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Eric Gay / AP

The health care system's complex payment system gives doctors and hospitals lots of incentives to bill for more expensive services than they actually provide, a practice known as upcoding. Numerous settlements between health care companies and the Department of Justice indicate it's a widespread problem.

Why it matters: Upcoding affects everyone — it saps money from the taxpayer-funded Medicare and Medicaid programs and could lead to higher premiums for people with commercial insurance. But there's no evidence the health care system is fighting upcoding effectively, or that the problem will go away.

The basics of upcoding: Health care providers document what they do as much as possible because they want to maximize their revenue and profit in an era of declining payments. Just take a quick glance at the multitude of industry coding webinars, including one titled "Keeping up with the Code-ashians."

But this can spur people to exaggerate medical claims or willfully overbill.

  • Carolinas HealthCare System, a hospital system based in North Carolina, paid $6.5 million to the Department of Justice last month to settle allegations that it knowingly overcharged Medicare and Medicaid for urine drug tests.
  • Instead of coding for the lower-paying "moderate complexity" urine drug tests, Carolinas' doctors allegedly used "high complexity" codes. The settlement cleared Carolinas of liability.
  • The services that are most vulnerable to upcoding are routine doctors' visits, known in the medical billing world as "evaluation and management" visits, and lab services. Billions of dollars have been wasted on those incorrectly coded services, according to the federal government.
  • This practice is separate from fraudulently billing for services that were never provided or weren't necessary, but it's a fine line.
  • There have been numerous other upcoding settlements with the Department of Justice over the past several years, including a $60 million settlement against IPC Healthcare, a national doctors group that was bought by TeamHealth.

Part of the problem is not every doctor or coder views medical services the same way. Notes and codes are vague, and interpretations can be different.

"You couple that ambiguity with a system that rewards increasing intensity of services, and it shouldn't be surprising that you wind up with upcoding," said Christopher Brunt, a health economist at Georgia Southern University who has studied the issue.

Punishments don't appear to be working: The financial penalties for upcoding can be severe, especially for smaller doctor groups. But the Department of Justice doesn't appear to be changing behaviors among the larger organizations. Carolinas' $6.5 million settlement, for example, is just 0.1% of the hospital system's revenue, or 3% of its operating income. U.S. Attorney Jill Westmoreland Rose, who oversaw the Carolinas settlement, wasn't available for an interview.

The continued use of higher-level medical codes "seems too prevalent to me to indicate that DOJ is a real credible threat," Brunt said.

This goes beyond providers: Health insurers, especially those that participate in Medicare Advantage, have been accused of inflating medical codes for members as well.

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