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Hospital bill audit programs can make a difference.

Hospital Bill Audit Programs Can Make a Difference

Many health and workers' compensation insurers are now making use of hospital bill audit services. Typically, insurers will refer bills for audit with unusually high charges or other unusual features. A review program will select only a small proportion of all bills received by an insurer. Although vendors of audit services claim in their advertising that 70 percent of 95 percent of hospital bills contain errors, they frequently recommend only large bills be referred in order to achieve optimal cost-effectiveness for the program.

The Washington State Fund, one of the nation's largest workers' compensation insurers, embarked on a large scale hospital bill audit program. Our experience has provided insight into how productive hospital bill auditing is, what types of hospitals produce large savings and the billing problems which produce savings.

But before discussing the results of our hospital bill audit program, we need to present some background on the Washington State Fund. The organization provides workers' compensation insurance to 120,000 employers and 1.3 million workers in the State of Washington, and regulates 360 large self-insuring firms with approximately 700,000 workers. It receives about 170,000 occupational injury and disease claims annually, expending $175 million on health care for injured workers. Hospitals are paid over $50 million annually: approximately $30 million for inpatient services and $20 million for hospital outpatient services.

In 1985, due to rapidly rising costs of health care, the state fund established an aggressive health care cost management program. In the area of hospital care, this included a diagnosis related group-based payment system for inpatient care and a fee schedule for hospital outpatient services.

A 1985 review of a sample of hospital inpatient bills indicated significant problems. We, therefore, assigned a high priority to a hospital bill audit program. The outpatient audits are excluded from the results reported in this article.

The state fund had authority for adopting rules concerning allowed or covered services and utilization review, based upon a provision in state law that care for injuries be provided on a "prompt and efficient" basis. The rules are invaluable in disputes with hospitals over allowed charges.

To bring the program up quickly, we hired a firm with expertise in evaluating hospital bill audit programs, National Medical Audit, to manage a contracting process. We decided to start with a six-month pilot program in the Seattle-Tacoma-Everett area, the state's most populous region with a large proportion of the state fund's hospitalizations and minimized travel costs for the auditors.

We held a competition to select vendors. Our criteria for selection included experience, demonstrated ability, innovative approaches, as well as price. To help identify our problems, we announced we would refer a random sample of hospital bills to vendors, and that vendors would be required to audit 75 percent of referred hospital bills over $3,500. Thus during the pilot, the selected vendors could not focus solely on the bills of large dollar amounts.

We intended to select two firms and randomly assign bills to each to encourage a competition for savings. However, one of the successful bidders withdrew during the contracting process for business reasons unrelated to the competition.

Before the bidding process began, we met with hospital representatives. Based on these discussions, we established several features for the pilot. These included that audits would be done after payment of the bill; auditors would be required to obtain signed acceptance from hospital staff of any adjustment; and recoveries for errors discovered by the auditors would be made through offsets to future payments to hospitals.

After the final vendor was chosen, all hospitals in the test area received a letter about the new program. In January 1986, we began randomly referring one-half of the bills received from hospitals in the test area to the remaining successful bidder, Intracorp, a division of CIGNA Corporation.

Based on the success of the pilot program, having decided to expand the program statewide, we held another national competition to select a vendor. In this bidding process, we required contractors to exchange data using electronic media to reduce the paper flow between the state fund and the vendor. August International of Orange, CA, was chosen to operate the expanded program.

The expanded program, which allowed the vendor to focus on maximum savings strategies, proved even more productive than the pilot program. While our emphasis on obtaining hospital agreements to bill adjustments continued unabated, we added an appeal process when hospitals refused to agree with audit findings. During the appeal, many issues have been resolved in favor of the state fund. In other cases, we determined that the audit finding was not substantiated.

During the expanded program, we had a test sample of hospital outpatient bills audited. The cost of the audits was greater than the savings produced.

Results of Audit Programs

The results differed significantly between the pilot and the statewide programs. Over a six-month period, Intracorp recovered $270,737 on audits of bills with original charges of $4,593,903, a recovery of 5.9 percent from the program. After adjusting for $86,861 in audit fees, net savings were $183,876, or 4 percent of billed charges. During the first 10 months, the expanded August International program recovered $2,167,547 on billed charges of $24,146,563, a 9 percent return. After adjusting for $523,792 in audit fees, net savings were $1,643,754, or 6.8 percent of billed charges. Recoveries on a per bill basis also showed differences in the two programs. In part because of our requirement during the pilot phase that the vendor audit 75 percent of all bills over $3,500, Intracorp had higher audit fees and a lower average recovery per bill.

August International's ability to selectively audit bills to maximize recoveries aided a higher average recovery per bill. It generated average net savings of $232.10 per bill, while Intracorp's average net savings were only $195.76.

Intracorp obtained savings at 86.1 percent of hospitals audited in the pilot area, compared with August International's 78.6 percent. This may reflect Intracorp's opportunity to focus audits on the state's tightest concentration of hospitals. Seventy-five percent of hospitals audited by Intracorp produced net savings after adjustment for audit fees, whereas only 69.9 percent of hospitals audited by August International did so.

We have also analyzed savings across hospital peer groups, using categories established by the Washington State Hospital Commission. Most hospitals in Washington fall into one of four peer groups, according to the commission. Group A consisted of rural hospitals are defined by the State Health Coordinating Council; Group B general Medical/Surgical hospitals not falling into group A or C (primarily small- to medium-size urban hospitals; Group C non-tertiary teaching hospitals (primarily large urban facilities); and Group D tertiary and specialty hospitals (university medical centers, children's and psychiatric hospitals and hospitals operated by health maintenance organizations). A few hospitals are not grouped by the hospital commission and are labelled "No Group" in our study.

Intracorp only audited hospitals in the populous Seattle-Tacoma-Everett area. Consequently, it did not audit any Group A hospitals. For Intracorp, Group C hospitals had the highest average net recovery, with $7,485 per hospital, versus an average of $5,106 across all hospitals (See Table 1). Group B hospitals had the highest percent of net recoveries to hospital billed charges, just under 8 percent, compared with an Intracorp average of 4 percent across all hospitals. Group B hospitals also had the highest total and net recovery on a per bill basis. Total recovery was $404 per bill, versus $288 per bill across all hospitals. Net recovery was $297 per bill, versus $196 per bill across all hospitals.

In the August International program, the out-of-state hospital group recorded the highest total and net recoveries per bill. Among in-state hospitals, Group C had the highest average net recovery per hospital, $32,551, versus an average of $7,979 for all hospitals audited by August International (See Table 2). Group A hospitals had the highest percent of net recoveries to billed charges, 11 percent, compared with an average of 7 percent across all hospitals. While No Group hospitals had the highest recoveries per bill, the small number of hospitals in this category produce few bills.

Of the remaining in-state hospitals, during the August International program Group A had the highest total and net recovery per bill. Total recovery was $345 per bill, versus $306 per bill across all hospitals. Net recovery was $284 per bill, versus $232 per bill across all hospitals.

One factor that could have caused rural hospitals to look relatively productive in terms of audit recoveries during the program is that while urban hospitals have made some improvements in their billing practices based upon our activities during the pilot phase, rural hospitals did not have an opportunity to adjust to our audit program until we expanded statewide.

Reasons for Recoveries

Both Intracorp and August International were asked to identify reasons for charges denied during audits. Each developed their own codes, which unfortunately are not comparable. Intracorp used six codes to identify the reasons for denied charges. Billing errors or lack of documentation in medical records accounted for only 4 percent of total recoveries (See Table 3). Recoveries due to unauthorized treatments accounted for 64 percent of total savings. Unauthorized treatments are those not allowed under the policies of the state fund, including hospital bed rest stays for back injuries not justified on medical grounds.

In turn, August International used nine denial codes to document recovered charges. Billing errors or lack of documentation in medical records accounted for less than 2 percent of recoveries. The major reasons for recoveries by type of denial were bed rest stays for back injuries not justified on medical grounds, treatments unrelated to the industrial injury and services not medically necessary (See Table 4). About 14 percent of the bills contained no denial codes and cannot be categorized.


A hospital bill audit program, backed by rules on allowed services and appropriate appeal procedures, can be an effective component of a strategy to control health care costs. Insurers can use a competitive bidding process to identify well qualified vendors and obtain an economical price for operating the program. Sophisticated bill audit vendors can provide electronic linkages to reduce the administrative burden of passing volumes of paper between the insurer and the vendor and permit ready identification of sources and levels of savings.

Certain areas are most productive for audit activities; audit energy should be targeted to where the pay off is highest. Our experience to date indicates that on a per-bill basis, audits of rural and small- to medium-sized urban hospitals have the highest net payoff, whereas audits of tertiary hospitals are relatively less productive. Audits targeted at utilization review issues, including medical necessity, services not covered by the insurer and in the workers' compensation arena, treatments unrelated to the work injury or disease, have a high return. On the other hand, looking for simple billing errors is not very productive.

Finally, we believe that over time a number of hospitals changed billing practices in response to our audit programs. This means that audits of certain hospitals may become unproductive or may need to be refocused to uncover new problems. [Tabular Data 1 to 4 Omitted]

Taylor Dennen is assistant director for medical services and Michael Zell, an analyst, for the Washington State Fund, a workers' compensation insurer. Michael Arnis is assistant director for information services for Washington Basic Health Plan.
COPYRIGHT 1989 Risk Management Society Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1989 Gale, Cengage Learning. All rights reserved.

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Author:Dennen, Taylor; Zell, Michael; Arnis, Michael
Publication:Risk Management
Date:Jan 1, 1989
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