BACKGROUND: In our recent report, Using Software to Detect Upcoding of Hospital Bills (OEI-01-97-00010), we examined the ability of commercially available software to identify DRG upcoding through analysis of electronic claims data. We used two software products to identify 299 hospitals with a high suspected rate of upcoding. We then used accredited medical records professionals to perform a blinded DRG validation on a sample of over 2,600 claims from 50 of these hospitals and a control group of 20 hospitals.

In the course of conducting this study, we developed serious concerns about the potential for abuse of the DRG system through upcoding and about HCFAs oversight of the accuracy of DRG coding. Specifically, we found that, although the hospital payment system is functioning well as a whole, the system has significant vulnerabilities to upcoding that can easily be avoided. We also found that, despite these vulnerabilities, HCFA is not performing routine, ongoing monitoring and analysis of DRG coding to detect problematic DRGs, hospitals, and coding situations that require administrative, educational, or law enforcement intervention.

FINDINGS: The DRG system is vulnerable to abuse by providers who wish to increase reimbursement inappropriately through upcoding, particularly so within certain DRGs. Our analysis found noticeable, detectable, and curable upcoding abuses among providers and within specific DRGs.

In a focused sample from a group of 299 hospitals that computer software identified as high upcoders, we found that an average of 11 percent of DRG bills submitted during 1996 were upcoded, versus 5 percent of bills among a control sample of hospitals.


Source: Office of Inspector General, Using Software to Detect Upcoding of Hospital Bills (OEI-01-97-00010), August 1998.

The average rate of upcoding in the control sample of hospitals (those without a high predicted rate of upcoding) was not statistically different from the average down coding rate. However, among hospitals that the software predicted would have a high rate of upcoding, the average upcoding rate was more than twice that of down coding. The difference between upcoding and down coding in these hospitals suggests intentional abuse of the DRG system by some providers.

Using data from both our focused review and the more broadly representative 1996 DRG validation performed by HCFAs clinical data abstraction centers (CDAC), we found that certain DRGs are particularly susceptible to upcoding.


Claims billed for these three DRGs show a clear pattern that exemplifies the upcoding seen in a group of over half a dozen DRGs we examined. These DRGs were up coded disproportionately, especially by our experimentally identified upcoding hospitals, but also among hospitals from the general population represented by the CDAC review and our control sample.

The HCFA does not routinely analyze readily available billing and clinical data that could be used to proactively identify problems in DRG coding.

The HCFA does not routinely analyze data from the annual validation of DRG coding performed by its clinical data abstraction centers.

Since 1995, HCFA has used two specialized contractors called Clinical Data Abstraction centers to validate the DRGs on an annual national sample of over 20,000 claims billed to Medicare. On a monthly basis, the CDACs report detailed data on each claim reviewed to HCFAs Office of Clinical Standards and Quality. These data include original and validated diagnostic coding, original and validated DRGs, and reasons for any variance between the DRGs. The purpose of this validation effort is to provide HCFA with insight as to the accuracy of DRGs billed to Medicare.

However, we found that HCFA performs no routine, ongoing analysis of CDAC data. In our interviews with staff at the two HCFA components that have responsibility for DRGsthe Office of Clinical Standards and Quality, and the Center for Health Plans and Providersstaff were unable to identify any routine monitoring and analysis of CDAC data. In our review of HCFAs instructions to the peer review organizations (PROs), contractors who have statutory responsibility for DRG oversight, we found no instructions advising them to perform regular analysis of CDAC data.

Yet we believe that analysis of CDAC data can be of great value to HCFA in overseeing the accuracy of DRG coding. For example, in HCFAs 1996 DRG validation, the CDACs found a 4 percent upcoding rate with estimated net overpayment of $183 million. Some may suggest that overpayments of $183 million in an $80 billion program (less than one-quarter percent) indicate that the DRG payment system does not have major problems with upcoding and warrants no further analysis. However, our analysis presented above shows that by digging below the immediate surface, upcoding problems are readily apparent.

The HCFA does not routinely analyze data from hospitals, despite the fact that these data are ideally suited for monitoring and analysis of DRGs.

The HCFA maintains valuable clinical, demographic, and administrative data that form the underlying basis of each of the over 10 million DRG-based claims billed to Medicare each year. Data for each hospitalization include diagnosis codes, procedure codes, beneficiary demographics, admission and discharge detail, cost reporting data, and hospital identifier for linkage with provider demographics. Whether used on its own to monitor billing patterns and trends or used to further explore potential problem areas identified within CDAC data, data from hospital claims can provide valuable information to assist in HCFAs oversight of DRG coding.

However, we found that HCFA does not make routine use of data from hospital claims for monitoring and analysis of DRG coding. In our interviews with staff at both HCFAs Office of Clinical Standards and Quality and its Center for Health Plans and Providers, staff were unable to identify any routine monitoring and analysis of DRG billing data. Interviews at HCFAs Program Integrity unit, within the Office of Financial Management, revealed that HCFA conducts some limited analysis of billing data. However, this analysis is done on a very broad level, primarily to identify coverage issues.

We also reviewed HCFAs current instructions to the Medicare PROs. We found no instructions to the PROs advising them to perform any routine monitoring and analysis of DRG coding, despite the fact that PROs already have a complete set of inpatient billing data provided to them by HCFA. In fact, HCFA staff told us that the PROs were instructed not to do coding projects within their current contract. We did find that PROs are involved in sporadic activity around DRG oversight; however, this activity often is in support of an OIG investigation. (Department of Health and Human Services, Office of Inspector General, 1999, pp. 14)

Case study 1  questions 


  • Summarize the information presented in this case study.
  • Justify what Health Care Finance Administration should do moving forward with regards to monitoring DRG upcoding.
  • Discuss how differences in an organizations case mix and payer mix could impact the findings of this study.

case study 2 


OBJECTIVE: To determine (1) whether modifier 59 is being used inappropriately to bypass Medicares National Correct Coding Initiative (CCI) edits and (2) to what extent Medicare carriers are reviewing the use of modifier 59.

BACKGROUND: In January 1996, the Centers for Medicare and Medicaid Services (CMS) began the CCI. This initiative was developed to promote correct coding by providers and to prevent Medicare payment for improperly coded services. The initiative consists of automated edits that are part of the carriers claims processing systems.

Specifically, the CCI edits contain pairs of Healthcare Common Procedure Coding System codes (i.e., code pairs) that generally should not be billed together by a provider for a beneficiary on the same date of service. All code pairs are arranged in a column 1 and column 2 format. The column 2 code is generally not payable with the column 1 code. Throughout this report we will refer to the column 1 code as the primary code or service and the column 2 code as the secondary code or service.

Under certain circumstances, a provider may bill for two services in a CCI code pair and include a modifier on the claim that would bypass the edit and allow both services to be paid. A modifier is a two-digit code that further describes the service performed. Thirty-five modifiers can be used to bypass the CCI edits. Modifier 59 is one of these modifiers.

Modifier 59 is used to indicate that a provider performed a distinct procedure or service for a beneficiary on the same day as another procedure or service. It may represent a different session, different procedure or surgery, different anatomical site or organ system, separate incision or excision, separate lesion, or separate injury (or area of injury in extensive injuries). Modifier 59 should be attached to the secondary, additional, or lesser service in the code pair. According to CMS, this is the second code in a CCI code pair. When modifier 59 is used, a providers documentation must demonstrate that the service was distinct from other services performed that day.

CMS provides carriers with guidance and instructions on the correct coding of claims, including the use of modifier 59, through manuals, transmittals, and CMSs Web site. Carriers, in turn, are required by CMS to educate providers concerning issues such as correct coding. Carriers are also responsible for developing their own prepayment and post-payment medical review strategies to identify billing errors.

We selected a stratified random sample of 350 code pairs for services that bypassed CCI edits using modifier 59 in fiscal year (FY) 2003. An independent contractor conducted a coding review of the medical records for these services to determine the appropriateness of the use of modifier 59. We performed separate analysis on our FY 2003 data to determine whether modifier 59 was billed with the primary or secondary code. We also surveyed each Medicare carrier to learn about their medical review activities, claims processing systems, and provider education activities related to modifier 59.

FINDINGS: Forty percent of code pairs billed with modifier 59 in FY 2003 did not meet program requirements, resulting in $59 million in improper payments. Medicare allowed payments for 40 percent of code pairs that did not meet the following program requirements: (1) the services were not distinct from each other or (2) the services were not documented. Specifically, modifier 59 was used inappropriately with 15 percent of the code pairs because the services were not distinct from each other. Medicare allowed an estimated $31 million for the secondary services in these code pairs. Secondary services are the services that CCI edits would deny. Most of these services were not distinct because they were performed at the same session, same anatomical site, and/or through the same incision as the primary service. Five code pairs represented 53 percent of the services that were not distinct. In addition to services that were not distinct, 25 percent of the code pairs billed with modifier 59 were not adequately documented. Medicare allowed an estimated $28 million for these services. In most of these cases, either one or both services billed were not documented in the medical record, or the documentation indicated that another code should have been billed for one or both of the services performed. In the remaining cases, either the documentation was insufficient to make a determination, or the documentation was not provided.

Eleven percent of code pairs billed with modifier 59 in FY 2003 were paid when the modifier was billed with the incorrect code. Pursuant to the Medicare Claims Processing Manual, modifier 59 should be billed with the secondary, additional, or lesser service in a CCI code pair. However, our analysis of 3.4 million code pairs showed that 11 percent of the code pairs were paid when modifier 59 was attached to the primary code only. This billing error represented $27 million in Medicare paid claims. Our analysis also indicated that 37 carriers paid for at least 10 percent of their claims billed with modifier 59 when the modifier was attached to the incorrect code.

Most carriers did not conduct reviews of modifier 59, but those carriers that did found providers who were using modifier 59 inappropriately. Between 2002 and 2004, 11 of 56 carriers conducted 1 or more reviews of the use of modifier 59. Ten carriers completed at least one review and one carriers only review was still in progress. All the carriers that completed reviews found providers who were using modifier 59 inappropriately. One-third of 32 reviews completed found error rates of 40 percent or more for services billed with modifier 59. (Department of Health and Human Services, Office of Inspector General, 2005, pp. iiii)

case study 2 questions 


  • Summarize the information presented in this case study.
  • Determine what CMS encourages carriers to do moving forward regarding using modifier 59.
  • Discuss how claims for other carriers could be impacted by using modifier 59.

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