Today's system of health care billing is dominated by medical codes. First, a health care provider assigns one or more diagnostic codes for the patient in order to coordinate and streamline his/her care. In the absence of a definitive diagnosis, the reason for the initial visit may be cited instead. Each diagnosis is associated with an International Classification of Disease (ICD) code, which can have up to six characters. Payors often use the ICD code to determine if each service or product is a "medical necessity" for that beneficiary's diagnosis. For example, if the medical provider submitted claims for pre-natal care, the medical claims analyst could determine the patient was pregnant from the ICD code.

Medicare and other government programs require billers to use procedural codes established by the Healthcare Common Procedure Coding System (HCPCS) to identify items and services provided for the patient. Level I HCPCS is identical to the Current Procedural Terminology (CPT) system of the Americal Medical Association. Level II HCPCS is a separate alphanumeric system that is used for non-physician services such as ambulance services and prosthetic devices.


Despite the standardized code systems for diagnoses and services, reimbursement rates can be highly unpredictable. Virtually no healthcare plan pays the actual bill claimed by the medical provider. Healthcare plans always reimburse according to “allowable” or “negotiated rates,” which vary greatly between plans. After payment is made, the plan issues an Explanation of Benefits (EOB) (or similar documentation) for each transaction.

Copayments, deductibles and secondary payors can make the billing system seem confusing. Most medical providers try to collect copayments during patient encounters. Sometimes a secondary payor covers the deductible and sometimes not. Medical billers are often required to submit claims knowing has to submit the claim bill regardless. After payment of the deductible is denied the claim can be passed on to the patient.

There is considerable incentive for some medical providers to "upcode" services or products by exaggerating the patient's diagnosis. This is partucularly true for government claims. For example, Medicare may only pay for a chest x-ray if there is an indication of some disease but not as part of a routine pre-operative check-up. A surgical facility's radiology department could increase that facility's revenue by systematically upcoding Medicare patients' ICD codes to reflect lung pathology regardless of the patient's medical status.