DATE:  January 21, 1999 
FROM:  June Gibbs Brown 
Inspector General 
SUBJECT:  Monitoring the Accuracy of Hospital Coding (OEI-01-98-00420) 
TO:	 Nancy-Ann Min DeParle 
Administrator 
Health Care Financing Administration 
Since the inception of Medicares prospective payment system (PPS) in 1984, the Office of 
Inspector General has played an active role in monitoring diagnosis related group (DRG) 
upcoding.  In this final memorandum report, I would like to share with you some concerns that 
have evolved out of our recent work in this area.  While we understand that the Health Care 
Financing Administration (HCFA) is taking steps to increase monitoring of DRG coding, we 
elaborate here on our areas of concern and offer some options that HCFA could take to 
improve monitoring and oversight of DRG coding. 
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.  Page 2 - Nancy-Ann Min DeParle 
<	 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. 
Identifying Hospitals that Upcode 
Average  Average 
Upcoding Rate  Downcoding Rate 
OIG Experimental sample - hospitals with 
11.4%  5.1% 
a high predicted rate of upcoding  (n=50) 
OIG Control sample - hospitals without a 
5.2%  3.9% 
high predicted rate of upcoding  (n=20) 
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 downcoding 
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 downcoding.  The 
difference between upcoding and downcoding 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. 
Three Highly Vulnerable DRGs 
OIG Experimental  OIG Control  CDAC 
Sample  Sample  Sample 
Up- Down- Up- Down- Up- Down-
coded  coded  coded  coded  coded  coded 
DRG 79:  37.7%  0.0%  18.5%  0.0%  11.0%  0.7% 
Respiratory Infections  (n=60)  (n=0)  (n=5)  (n=0)  (n=48)  (n=3) 
DRG 416:  21.2%  0.0%  16.7%  0.0%  13.3%  1.1% 
Septicemia  (n=14)  (n=0)  (n=3)  (n=0)  (n=49)  (n=4) 
DRG 14:  Specific  10.1%  0.0%  6.7%  0.0%  3.5%  0.4% 
Cerebrovascular  (n=10)  (n=0)  (n=2)  (n=0)  (n=24)  (n=3) 
Disorders 
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 upcoded  Page 3 - Nancy-Ann Min DeParle 
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 
DRGs  the Office of Clinical Standards and Quality, and the Center for Health Plans 
and Providers  staff 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 that 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.  Page 4 - Nancy-Ann Min DeParle 
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. 
Recommendation 
The HCFA should perform routine monitoring and analysis of hospital billing 
data and clinical data to proactively identify aberrant patterns of upcoding. 
The HCFA is taking steps toward increased monitoring for DRG upcoding.  For 
example, the agency is considering an increased role for monitoring DRG upcoding 
within the next round of contracts with the Medicare PROs.  We offer our 
recommendation within this context.  The following approaches are examples that the 
agency may wish to consider as it develops its monitoring and analysis approach to 
detect upcoding. 
<	 As a starting point, the agency could routinely analyze the DRG validation data 
that it receives from the clinical data abstraction centers with which it contracts. 
<	 The agency could opt to organize its monitoring effort in a variety of ways.  It 
might choose to use its own staff; alternatively, it might determine that the 
preferable route is to contract with an outside party with which it currently has a 
contract, such as the fiscal intermediary fraud units or the peer review 
organizations; or it might work with a new entity under the Medicare Integrity 
Program. 
<	 The agency could use a variety of analytical approaches, such as examining claims 
data for patterns, trends, change pairs, and spikes in DRG billing volume.  This 
analysis also could include examination of coding validation data for trends in 
miscoding as a way to detect problem DRGs, providers, or coding situations. 
<	 The agency could establish criteria, policies, and procedures to make referral for 
collection to the Office of Inspector General or to fiscal intermediaries, as 
appropriate, from providers who are deliberately exploiting and abusing the system 
through upcoding claims for payment.  Page 5 - Nancy-Ann Min DeParle 
Comments on the Draft Report 
The HCFA concurs with our recommendation that it perform routine monitoring and analysis 
of hospital billing and clinical data to proactively identify aberrant patterns of upcoding.  In its 
comments, HCFA specified the actions that it will take to reduce DRG upcoding.  These 
actions are: 
<	 Establish a payment error prevention program in the upcoming PRO 6th Scope of 
Work to focus on reducing inappropriate DRG payments. 
<	 Expand the size and content of the annual CDAC DRG validation and use it to identify 
trends in coding practices and to point out problem areas. 
<	 Pilot a program in which a selected Medicare fiscal intermediary will use PRO/CDAC 
data to identify aberrancies and develop cases for referral to law enforcement. 
<  Procure a statistical analysis contractor to conduct statistical and trend analysis. 
We applaud the steps that HCFA will take to increase monitoring and oversight of the 
accuracy of DRG coding.  We look forward to working with HCFA in the future as we 
continue our work in this area. 
The full text of HCFAs comments on our draft report appears on the following pages. 
In Closing 
Our work in DRG coding is continuing.  We are currently developing reports on specific 
DRGs to illustrate techniques that can be used to detect aberrant upcoding situations.  We look 
forward to continuing our work with you to eliminate DRG upcoding from the Medicare 
program and to ensure that Medicare pays accurately for all services delivered. 
If you have any questions, you may call me or George Grob, Deputy Inspector General for 
Evaluation and Inspections, or have your staff call Mary Beth Clarke at (202) 619-2481.