Medical Care Reform!

"This truth should be kept constantly in mind by every free people desiring to preserve the sanity and poise indispensable to the permanent success of self-government."
~ Theodore Roosevelt ~

Medical Fraud Upcoding
by Kelly Reiff ~

Cases today and in the past have illustrated upcoding or charting for dollars by hospitals, clinics and other institutional providers as a method for maximizing revenues and profits. This paper takes a look at an acceptable billing procedure, what constitutes upcoding, and the costs that Healthcare accounts for because of fraudulent activities. Means of preventing such behavior are analyzed as well as examples of upcoding. Healthcare reform is also mentioned to determine what actions have been and are currently being taken to solve this issue along with California’s plan to get even tougher on Medical fraud.

We are now living in a world of increasing Healthcare costs. Rises in Healthcare can be attributed to several factors, one being litigation costs from Healthcare fraud. Healthcare fraud can be attributed to various unethical means. The Healthcare system is very complex and different aspects, such as prevalence of fraud, can be evaluated in order to determine where costs are emerging from and what can be done to lower them. Healthcare fraud and in particular, upcoding to maximize revenues, is a current issue that needs to be evaluated.

The billing process for hospitals, clinics, and other services is to be followed with extreme detail. The process involves steps such as appointment scheduling, registration, charge collection, claims submission, payment posting, accounts receivable management, and collections.  During the charge collection step it is important to verify that charges and associated diagnosis codes are documented on the superbill, and the codes should be well documented in the patient’s chart. The claims submission step includes verifying that all services are accounted for and entered into the billing system accurately, that the procedure codes are attached to the appropriate diagnosis codes and that the insurance information is accurate and complete.[1]  Following this procedure along with using ethical guidelines will help prevent fraudulent activities from occurring.

Medical providers use a standardized system of numerical codes for patient services that are required by government programs such as Medicare and Medicaid. This way insurers and the government do not have to decipher what services were provided from thousands of different types of coding or billing systems. There are several codes that are applicable for medical procedures. The misuse of these standardized codes to obtain more money than is allowed by law is commonly termed upcoding.[2]  Each Medicare billing code corresponds to a particular group of services and will eventually result in reimbursement to the physician or other provider based upon the code entered.  Providers or the organization they work for have financial incentives to increase the bill by exaggerating or even falsely representing what medical conditions were present and what services were provided. Greater government payment results from more serious medical conditions, a large number of medical conditions listed as being present or treated, and the more extensive the services provided.

An example of upcoding would be when a two-minute visit for a diagnosis and treatment of an upper respiratory condition is upcharged from a very low reimbursement rate code by instead intentionally using codes for a more serious condition. Thus, the diagnosis is altered to falsely diagnose the patient suffering from a more severe bronchitis and sinus infection, with some breathing impairment requiring nebulizer treatment, all requiring a one-hour office visit. If these additional services were or were not provided, but not needed medically, a fraudulent upcharge occurs.[3]

When medical providers act upon the temptations to use higher diagnosis codes in order to receive a larger reimbursement or even document that they provided a service when in fact they did not, medical fraud is performed. In 2000, “the U.S. government collected more money in the form of fraud recoveries than ever before -- $ 1.6 billion.  And most of that money -- $1.2 billion – came from Healthcare fraud cases, according to Dept. of Justice statistics released in November.”[4]  Some may wonder why Healthcare accounts for such a large percentage of the fraud recoveries.   For one, Healthcare programs account for nearly half a trillion dollars in spending.  The Healthcare field is flooded with “contractors”; physicians, hospitals, nursing homes, pharmaceutical companies and others bill the government, which creates many opportunities for improper billings.  Another reason why Healthcare programs are responsible for so much fraud is because of the fact that they are a growing sector, unlike other areas the government monitors for fraud.[5]

In effort to avoid fraudulent behavior and coding practices, coding reviews can be enforced. A coding review involves comparing patient charts with the codes submitted to the Department of Health and Human Services (HHS) or private insurers. Understanding what an effective review is, when and how to set it up and how to make it most effective can be important to the financial health of the practice. The quality of coding is one of the most important factors determining the financial state of a practice. If there are problems, they have to be solved quickly. But before they can be solved, they have to be found, which is why regular coding reviews are important.

There are two types of coding reviews: an audit performed by HHS agents and voluntary reviews performed by the physician practice. The procedures are similar, but the effects vary between the two. The audit can be emotionally draining and financially ruinous, however the voluntary review has the opposite effect. The voluntary review can reveal underpayments, which would improve the practice’s finances, and it can help ensure compliance with federal evaluation and management (E&M) coding rules, making the HHS audit less frightening and ultimately less expensive.[6]

Coding reviews are inevitable for most doctors except for the few subspecialties that perform a small number of the same procedures every day. "There's just too much complexity and confusion in the coding system to assume your practice is doing it right," says Thomas Obade, MD, part of the four-doctor group Orthopedics at Woodbury, in Woodbury, N. J. “The only way to know for sure that all the doctors in the practice, as well as the coding employees, are coding properly is to check the work on a regular basis,” says Dr. Obade, who is also chair of the Health Policy and Practice Committee of the New Jersey Orthopedic Society.[7]

Physicians usually do not get too involved with coding review; they are limited to setting up and paying the bill and keeping up with clinical issues. Although the process mainly involves administration, it is ideal to include some physician oversight. "I think there should be one doctor who takes responsibility for it. After all, no matter what the administrators do, it is the doctors who are legally responsible and who will have to pay for any mistakes," says David Zehring, MD, a plastic and reconstructive surgeon who also helps practices perform coding reviews though his company, Spanish Peaks Healthcare Consultants in Denver.[8]

As a precaution some clinics may feel it is necessary to undercode to avoid fraudulent claims, however, undercoding can result in fines. As a matter of law, all Medicaid patients have to be charged the same for the same procedure. If the practice undercodes a procedure for one Medicaid patient and not for another, the procedures that were coded at the higher level could be considered Medicaid fraud. So undercoding as a precaution will not help.

When someone is considering a case of Healthcare fraud, they more than likely will come across the 1986 Federal False Claims Act. The False Claims Act (FCA) prohibits the submission of “knowing” false claims to obtain federal funds.[9]  The United States may sue violators for treble damages, which are three times the government's loss, plus $5,000 to $10,000 per false claim. The Act gives the government a remedy against all of the key players in a scheme.

The law allows the U.S. to sue on its own behalf, and it also authorizes qui tam plaintiffs, which are private persons also referred to as relators or whistleblowers, to sue on the government’s behalf as well as their own. Private complaints must be filed in federal district court off the public record and be accompanied by a statement, filed with the Department of Justice, disclosing all of the material evidence the plaintiff has. The government has at least sixty days to investigate and decide whether to take over the case. The government may obtain extensions to continue its investigation, and if the government does take over the case, the qui tam plaintiff continues to be a party and may recover up to 25% of the amount the government collects. If the government does not take over the case, the plaintiff may go on and be awarded up to 30% of the government’s recovery.

The government has used the False Claims Act to investigate a wide range of Healthcare providers, from managed care organizations, clinical laboratories, pharmaceutical companies, and chains of hospitals and nursing homes, to physician practices, home health agencies and durable medical equipment suppliers. The government has also pursued the entities that assist plans and providers with Healthcare transactions, such as billing companies, attorneys, and Medicare carriers and fiscal intermediaries.

Physicians practicing fraudulent behavior may feel that they are untouchable and will not be roped into a multimillion-dollar fraud investigation.  Patsy Vargo, MD, has two words for physicians that feel that way: Think again.[10]   In 2000, she was in her fifth year of trying to disprove allegations of upcoding. The government sought as much as $37 million from her because of her supposed overbilling to the Civilian Health and Medical Program of the Uniformed Services for treatment she provided to patients at an air force base in Montana. The government contended that from 1991 to 1995, she consistently charged and claimed higher Current Procedural Terminology (CPT) codes for medical services than allowed. They are basing their case on several audits, one of which concluded that she was overpaid almost $8,000 for one month. The audit included a billing for a cholesterol check as a level 4 service and treatment for a sinus infection as a level 4 service, when those charges are usually reserved for cases that require complex medical decision-making. Dr. Vargo refuses to settle with the government because she thinks it would only encourage them to go after other doctors and she feels that she did nothing wrong.

Upcoding is also occurring in New York; the Medical Society of New York is fighting back against Oxford Health Plans’ demand for payments of up to $100,000 from about 200 physicians who the insurer contends were upcoding claims. Oxford would pay the claims, but later ask for refunds when upcoding was suspected. They informed the physicians that the insurer would bring the issue to arbitration if they did not pay at least three-fourths of the amount due within ten days.[11]  They did not deny claims in the first place because they felt that it was more appropriate to ask physicians for money back than to review and downcode claims upon their submission.

Another example of upcoding occurred in California. A jury ordered three doctors and nine clinics to pay Allstate Insurance Co. $8.2 million after finding them liable for billing for services they did not provide and for changing bills to justify excessive charges.[12]  This case is the first to go to trial under a unique California law created like the False Claims Act. The success of Allstate could lead to more people using civil suits as a tool to pursue fraud and abuse cases.  It could also lead to other states adopting their own legislation. "This case is extraordinarily important," said Los Angeles-based attorney Dennis B. Kass, of Manning & Marder, Kass, Ellrod, Ramirez, who represented Allstate in the case. "Hopefully, it will encourage more people to use the law to stop fraud. Upcoding is very, very costly. It's unfair to good doctors."[13]  Allstate ended up settling with three of the doctors before the trial went to court. After a six week hearing, the jury found the doctors and clinics that went to trial liable for fraud against Allstate.

On January 17, 2002, John W. Suthers, U.S. Attorney, announced that the U.S. had entered an agreement with the St. Mary’s Hospital and Medical Center in Grand Junction, Colorado, to settle allegations that St. Mary’s Hospital caused false claims to be submitted for payment by federal Healthcare benefit programs.[14]  St. Mary’s Hospital is a non-profit subsidiary of the Sisters of Charity of Leavenworth Health Services Corporation of Leavenworth, Kansas. Under the agreement, St. Mary’s will pay just over $1.2 million to the United States in exchange for a release of liability under the False Claims Act.

This agreement settles accusations that the hospital submitted claims for inpatient treatment of pneumonia that were billed to federal payers using diagnosis codes for more serious illness than what was actually treated. The settlement demonstrates the hospital’s willingness to meet the ethical and legal requirements to honestly bill the government. This case was investigated by the U.S. Department of Justice and the Inspector General for the U.S. Department of Health and Human Services as a part of a national initiative to address upcoding of pneumonia claims by hospitals.  The government subpoenaed more than 200 medical records from St. Mary’s Hospital seeking support for claims that had been submitted to either Medicare or Medicaid for the treatment of pneumonia.[15]  An audit revealed that St. Mary’s had selected a principal diagnosis that was not supported by the records. The principal diagnosis, the main condition that caused the patient to be admitted to the hospital, is the primary factor for classifying treatment for a hospital inpatient into a particular Diagnosis Related Group (DRG), which is a category system that is used for reimbursement purposes in a hospital. DRGs are based upon information reported to the payer about the patient’s diagnosis, the procedures performed, and certain demographic factors.

The claims that were subpoenaed made use of principal diagnosis codes that corresponds to “pneumonia due to other specified bacteria.”[16]  They were able to obtain reimbursement under DRG 079 (respiratory infections and inflammations), which offers a higher reimbursement from Medicare and other payers than an uncomplicated case of pneumonia. The uncomplicated case in which the illness is not specified falls under DRG 089 (simple pneumonia). During the years St. Mary’s billing procedures were being investigated, the amount paid to them from Medicare for DRG 079 was approximately $2,700 higher per patient than the reimbursement for DRG 089.[17]

St. Mary’s denied any intentional wrongdoing in connection with claim submission. Because they reached a settlement, the dispute was resolved without a lawsuit being filed or admission of liability by St. Mary’s hospital.

A physician in Kansas, specializing in ear, nose, and throat illnesses, performed unnecessary surgeries, billed for more costly procedures than were actually provided, lured patients into unnecessary surgeries that caused them serious bodily injury, and also created false documents and provided false testimony to cover up his fraud.[18]  Out of 105 surgeries performed in 1999, an expert witness found that 40% of those were unnecessary. From 1998-1999, all but one of the forty mastoid ear surgeries he performed was unnecessary. It was also said that he could not have performed the surgeries billed in the short surgery times that were recorded. The physician was sentenced to six years in jail. He lost his license and agreed to be excluded from Federal Healthcare programs for fifteen years after his release from prison.

One may wonder what is being done to decrease these fraudulent activities. The federal government’s approach to Healthcare fraud goes back and forth between punishment and sanctions to education and collaboration. With Janet Rehnquist as Health and Human Services’ Inspector General in the Bush administration, the attitude shifted more toward education.[19]  Greater emphasis on compliance programs and clearer iterations of the rules are being enforced to help physicians avoid billing mistakes that might be mistaken for fraud. However, that could be changing; there is a growing concern that it is time that anti-fraud measures are made stricter.

If more severe measures were enforced, it could mean a return to a time when fear of prosecution was a major concern. This fear was not meant to lead physicians to shortchange themselves, though. Mac Thornton, chief counsel to the Inspector General for 12 years, who is now with the law firm Sonnenschein Nath & Rosenthal said, "There was never a policy of going after physicians for honest mistakes. We wanted everyone to be aware that claims were being scrutinized more closely in the 1990s, but we didn't want to engender a degree of fear. There were some stories circulated that were basically either not true or hyped up that seemed to illustrate that fear was justified."[20]  The doctors’ worries stimulated criticism against the federal government’s enforcement policies and resulted in the OIG’s effort to improve its communications with physicians by placing a greater emphasis on education and compliance soon after.

In February of 2003, Rehnquist expressed continued commitment to the compliance approach. "I do realize that some continue to question the value of compliance and whether [it] is a good investment," she said. "Compliance is more important than ever to this industry. With new payment systems, expanding benefits, changing regulations -- these factors all create a constantly changing environment for Healthcare organizations, and they must have systems in place to stay on top of the program requirements."[21]  She also said that the Center for Medicare and Medicaid Services was working on a project in order to measure effectiveness of compliance programs.

Some states are taking action themselves to decrease Healthcare fraud. “California officials want to get even tougher on Medical fraud, which they say costs as much as $3 billion annually – 10% of the program’s $30 billion budget.”[22]  They had increased prosecutions in the past few years, but now want to create an even more targeted and aggressive approach against individuals who abuse the system. If approved by Legislature, the plan would result in more scrutiny for doctors. The California Medical Association supports fair and reasonable ways to lessen fraud.

California Attorney General Bill Lockyer said, "[The plan] will help us more aggressively detect, investigate and prosecute Medical fraud, protecting the system for the taxpayers who pay for it and for the beneficiaries who depend on it for vital Healthcare.” He and lawmakers are suggesting reforms that would do such things as give the Department of Health Services the right to make unannounced visits to businesses that bill Medical to inspect records, provide monetary reward for those who report fraud, or mail letters to Medic-Cal recipients asking them to confirm that they received the care or products that they were reported to receive. Doctors and others would also receive a notification for services billed under their IDs.

There are still specifications in the plan that need to be worked out. They want to involve both providers and beneficiaries in detecting fraud.   “In fiscal years 2001-2002 and 2002-2003, claims that doctors or others padded bills by charging for goods and services that weren't provided or by upcoding visits were part of 101 complaints that the AG's office received. That constituted 43% of complaints.”[23]   The changes would not only help in discovering those who are committing fraud, but also protect physicians who are victims of fraud, for example having their ID stolen and someone else using it to bill the state. This legislation is important and other states could soon follow in California’s footsteps.[24]

In conclusion, it must be noted that Healthcare fraud is a serious topic for Healthcare executives. Upcoding and other fraudulent actions have resulted in high fines; for example a settlement with the University of Pennsylvania for more than $30 million and in the largest settlement to date, Columbia/HCA paid approximately $850 million.[25]  These amounts are significant and believed to be affecting the cost of Healthcare today.  Action must be taken in order to prevent fraudulent behavior from continuing to take place, whether it be through education or by means of stricter punishment. I believe that Healthcare fraud and abuse should not be taken lightly.

Works Cited;

Albert, Tanya. California decision hits physicians for fraud against Allstate. April 2, 2001. Copyright 2001 American Medical Association. <>

Albert, Tanya.  California launches plan to crack down on Medical fraud.  May 17, 2004.  Copyright 2004 American Medical Association. <>

Albert, Tanya.  Healthcare top source of fraud recoveries.    Dec. 10, 2001.  Copyright 2001 American Medical Association. <>

Hawryluk, Markian.  Medicare fraud: Back to stricter scrutiny?  March 3, 2003.  Copyright 2003 American Medical Association. <>

Jacob, Julie A. & Jackson, Cheryl. Oxford pressing physicians for E&M upcoding refunds.   June 19, 2000. Copyright 2000 American Medical Association.  <>

Klein, Sarah A.  Feds try new tack in charging doctor with upcoding.    Feb. 21, 2000. Copyright 2000 American Medical Association.  <>

Schechter, Karen.  7 steps to prevent overdue payments.  July 28, 2003.  Copyright 2003 American Medical Association. 

Schowalter, J. Stuart.  The Law of Healthcare Administration.   4th ed. Health Administration Press, Chicago, IL.  Pg. 231-236.

Slade, Shelley R. Healthcare Fraud: How Far Does the False Claims Act Reach? August 23, 2000.  <>

Stevens, Larry.  Up to code: A way to ensure your financial health.   Nov. 5, 2001.  Copyright 2001 American Medical Association.   <>

Suthers, John W. (U.S. District of Colorado Attorney). Press Release:   St. Mary’s Hospital and Medical Center settle Medicare false claims allegations.   January 17, 2002   <>

The Department of Health and Human Services And The Department of Justice
Healthcare Fraud and Abuse Control Program Annual Report For FY 2002, September, 2003. <>

“Upcoding in the Medical Office—A Big No-No!” Medical Practice Management.  2003   <>

[1] “7 steps to prevent overdue payments”  By Karen Schechter

[2] “Upcoding in the Medical Office—A Big No-No”

[3] “Upcoding in the Medical Office—A Big No-No”

[4], [5] “Healthcare top source of fraud recoveries”  By Tanya Albert 

[6], [7] “Up to code: A way to ensure your financial health”   By Larry Stevens 

[8] “Up to code: A way to ensure your financial health”  By Larry Stevens

[9] “Healthcare Fraud: How Far Does the False Claims Act Reach?”   By Shelley R. Slade, Esq.

[10] “Feds try new tack in charging doctor with upcoding”  By Sarah A. Klein 

[11] “Oxford pressing physicians for E&M upcoding refunds” By Julie A. Jacob and Cheryl Jackson

[12], [13] “California decision hits physicians for fraud against Allstate” By Tanya Albert 

[14], [15] District of Colorado Press Release, John W. Suthers, US Attorney, Dept. of Justice 

[16], [17] District of Colorado Press Release, John W. Suthers, US Attorney, Dept. of Justice 

[18] The Department of Health and Human Services And The Department of Justice Healthcare Fraud and Abuse Control Program Annual Report For FY 2002

[19], [20] “Medicare fraud: Back to stricter scrutiny?” By Markian Hawryluk 

[21] “Medicare fraud: Back to stricter scrutiny?”  By Markian Hawryluk

[22] “California launches plan to crack down on Medi-Cal fraud”   By Tanya Albert 

[23] “California launches plan to crack down on Medi-Cal fraud “ By Tanya Albert

[24] “California decision hits physicians for fraud against Allstate” By Tanya Albert

[25]  The Law of Healthcare Administration,  Schowalter, J. Stuart

Click here to go back to the page you came from!



In America everyone is presumed innocent until convicted!
Oroville Online Medical Care
Reviewer 2006-2007
If you feel you can help in any way or would like to comment e-mail me, The Editor!
FAIR USE NOTICE: This site may contain copyrighted () material the use of which has not always been specifically authorized by the copyright owner. Such material is made available to advance understanding of ecological, political, human rights, economic, democracy, scientific, moral, ethical, and social justice issues, etc. It is believed that this constitutes a 'fair use' of any such copyrighted material as provided for in section 107 of the US Copyright Law. In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior general interest in receiving similar information for research and educational purposes. For more information go to: If you wish to use copyrighted material for purposes of your own that go beyond 'fair use', you must obtain permission from the copyright owner!