What Are Medical Billing and Medical Coding and Why Are they Important?

Healthcare consumers are often baffled by their medical bills. As long as an insurance company pays the bill, their attention is usually focused on whether the co-pay (if any) seems reasonable. 

When consumers attempt to take a deeper dive into a medical bill, they tend to wonder why the bill is filled with numbers. Some numbers represent charges — the price for services that the provider is billing. But other numbers represent codes that drive the payments insurance companies make. To understand medical billing, it is important to examine the components of a bill and to learn how medical bills are prepared.

Every medical bill includes the billing date and the patient’s account number. Patients need to provide their account number when they have questions about their bill so that the billing department match the bill to the patient. Billers need to be careful not to confuse account numbers. Mistakes can cause services to be billed to the wrong patient.

Other components of a medical bill usually appear in columns. Different providers may have different columns, but these basic components appear in nearly all medical bills:

1. The dates on which each billed service was provided is usually listed in a column on the left side of the bill.
2. A short description of the service provided or the supplies or medication that were dispensed to the patient. A description follows each date and is primarily for the patient’s benefit. Insurance companies are more interested in codes that follow the description.
3. A CPT code and a diagnostic code typically follow the written description. From an insurer’s perspective, the codes are the most important part of the bill. Codes are discussed in more detail below.
4. The fee charged for the service, procedure, supply, or medication. Some bills simply show the bottom-line charge the practice is billing to the patient or insurer. Other bills show a full charge and an adjustment representing a portion of the charge that the practice has agreed not to collect. Adjustments usually result from agreements with insurance companies about the dollar amount for a service that the practice will accept as full payment.
5. Payments received from insurance or the patient.
6. The unpaid balance that is the patient’s responsibility.

The amount due and the written description of services provided are usually of greatest concern to the patient. To an insurer (including government payers like Medicare and Medicaid), the codes typically determine whether the bill will be paid or denied.

Codes are inserted into a bill by medical billing coders. In some medical practices, the same person handles billing and coding. It is more common in larger practices for billers to handle the mechanics of preparing the bill, interacting with insurers, and answering billing questions posed by patients. A medical billing coder handles the more specialized task of assigning codes.

Coders assign two kinds of codes to medical bills. They base those codes on the patient’s medical records.

A diagnostic code is a numerical code used to identify a patient’s diagnosis. It describes the injury, disease, or health condition for which the patient received treatment. The World Health Organization (WHO) administers a system of diagnostic codes known as International Classification of Diseases (ICD). 

Diagnostic codes are quite specific. For example, K40.01 is used to describe a bilateral inguinal hernia with obstruction, without gangrene, that is recurring. If the same hernia is not recurring, a different code would be assigned.

Current Procedural Terminology (CPT) codes are used to identify the specific service or procedure that a patient received. The American Medical Association (AMA) is responsible for creating and maintaining CPT codes. Coders must be familiar with thousands of codes and the rules that govern the choice of code.

Coders determine the CPT code by identifying each service or procedure that a patient received. Many different services may be reflected on a medical bill. For example, a patient might see a CPT code for an office visit, another CPT code for a blood test, and another CPT code for medication that was dispensed. Every time a coder identifies something that the patient received for which the patient should be charged, the coder must look up the corresponding CPT code and add it to the bill.

A CPT code should correspond to the written description of the service or procedure that was provided. However, different doctors might describe the same service in different ways. Insurance companies need to know exactly what service or procedure was provided so that the company can pay the fee it has agreed to pay for that service or procedure. Insurance companies rely on CPT codes rather than written description because the codes standardize descriptions of services and procedures.

Errors in the assignment of CPT codes can cause insurers to deny payment of the bill. Errors can also cause patients to be overcharged. For example, when a minor procedure is routinely performed as part of the major procedure, only the CPT code for the major procedure should be included in the bill. A CPT code for the minor procedure would be added only if the procedure was performed at a separate time. When the coder includes two CPT codes instead of one, the bill will be inflated. Either the patient will be overcharged or the insurer will deny payment. Either way, it is important for coders to get it right the first time.

Insurers look for a match between the diagnosis and the treatment provided. For example, suppose a patient is being treated for generalized pustular psoriasis. The diagnostic code is L40.01. But if the coder mistakenly inputs K40.01, the insurer will wonder why a patient with a hernia is being treated for psoriasis. The insurer will deny payment because the bill makes no sense. 

Diagnostic and CPT codes may look like gibberish to patients. They are nevertheless the backbone of medical billing. Expert medical coders help doctors avoid billing errors by making sure that medical bills include the correct codes.