represent an important application of informatics to health care costs, and an opportunity to reduce health care costs while maintaining quality of care.