What is Medical Coding?

Magical numbers that turn medical services into money

Mar 31, 2022

The TL;DR

Medical coding is taking a patient’s medical record and turning it into a series of codes to make communicating about the patient’s treatments and diagnoses easy across organizations.

Medical coders are specialized in this area. Their job is to read through a patient’s medical chart and turn it into a series of medical codes.
There’s a variety of coding languages. ICD codes are used for diagnosis, while CPT and HCPCS codes are used for treatments, including office visits, medications, medical equipment, and procedures.
The most common use of medical coding is for billing, although medical codes can also be useful for researchers.
Medical coding is ripe for abuse, and is a center of lots of medical reimbursement fraud.

What is medical coding?

Different parts of the medical system need to talk to one another. One very important piece of this communication is between doctors (providers) and payors – the people who are paying for care.

Sometimes patients themselves act as payors, but more often the payor is an insurance company or the government (in the form of Medicare or Medicaid). Doctors need to report their actions to payors in order to get reimbursed for their services. This involves accurately reporting on the patient’s diagnosis, as well as any office visits, medications, or procedures that they used.

But the folks over at the insurance company, well, they aren’t doctors. They can’t be expected to know the technical terms for every single medical diagnosis and procedure. They need a simpler way to keep track of things than knowing the difference between neonatal hypoxic-ischemic encephalopathy and intrapartum asphyxia.

And they don’t have time to read through every note in a patient’s chart and try to figure out what actually happened.

Enter medical coding. This is a huge system of codes which are used to keep track of medical diagnoses, office visits and exams, and procedures – everything that doctors (and other healthcare providers) do. Medical coding takes a patient’s medical record and turns it into a standardized, easily sharable set of codes.

What are medical codes used for?

The primary use of medical codes is for billing. The codes will be used to generate an invoice, which is then sent to the payor. We’ll cover this workflow later.

Medical codes can also be very useful for researchers. Say that you’re doing a study on how a certain environmental pollutant affects the risk of breast cancer. You can use the various codes for breast cancer to figure out how many cases and deaths there were in different areas of the country, and you could then compare that to average levels of the chemical that you’re studying. As another example, when statistics are published on the most common causes of death in the US, medical codes were used to figure this out. So even though the immediate use of these codes is to facilitate medical billing, they can also be used in other ways.

Medical coding is its very own specialty

A provider will generally medical coders either in house or outsourced, whose entire job is to turn what happens in the office into a series of medical codes, which will allow for appropriate record-keeping and billing. Usually, the billing itself is done separately, by a different employee. All the medical coder does is determine the appropriate codes, while another office will take those codes and generate an invoice to send to the payor.

Medical coding is an important job— coding correctly is how a doctor’s office gets paid, and getting paid is how a doctor’s office stays open. Also, coding correctly is how a doctor stays on the right side of the regulators – if coding is done incorrectly, the doctor could end up fraudulently billing the government, which they really don’t like.

Medical coders certainly aren’t doctors, but they do need to have a pretty good understanding of what doctors do. They will need to be able to read a patient’s medical record and turn it into a series of codes for the patient’s diagnosis and the various treatments that were used. In order to learn how to do all this, they need a training course that takes about six months, and then they have to pass a certification exam.

There are a few different medical coding languages

As if things weren’t complicated enough, there are also a few different systems of medical coding, and medical coders often need to use all of them at the same time.

ICD codes – the diagnosis

The first type of codes are the ICD codes. These are used to code a patient’s diagnosis (or diagnoses). ICD stands for International Classification of Diseases, and this system was developed by the World Health Organization decades ago in an effort to standardize medical diagnoses. Of course, it’s been updated a few times since then; the version we use now (in 2022) is called ICD-11 (which, as you might suspect, is the 11th version)

CPT codes – the treatment

The next type of codes are the CPT codes. These are used to code the procedures (including office visits) that are used to address the patient’s diagnosis. CPT stands for Current Procedure Terminology, and this system was developed by the American Medical Association. The list of CPT codes is updated every year to keep pace with medical advances.

ICD codes and CPT codes work together to allow insurance companies to determine medical necessity. ICD codes tell payors what’s wrong with the patient, and CPT codes tell them what the medical team is doing about it. Crucially, the procedures that are listed must be approved as treatments for the diagnoses that are listed. For example, if a patient has a leg injury, then an X-ray will likely be approved; if they have a sore throat, it won’t. (Doctors spend an inordinate amount of time fighting with insurance companies over what actually constitutes “necessary” treatment for a given patient, but that’s a story for another day.)

HCPCS Level II – even more about the treatment

Just to make things even more complicated, there’s yet another set of codes. This is the Healthcare Common Procedure Coding System (HCPCS), and it’s used as an addendum to the CPT. HCPCS is used to code for certain types of equipment, services, and procedures that aren’t covered in the CPT. For example, prosthetics and ambulance rides are both coded by HCPCS.

And to make things even more complicated, HCPCS has two levels. HCPCS Level I is basically just CPT, while HCPCS Level II is all the other things that aren’t covered under CPT. In general, CPT codes are used for most outpatient services and some inpatient services, while HCPCS Level II is used mainly for surgical billing and supplies.

Medicine is continuously variable, but medical codes must vary in discrete steps

For a doctor, every patient visit and every procedure are a little bit different. Try reading the notes in a medical chart – they’re long and complicated, taking note of all of the details. No two visits are ever exactly the same.

However, the billing system needs to decide an exact dollar amount for each office visit or procedure. This requires a way of turning continuously variable data into discrete steps – kind of like turning the spectrum of white light into a series of colors.

This is one reason why medical coding isn’t as simple as it might seem at first glance. What if there was just one code for an office visit with a doctor? An office visit could mean a quick 10-minute check-in to discuss how a longstanding patient’s diabetes medication is working, or it could mean spending an hour with a new patient who doesn’t really know what meds they already take, while trying to puzzle out a variety of different symptoms of unknown origin. These are obviously not the same thing, and paying the doctor the same amount for doing them wouldn’t really make sense.

So there are a few different codes for an office visit (or in coding parlance, E/M or E&M – evaluation and management). There are five levels of visit complexity, and a different set of these levels for a new patient versus an existing patient. So our two patients above would receive two different codes. There’s still the problem of trying to take something with continuous variation and chunk it into five different levels, but at least we’re able to code for different office visits differently.

There is a continual effort to make this system as transparent as possible. For example, years ago, a medical office visit was coded on the basis of “complexity.” The visit had to be marked from 1 to 5, in terms of how complex it was. This is obviously a little bit tough to assess objectively, and some doctors would routinely overestimate the complexity of their patient visits.

To make things a little easier, the codes for office visits are now based on approximately how long the visit takes. This is at least easier to measure objectively, and routine overcoding would be relatively simple to prove. If you bill for six 30-minute office visits in an hour – well, that’s obviously fraud. There’s just really no way to claim otherwise.

Ways that the medical coding system can be abused

Through the process of medical coding, medical care is being turned into money. Whenever people are turning something into money, someone somewhere is going to find a way to turn that something into more money than they’re really supposed to. Medical coding is no exception. Over the years, some doctors have found various creative ways to overcharge insurance companies (and the government) for their services.

The boldest method is to just completely invent services that you didn’t really perform. This certainly does happen – it’s known as Phantom Billing. But more subtle ways of manipulating the system of medical coding have also been developed. These methods take services that were actually performed, and find a way of charging more for them than you were really supposed to.

→ Upcoding: overstating the case

One of the ways to abuse the medical coding system is the practice known as upcoding. This involves billing for more serious diagnoses and more complex (read: more expensive) procedures than were really performed. Some examples would be billing for a longer office visit than was actually provided, for the excision of a larger skin lesion than was really there, or for a more complex series of X-rays than was really performed.

When a provider upcodes, they aren’t really making things up, exactly. They’re just overstating the case a little. Rounding up, as it were.

The problem is that real money is attached to the jump from one code to the next. And while that amount of money might be relatively small for an individual instance, when it’s added up over time, it can suddenly start to be a whole lot of money.

→ Unbundling: double-dipping

Another way to take advantage of the system is a practice known as unbundling, also called fragmentation. Some medical codes automatically include a series of procedures formed together. For example, when a mole is removed from the skin, the closure of the skin wound is included. It’s just part of the procedure.

But closing a skin wound is also its own procedure code. (It might be used if someone comes in having gotten a cut on their arm, for example.) And, well, the doctor did in fact perform closure of a skin wound when they took off the mole.

But if the doctor takes off that mole, and then bills for both the mole removal and the closure of the skin wound, then that would be unbundling. They’re essentially getting paid twice for the part of the procedure that involves closing the incision. The wound closure was supposed to be included in the code for mole removal, not billed separately.

Are these practices really fraud?

Yes. Yes, they are. Anytime that someone tricks more money out of a system than they were legitimately allowed to receive, that is fraud.

The various authorities involved have really not taken kindly to these kinds of practices. They do their best to crack down on them, when they can. There have been a few cases of practitioners who were fined hundreds of thousands of dollars after they were found to have been routinely upcoding or unbundling.

Keep in mind that when doctors bill Medicare or Medicaid for their services (as most of them do), they’re billing the government. And the government is not happy when people take money from them. Upcoding, unbundling, or other fraudulent coding practices, when used to bill Medicare or Medicaid – that constitutes defrauding the federal government, and they take it very seriously.

Modifiers communicate additional information

The regulators are wise to these types of tricks, and so they’ve developed methods to try and minimize them. For example, there’s the National Correct Coding Initiative (NCCI). This is a way to prevent unbundling. It’s a series of sets of codes that aren’t allowed to be billed together. In general, if you try to bill for two of these codes on the same day, then one of them will be denied. In our above example, if a provider billed for both mole removal and wound closure on the same patient on the same day, then the payment for the wound closure would be denied.

But wait. There could be a legitimate reason why these two codes were both billed on that day. What if the doctor did the mole removal on the patient’s back, and also stitched up a wound on his left arm, on the same day? These are, in fact, two separate procedures, and the doctor should legitimately be paid for both.

There’s a workaround for this. There are little additions, called CPT modifiers, that can be used to override the automatic denial. In this example, the doctor would add a modifier to the code for wound closure, to establish that it was in fact a separate procedure from the mole removal.