Department of Health and Human Services 
OFFICE OF 
INSPECTOR GENERAL 
MEDICAL BILLING SOFTWARE AND 
PROCESSES USED TO PREPARE 
CLAIMS 
JUNE GIBBS BROWN 
Inspector General 
MARCH  2000 
OEI-05-99-00100  OFFICE OF INSPECTOR GENERAL 
The mission of the Office of Inspector General (OIG), as mandated by Public Law 95-452, is to 
protect the integrity of the Department of Health and Human Services programs as well as the 
health and welfare of beneficiaries served by them.  This statutory mission is carried out through a 
nationwide program of audits, investigations, inspections, sanctions, and fraud alerts.  The 
Inspector General informs the Secretary of program and management problems and recommends 
legislative, regulatory, and operational approaches to correct them. 
Office of Evaluation and Inspections 
The Office of Evaluation and Inspections (OEI) is one of several components of the Office of 
Inspector General.  It conducts short-term management and program evaluations (called 
inspections) that focus on issues of concern to the Department, the Congress, and the public.  The 
inspection reports provide findings and recommendations on the efficiency, vulnerability, and 
effectiveness of departmental programs. 
OEI's Chicago Regional Office prepared this report under the direction of William C. Moran, 
Regional Inspector General and Natalie A. Coen, Deputy Regional Inspector General.  Principal 
OEI staff included: 
REGION  HEADQUARTERS 
John M. Traczyk, Project Leader  Jennifer Antico, Program Specialist 
James Athas, Intern 
To obtain copies of this report, please call the Chicago Regional Office at 312-353-4124. 
Reports are also available on the World Wide Web at our home page address: 
http://www.dhhs.gov/progorg/oei  E X E C U T I V E   S U M M A R Y  
PURPOSE 
To provide information about the different types of medical billing software and the 
processes used to prepare claims for submission to Medicare. 
BACKGROUND 
Medicare leads all other health care payers in accepting and processing electronic claims. 
Medicare receives electronic claims directly from providers or via independent parties 
(billing agencies) acting on their behalf.  In 1998, Medicare received and processed more 
than 700 million claims.  More than 80 percent of these claims were submitted 
electronically using computer software developed for medical billing.  Medicare also 
received 149 million Part A claims in 1998.  Nearly all of which (96-97 percent) were 
submitted electronically. 
Medical billing software helps providers manage financial information and reduces errors 
on claims submitted to Medicare and some 2,800 other insurance companies.  Medical 
billing software can be a standalone function or integrated with other aspects of medical 
practice such as patient medical records.  It can be linked to the laboratory and other 
ancillary service areas.  It can interface with other software that will analyze claims for 
completeness, accuracy and probability of being edited by Medicare.  The use of 
computers and software in the field of medicine is growing rapidly.  More and more 
medical providers are turning to electronic medical records.  Ancillary equipment such as 
x-ray machines, laboratory testing equipment and other patient testing equipment and 
services will soon be linked electronically to the patients medical record. 
We reviewed software literature and claim preparation processes to determine whether 
Medicare may be vulnerable to claims generated by electronic systems.  We looked for 
vulnerabilities in the billing process and for vulnerabilities in software used to generate 
claims. 
CLAIM ORIGINATION 
We were unable to determine how many claims Medicare receives directly from medical 
providers or from third parties billing on their behalf.  Medicare can identify providers who 
have a submitter number to bill electronically.  However, this does not necessarily mean 
that the submitter number shown on a claim is actually the party that submitted 
1 
Billing Software  OEI-05-99-00100  claims to the Medicare system.  An unknown number of providers allow billing companies 
to use their submitter number.  The potential for misuse of submitter numbers is a 
vulnerability not adequately addressed by Medicare. 
Medicare cannot identify most of the clearinghouses and billing agencies submitting claims 
into the Medicare systems.  When clearinghouses and billing agencies submit claims to 
Medicare, they use the physicians or medical suppliers billing number and submitter 
number.  Inability to assess whether a claim came directly from a provider, or passed 
through the hands of a third party, represents a vulnerability in Medicare program 
safeguards.  Medicare cannot determine whether claims enter their system from an 
authorized biller's site and computer or from unauthorized sites and computers.  Billing 
companies, their employees and employees of providers have access to patient and provider 
information needed to access the Medicare system.  This information can be misused 
(without the medical providers knowledge) by clearinghouses or their employees to 
generate false claims. 
BILLING PROCESSES 
Source Documents 
Diagnostic and service information, about a patient visit, is rarely coded directly into 
medical billing software by physicians and other medical service providers.  This 
information is usually conveyed to the person or entity responsible for preparing a bill via a 
source document completed at the end of the patient visit. 
Source documents can be preprinted forms completed by the physician or handwritten 
notes made by the doctor or notes made by other office staff for a physician.  Whether 
formal, or informal, all source documents provide information needed for billing.  The 
quality and completeness of this information vary from physician to physician.  Improperly 
designed source documents contribute to billing error. 
Data Entry 
Each time information changes hands, or is acted upon outside an automated system, the 
risk of error increases.  Source documents pass through the hands of many people before 
information is entered into a software program.  Employees of the physician, or an outside 
billing agency, may misinterpret source document information, mis-key information into the 
system or add, delete or modify information on source documents.  Whether intentional or 
unintentional errors occur, the patients medical record may not support the claim 
submitted to Medicare.  The claim will be incorrect, resulting in an overpayment or 
underpayment. 
2 
Billing Software  OEI-05-99-00100  MEDICAL BILLING SOFTWARE 
Basic billing software relies heavily on user knowledge and entry skills.  It is widely 
distributed by Medicare fiscal agents and the private sector.  Users key most, if not all, 
claims information onto a claims facsimile. The software manipulates these entries to 
produce an electronic claim.  Typical errors involve entry errors, incorrect or missing 
patient or provider information, incorrect or incomplete diagnosis codes or invalid Current 
Procedural Terminology codes.  Basic medical billing software, developed for mass 
markets, usually does not allow users to customize or override its programs.  The greater 
risk of claim error is in data entry. 
Informational software augments basic software capabilities.  It uses data bases and linked 
files to recall patient, provider, diagnostic and service information.  Invalid code 
combinations, missing diagnosis and other errors that might prevent processing of a claim 
can be brought to the users attention before the claim is submitted for payment. 
Informational software does not appear to generate erroneous claims.  It provides tools to 
help providers code their claims accurately.  Vulnerabilities are more likely to stem from 
improper software configuration and use.  For example, limited procedure coding options 
for office visits may steer claim decisions to higher valued procedure codes. 
Interactive software combines and enhances basic billing and informational software 
capabilities.  It can give the user options for correcting problems detected by the software. 
What distinguishes interactive software from other medical billing software is its ability to 
provide the user with information and the likely consequences (no pay, more pay, less pay) 
of their decision. 
Proprietary software may present the greatest risk of misuse.  This type of software is 
developed for a specific user.  Inner workings of proprietary software may only be known 
to a single person or a select few.  Hidden programs may add or modify claim information 
producing erroneous or fraudulent claims.  Unlike commercially available software 
packages, manufactured for a broad market,  proprietary software is created to meet a 
specific, single customer's needs.  Commercial software that produced inaccurate claims 
has a greater chance of detection and of being reported by honest medical providers. 
Proprietary software presents a vulnerability to Medicare because it is created for, and used 
by, a select few.  Proprietary software, and not commercial software, posses the greatest 
risk of being intentionally designed to produce improper or inaccurate claims. 
3 
Billing Software  OEI-05-99-00100  CONCLUSION 
It appears that programs written for commercial distribution to a large audience pose little 
risk of producing erroneous or false claims.  Proprietary software, by its very nature, 
appears more likely to pose some risk of misuse or fraudulent use.  As with paper claims, 
humans (and not software) may be the greatest cause of claim error. 
Billing Medicare has become a complex endeavor.  The sheer number of diagnostic codes, 
procedure codes and other coding requirements increase the chance of billing error. 
Automation helps physicians, and other Medicare providers, manage data.  It helps  ensure 
that claims for reimbursement will meet Medicare standards for claims acceptance.  The 
same tools used to ensure accurate billing can also be misused to maximize reimbursement 
and to submit false claims. 
The HCFA needs to evaluate its electronic claim safeguards to ensure that only agencies 
authorized by a provider submit claims.  As further work is done in this area, the Health 
Care Financing Administration may want to consider: 
<	 Identifying and registering all clearinghouses and third-party billers.  The Internal 
Revenue Service requires preparers of tax returns to identify themselves.  Medicare 
should require claim preparers to do the same.  This would provide an audit trail 
and ensure that claims enter the Medicare system from authorized sources. 
<	 Improving safeguards to ensure that electronic claims are accepted only from 
authorized sites and terminals.  Passwords and new technologies, such as caller 
identification, can be used to ensure that claims are received and processed only 
from known terminals. 
<	 Educating the provider community concerning their liability for erroneous claims 
submitted to Medicare using their provider number(s).  The HCFA currently relies 
on provider reviews of remittance notices to identify misuse of provider numbers. 
These notices can be re-routed to a billing company, or another address, and 
providers may never see them.  Providers should be made aware of their 
responsibility to review remittance notices. 
HCFA COMMENTS 
We received comments to this report from HCFA.  They concurred with all of our 
recommendations and provided technical comments.  Where appropriate, this report was 
revised to incorporate those comments and suggestions.  The full text of HCFAs response 
can be found in Appendix A. 
4 
Billing Software  OEI-05-99-00100  T A B L E   O F   C O N T E N T S  
PAGE 
EXECUTIVE SUMMARY  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

INTRODUCTION  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

CLAIM ORIGINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Physicians and Other Providers  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Clearinghouses and Billing Agencies  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

BILLING PROCESSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  10

Data Origination  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Source Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Data Entry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

MEDICAL BILLING SOFTWARE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  13

Basic  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Informational  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Interactive .  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Proprietary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

CONCLUSION  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  18

APPENDIX A  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  19

HCFA Response  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

BIBLIOGRAPHY  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  23

5 
Billing Software  OEI-05-99-00100  I N T R O D U C T I O N  
PURPOSE 
To provide information about the different types of medical billing software and the 
processes used to prepare claims for submission to Medicare. 
BACKGROUND 
The Health Care Financing Administration (HCFA) administers Medicare, the nation's 
largest health insurance program.  Medicare provides health insurance to people age 65 
and over and those who have permanent kidney failure and certain people with disabilities. 
Medicare has two parts:  Hospital Insurance (Part A) and Supplementary Medical 
Insurance (Part B).  Part A helps patients pay hospitals and skilled nursing facilities for 
inpatient services.  It also helps pay for home health services and hospice care.  Medicare 
Part B helps patients pay for physician services, outpatient hospital services, medical 
equipment, supplies and other health services.  More than 40 million people are currently 
enrolled in Medicare. 
In 1998, Medicare contractors received and processed more than 700 million claims. 
More than 80 percent of these claims were submitted electronically using medical billing 
software.  Medicare also received 149 million Part A claims in 1998.  Nearly all of which 
(96-97 percent) were submitted electronically.  The remaining claims were submitted on 
paper claims and were manually entered into the claims processing system by contractor 
staff. 
In addition to claims preparation and submission, physicians, hospitals and other medical 
providers use medical billing software to help them manage financial and medical 
information.  Computerization lowers costs and reduces the likelihood of error on medical 
claims submitted to more than 2,800 insurance companies.  Medical billing software can 
be a stand-alone function or integrated with other aspects of medical practice such as 
patient medical records.  It can be linked to the laboratory and other ancillary service 
areas.  It can interface with other software including software that will analyze claims for 
completeness, accuracy and probability of being edited by Medicare or other insurers. 
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6 
OEI-05-99-00100  BILLING SOFTWARE  Today, Medicare leads all other health care payers in electronic claims acceptance and 
processing.  In the early eighties, Medicare gave providers free, or low cost, software so 
they could bill electronically.  Initially, there were no national standards and each Medicare 
fiscal agent developed and distributed their own unique software.  These different 
electronic formats hindered the development of affordable off-the-shelf medical billing 
software.  Efforts by HCFA that led to standardization of record layouts and other data 
processing elements has spurred the development (and medical community acceptance) of 
software for electronic claim preparation and submission.  Off-the-shelf billing software 
in a wide price range is now readily available to the medical community. 
Although Medicare provides free electronic billing software and support to assist 
providers,  providers are not required to use Medicares software.  If they choose, a 
provider can purchase their own software from a public/commercial source.  The producer 
of the software ensures that their product complies with Medicare requirements for 
electronic claim submission. 
An unknown number of Medicare providers contract with an independent party 
(commonly referred to as a billing agency) to prepare their electronic claims.  The 
providers furnish the billing agency with information about patients and the services 
provided to them.  The billing agency enters the information into their computer systems 
and electronically submits the claims to Medicare using the providers Medicare 
authorization.  Other providers enter claims information into their own computer system 
but contract with a clearinghouse to actually submit their claims to Medicare and other 
insurance companies. 
The HCFA captures information regarding billing agencies on provider enrollment 
applications.1  They also approve billing arrangements before an applicant can receive 
billing privileges.  Providers not adhering to billing arrangements can have their 
assignment privileges revoked.  Studies have shown that information on provider 
applications concerning billing agents is often outdated and inaccurate.  The HCFAs 
primary safeguard against billing agency fraud/abuse is a policy  stating that: 
...all Medicare payments are made in the name of the provider and sent to a 
pay-to-address designated by the provider.  In addition, monthly remittance 
notices are sent to the provider showing what is billed under his/her name. 
Therefore, the provider community has a responsibility to review the remittance 
notice and notify the program if they believe false claims were generated. 
1  In the future, enrollment information will be recorded in HCFAs Provider Enrollment, Chain 
and  Ownership System (PECOS). The PECOS will record all provider enrollment information and will 
capture some information on chain organizations. 
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7 
OEI-05-99-00100  BILLING SOFTWARE  METHODOLOGY 
We researched more than 100 Internet sites maintained by manufacturers and/or 
distributors of medical billing software.  At each site, we analyzed statements about 
products and medical billing capabilities.  We used manufacturers and distributors 
product descriptions to classify widely available commercial software into one of three 
categories based on the nature and extent of interaction between the software user and the 
software.  A fourth category was created to discuss software not commercially available 
to the medical community.  Observations and hands-on experience with software at 
medical conferences supplemented our Internet research.  Several publications related to 
electronic billing were also reviewed. 
We also examined the various steps that occur in preparing claims for submission to 
Medicare for payment.  Each step in the claims preparation processed was examined to 
determine whether any vulnerabilities might exist.  We used the General Accounting 
Offices (GAO) Audit Guide for Evaluating Internal Controls In Computer-Based Systems 
and other books on assessing controls and vulnerabilities in computerized systems.  These 
controls and vulnerabilities are provided at the beginning of each discussion. 
As part of this inspection, we randomly selected two samples of Medicare contractors 
from the Chief Financial Officers 1998 audit of Medicare claims.  Each sample consisted 
of 10 contractors selected at random without replacement.  We contacted each contractor 
by telephone.  We asked if they could readily identify which claims were submitted directly 
from medical providers and which claims were submitted through a clearinghouse or third-
party biller.  If the fiscal agent could not readily identify clearinghouses or third party 
billers from their claims data, we asked whether this information was available elsewhere 
in their system. 
This report focuses on processes used by physicians for billing patients, Medicare and 
other insurers.  The same, or similar processes, are used by hospitals, clinics, laboratories 
and other medical suppliers to prepare their bills.  The vulnerabilities discussed apply to all 
parties involved in Medicare claims preparation or submission. 
This review was conducted in accordance with the Quality Standards for Inspections 
issued by the President's Council on Integrity and Efficiency. 
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8 
OEI-05-99-00100  BILLING SOFTWARE  CLAIM ORIGINATION 
Physicians and Other Providers 
Controlling access to Medicare's computer systems by identifying and verifying persons 
who try to gain access reduces risk and potential adverse impact that unauthorized or 
malicious acts could have on the Medicare program.  (GAO.  Pages 84 & 99) 
Since 1990, Medicare has required physicians and other providers of medical services to 
submit claims directly to Medicare on behalf of beneficiaries.  The increased workload and 
increasing complexity of procedure and diagnostic coding has encouraged physicians to 
turn to computer automation to improve efficiency. 
Physicians and other medical service suppliers must be authorized to bill Medicare 
electronically.  Each is given a unique number (submitter number) to use when submitting 
claims electronically.  We were unable to determine how many electronic claims Medicare 
receives directly from physicians and other medical providers or from third parties billing 
on their behalf.  We found that Medicare can identify providers who have requested and 
obtained a submitter number; however, this does not mean that the submitter number 
shown on a claim is actually the party that actually submitted claims to the Medicare 
system.  An unknown number of providers allow  billing companies to use their submitter 
number.  Medicare assumes the provider is sending in claims when, in fact, anyone with a 
computer, modem and access to a provider's submitter number and patient's health 
insurance number could be sending claims to Medicare.  The potential for misuse of 
submitter numbers is a vulnerability not adequately addressed by Medicare. 
Clearinghouses and Other Third-Party Billers 
Audit trails are necessary to trace the flow of data.  They identify the source of the claim, 
and all persons or parties through whom the claim passed before it was received by 
Medicare.  (Porter & Perry.  Pages 103 - 104) 
Claims entering the Medicare program via a clearinghouse or billing agency do so using 
the providers submitter number.  Consequently, Medicare is unable to identify most of 
the clearinghouses and billing agencies actually submitting claims to Medicare. 
We tried to determine how many claims enter the Medicare system from a third party only 
to discover that many carriers and intermediaries have no way of knowing who actually 
submitted the claim to Medicare.  Inability to assess whether a claim came directly from a 
provider or passed through the hands of a third party represents a vulnerability in 
Medicare program safeguards.  Medicare cannot determine whether claims enter their 
system from an authorized biller's site and computer or from unauthorized sites and 
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9 
OEI-05-99-00100  BILLING SOFTWARE  computers.  Billing companies, their employees and employees of providers have access to 
patient and provider information needed to access the Medicare system.  This information 
can be used (without a providers knowledge) to generate false claims. 
Locating information about clearinghouses, third-party billers or billing services is not 
easily done.  A manual review of provider applications for a Medicare billing number will, 
in some cases,  indicate that claims will be submitted to Medicare via a third party.  Our 
experience, during other studies, is that the information in the carriers provider files is 
often obsolete or inaccurate. 
Many clearinghouses and billing agencies use the same commercial billing software 
packages available to hospitals, physicians and other medical suppliers.  Some have 
developed their own proprietary software.  The vulnerabilities discussed in this report 
apply to all parties involved in Medicare claims preparation or submission. 
In an unrelated study, we were told by State Medicaid Agencies that third party billers and 
clearinghouses were an area of concern.  Clearinghouses and third-party billers charge by 
the claim and States feel that this may serve as an incentive to split claims.  At least one 
State was concerned that they did not know who actually submitted the claim or from 
where the claim was submitted.  They felt that anyone with access to a physicians 
electronic billing number and access to a telephone could submit false claims for payment. 
More than 30 billing individuals/entities have been excluded from participation in 
Medicare and State Medicaid programs.  There are also a number of open criminal cases 
involving billing agency fraud.  In most cases, these companies used the information they 
obtained from legitimate providers to prepare and submit false claims.  In some cases, the 
billing companies totally fabricated claim information and billed for services not rendered. 
Other problems with billing companies include unbundling of services, upcoding, adding 
services and diagnostic information and billing more than one carrier for the same services 
provided to a patient. 
THE BILLING PROCESSES 
Providers and billing companies can submit claims to Medicare that cause payment errors. 
However, errors on claims can occur long before an actual claim is produced.  Providers, 
their employees and subcontractors may add, delete or modify potential claim information 
at several points in the billing process.  Vulnerabilities inherent in billing processes affect 
claim accuracy. 
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10 
OEI-05-99-00100  BILLING SOFTWARE  Data Origination 
It is important to establish control of the data as close to the point of origination as 
possible, since the remainder of ...[the processing steps] depends upon the accuracy of 
source data.  (GAO.  Page 141) 
For some patients, the billing process begins when they schedule an office visit.  Some 
medical providers have integrated their patient appointment software with their billing 
software.  In these systems, the billing software system is prepared to execute a claim for 
each patient scheduled, using information already in the billing system, unless the 
appointment is canceled.  In these instances, patients who fail to keep their appointment 
may still be billed for services. 
For most patients, the billing process begins after a physician or other medical supplier 
provides services to them.  Information about a patient visit and services provided is 
recorded in the patients medical chart by the physician usually during the visit.  Nearly all 
physicians make notes in the patients chart during a patient visit.  Many physicians use 
their handwritten notes as reminders and as a guide when dictating patient visit 
information for transcribing.  Diagnostic and service information about the patient visit is 
very rarely coded directly into medical billing software by physicians and other medical 
service providers.2  This information is usually conveyed to the person or entity 
responsible for preparing a bill via a source document completed at the end of the 
patient visit. 
Source Documents 
Special purpose forms should be used to make sure the preparer initially records a 
transaction correctly and in a uniform format.  (GAO.  Page 142) 
Source documents help promote accurate initial recording of information that will be used 
to generate claims.  Missing or inaccurate entries exposes physicians and other medical 
suppliers to payment errors.  These errors could result in an overpayment or under 
payment to the provider. 
Source documents can be preprinted forms completed by the physician or handwritten 
notes made by the doctor or notes made by other office staff for a physician.  Whether 
formal or informal, all source documents provide information needed for billing.  The 
source document conveys information from the doctor or other medical supplier to the 
2  New Technologies (such as voice recognition or bar coding) and acceptance of electronic records and 
systems by physicians and the medical community could eventually lead to direct entry into the system and the 
elimination of source documents. 
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11 
OEI-05-99-00100  BILLING SOFTWARE  person responsible for entering information about the patient encounter into the billing 
system.  The quality and completeness of this information varies from physician to 
physician.  We have attended billing seminars where billing personnel expressed frustration 
at their inability to get their physicians to provide diagnostic information. 
Source documents are usually tailored to meet specific physician and medical supplier 
needs.  This is usually done by listing only the most common procedures and services 
provided to patients.  The physician simply checks off the procedure or service provided 
or hand enters services not on the preprinted form in space provided for this purpose. 
While most physicians use preprinted forms, some do not.  These physicians jot down the 
information on a piece of paper or verbally inform office staff as to what services were 
provided to a patient.  In rare cases, physicians may enter their own claim information 
directly into their own computer system. 
Source documents are used to prepare the actual bills submitted to Medicare.  Their 
design can influence billing decisions, possibly steering the user to procedure codes that 
have higher payment.  Source documents may be ambiguous, leaving the user uncertain as 
to actual diagnosis and treatment provided to a patient.  If improperly completed, 
documentation in the patients medical file will not support the services billed and the 
resulting claim will be incorrect. 
Improperly designed source documents that limit coding options, fragment procedure 
codes or otherwise affect the services billed to Medicare also contribute to billing error. 
Recent action by the Justice Department seeks recovery of millions of dollars in 
overpayments arising out of source documents that limited procedure code selection to 
higher valued codes.  A number of cases involving improperly designed source documents 
that fragmented services, added services or upcoded services have also been successfully 
pursed by the Justice Department in recent years. 
Data Entry 
Each time information changes hands or is acted upon outside an automated system the 
risk of error increases.  (Porter & Perry.  Pages 221-222.  Fitzgerald.  Pages 16 - 22) 
Source documents completed during the office visit are usually given to a designated 
person within the physicians office.  This person ensures that source documents for each 
patient seen that day are collected.  They may, or may not, review them for completeness. 
They may add, delete or modify the entries.  For example, when a physician performs a 
procedure not listed on their preprinted source document, they note the service provided 
in space often provided for this purpose.  Someone else may add the procedure code, 
diagnosis code and fee to the source document. 
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12 
OEI-05-99-00100  BILLING SOFTWARE  Completed source documents can be entered into the physicians own billing system and 
forwarded directly to Medicare.  They may be entered into the physicians system and 
subsequently sent to a clearinghouse which, in turn, submits the claims to Medicare. 
Finally, source documents may be sent to an outside billing agency that will enter the data 
and submit it to Medicare either directly or through a clearinghouse. 
The person who actually enters the data (whether an employee of the physician or an 
outside agency employee) uses the source document as a guide to identify patient, 
provider, diagnosis, procedure coding and other information needed for claim coding. 
They may also resolve any missing, incomplete or erroneous information detected either 
by computer software or document review. 
Employees of the physician, or an outside billing agency, may misinterpret source 
document information, mis-key information into the system or add, delete or modify 
information on source documents.  For example, the physician notes  I & D, [incision 
and drainage] on the source document.  Another person (within or outside the physicians 
office) will decide which one of the 10 incision and drainage codes will be billed.  The 
wrong choice may effect coverage and payment.  Additions to, deletion of  and 
modifications of source document information by data entry persons and other reviewers 
may not be supported in the patients medical chart.  Decisions made during the data entry 
process may reduce a physicians Medicare payment or create an overpayment. 
MEDICAL BILLING SOFTWARE 
Basic Software 
Billing software that requires users to input extensive information increases the risk of 
claim error.  (Fitzgerald.  Pages 9 - 15) 
Basic medical billing software is widely distributed by Medicare fiscal agents and the 
private sector.  Our review of Internet literature on medical billing software indicates that 
this type of software is inexpensive and in widespread use.  Users of non interactive 
software key most, if not all, claims information onto a claim facsimile. The software 
manipulates these entries to produce an electronic claim.  Typical errors involve entry 
errors, incorrect or missing patient or provider information, incorrect or incomplete 
diagnosis codes or invalid Current Procedural Terminology (CPT) codes. 
More sophisticated basic software may recall patient and provider billing information 
when a patients last name, Social Security number (SSN), medical record number or 
other identifier is entered.  The user then enters line-by-line information about the medical 
services provided onto the partially completed claim. 
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OEI-05-99-00100  BILLING SOFTWARE  Software feedback to the user, if any, is limited to program checks such as validity tests, 
completeness tests, logic tests and other conditions established by the software developer. 
Theses program checks may identify missing data required for processing.  They may 
check to ensure that the SSN contains nine digits or that the procedure codes used to 
describe services are the correct length.  If data entry errors exist, the software alerts the 
user.  The user must determine how to resolve the problem(s) and re-enter the correct 
data. 
A vulnerability exists because each person handling source documents is in a position to 
misinterpret, mis-key or deliberately alter the original information recorded by the 
physician.  Information needed to prepare a claim that must be manually researched 
increases the chance of billing error.  The  number of procedure codes, diagnosis codes 
and other information needed to produce a claim increases the likelihood that a billing 
error will occur. 
Informational Software 
...many operations previously performed manually are automated within [informational 
medical billing] system software.  (GAO.  Page 97) 
Medical billing software has become more sophisticated, and many operations previously 
performed manually are now being linked to, or included in, billing software packages. 
Unlike basic software which relies heavily on user knowledge, judgement and entry skills, 
informational software uses internal data bases and dictionaries to increase productivity 
and minimize the number of entry errors.3  Medical billing software packages with no, or 
limited, data base and dictionary capabilities can be linked to other independent software 
packages specifically designed to meet a particular billing need.  For example, software 
capable of recalling all diagnosis codes (ICD-9 codes) and all procedure codes is available. 
Related software packages can be linked to billing software or used to create dictionaries 
containing limited coding information. 
Another characteristic of informational billing software is the ability to recall patient and 
provider identifying information and in some cases the service items on the last claim 
submitted for payment.  The user can then update the last bill by merely adding line items 
to the claim or deleting them.  Adding line items to a claim is facilitated by the softwares 
data bases or dictionaries.  As the user enters a code or service number, the systems 
software  automatically recalls the CPT codes, charge information and other pertinent 
information stored in the softwares data base(s).  If the procedure code or diagnosis code 
3  Dictionaries and data bases are often used synonymously.  In this report, we use the term data bases to 
refer to patient and provider information that is recalled when a patients social security number or other identifier 
is entered. We use the term dictionary when referring to software that provides options for the user to select. 
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OEI-05-99-00100  BILLING SOFTWARE  is not in the softwares dictionaries, the software can be configured to accept additional 
codes and information or it can limit choices to those in the system.  With a few keyboard 
entries the user can create a new claim using new information and information already 
stored within the system. 
Like basic medical billing software, informational billing software also provides 
information to the user about validity tests, completeness tests, logic tests and other 
program controls established by the software developer.  It can be linked to other software 
packages designed to analyze claim information to see if it will pass Medicare and private 
sector scrutiny.  It can edit services entered on a claim and notify the user of invalid code 
combinations, missing diagnosis and other errors that might prevent the timely processing 
of the claim.  The user draws upon information provided by the system, and outside the 
system, to resolve errors identified by the software. 
Vulnerabilities inherent in information software are more likely to stem from manipulation 
of software configuration and data bases and not the software programs themselves. 
Limited procedure coding options may steer claim decisions to higher valued procedure 
codes and encourage the use of diagnostic codes not supported in the patients medical 
record.  Ultimately it is the software users choices and decisions and not the software that 
affects the accuracy of claims submitted to Medicare.  Improperly configured 
informational software data bases and dictionaries can be misused.  Misuse increases the 
probability of error and exposes physicians and other users to potential payment errors. 
Interactive Software 
Vendor software packages usually contain many options that can be used to generate a 
claim.  These software packages can be vulnerable to misuse and inadvertent error. 
(GAO.  Pages 97 - 105) 
Interactive medical billing software represents the state-of-the-art in software billing. 
Interactive software expedites data entry and offers users several options to facilitate 
claims processing.  Bar coding is one option available that reduces input error.  Other 
options include electronic links to an office laboratory or other medical services that allow 
the user to obtain billing information directly from the laboratory, other data files and 
other office areas.  Interactive software recalls patient, provider and last claim information. 
The software recognizes multiple insurance payers and the different coding rules and 
codes used by them.  Interactive systems can be programmed to link procedure codes to 
ensure the right code is submitted to each of the patients insurers.  For example, a private 
insurance carrier may require the use of procedure code 36145 when billing for 
venipuncture.  Medicare requires G0001 for the same service.  The software automatically 
selects the right code for each insurer. 
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OEI-05-99-00100  BILLING SOFTWARE  Interactive systems usually do more than give feedback that something is missing on a 
claim.  They provide information to help the user correct the problem.  For example, when 
the user enters an invalid CPT code, the interactive medical billing software advises that an 
invalid CPT was entered.  The software may produce a list of valid codes in the system 
and prompts the user to select one of the codes or enter a new code.  Some systems also 
show the expected payment for each code. 
Each software user decides what prompts will be in the system.  These prompts may 
also provide feedback as to how coding will affect reimbursement, show other coding 
options and the expected Medicare reimbursement for each option.  The user can accept a 
system prompt, bypass it or modify it.  Interactive systems reduce entry errors.  The 
software uses a form of artificial intelligence to learn from past claims activity which 
services will be paid or denied.  Providers can also purchase additional software that 
analyzes their claim information for compliance with Medicares correct coding initiative. 
Software manufactures and others are also working to identify HCFAs black box edits.4 
As the body of knowledge about these edits increases, software applications will no doubt 
be not far behind.  What distinguishes interactive software from other medical billing 
software is its ability to provide the user with information and the likely consequences (no 
pay, more pay, less pay) of their decision. 
Data bases and dictionaries that restrict user choice of diagnostic codes, CPT codes, place 
of service codes and other claim data can contribute to payment errors.5  The system may 
be programmed with default diagnostic codes.  Whenever medical services or tests are 
billed, the default diagnostic code can automatically be added to the claim to ensure that 
the service, procedure or supply billed to Medicare will avoid Medicare safeguards and be 
paid.  The end result produces claims that are flawlessly executed; unfortunately, the 
medical record may not support the services billed to Medicare.  Diagnostic information 
must be in the patient medical record for the date of service.  If it is not, Medicare will 
recover any money paid in error. 
4  The HCFA correct coding initiative (CCI) bundles individual procedures codes into a comprehensive 
service code which reflects correct reimbursement. It also detects procedures billed separately that are unlikely to 
be performed in combination. In addition to bundling and unbundling, the CCI checks to see if the most extensive 
procedure is being billed and whether the claim meets medical standards of practice. The term black box refers to 
proprietary software purchased by Medicare to screen claims. These edits are not published as part of the national 
correct coding initiative; hence, the name black box edits.  While HCFA has gone to great lengths to prevent 
release of black box edits, a number of sources have published information about suspected black box edits. 
5  Medicare requires that providers associate a diagnosis, symptom, complaint, condition or problem with 
each service, procedure or supply billed to Medicare. They use the International Classification of Diseases, 9th 
Revision (ICD-9). The ICD-9 codes provide information about the primary diagnosis or reason for a medical visit 
(i.e., high blood pressure, ICD-9 code 401 ) and information about complications (i.e,. High blood pressure with 
congestive heart failure, ICD-9 codes 402-405). 
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OEI-05-99-00100  BILLING SOFTWARE  Proprietary software 
 Controls should be established to prevent unauthorized and potentially inaccurate 
computer changes from being incorporated into [the medical billing system].... 
(GAO.  Page 50) 
Software developed for a single individual or a small group probably posses the greatest 
risk of financial harm to the Medicare program.  In some cases, the number of people 
involved in developing and implementing proprietary software is limited to one or two 
individuals.  This reduces the likelihood that someone will see and correct programming 
that produces erroneous claims. 
The degree of risk associated with proprietary software is directly related to the number of 
individuals involved and the checks and balances used during development of software.  A 
recent qui tam suit against a billing company revealed that the owners of the company 
configured their proprietary software to generated erroneous claims.6  They accomplished 
this by manipulating and using legitimate information about patients and providers already 
available in their system.  The company agreed to pay $1.5 million to resolve allegations 
that the company defrauded Medicare and other health care programs. 
In another case, emergency room physicians contracted for billing services from a 
hospital.7  The physicians were unaware that the hospital had purchased and designed 
billing software that automatically upcoded the services of the physicians.  The physicians 
were paid based on the codes they provided to the hospital billing department.  The 
hospital kept the higher payment generated from upcoding.  The hospital and physicians 
agreed to a civil settlement and paid more than $600,000 to settle the case. 
6  U.S. v. Medaphis, Central District of California 
7  U.S. v Saint Anthony-Mercy Hospital and Columbus Emergency Physicians, Inc. 
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OEI-05-99-00100  BILLING SOFTWARE  CONCLUSION 
Billing Medicare has become a complex endeavor.  The sheer number of diagnostic codes, 
procedure codes and other coding requirements increase the chance of billing error. 
Automation helps physicians, and other Medicare providers, manage data.  It helps  ensure 
that claims for reimbursement will meet Medicare standards for claims acceptance.  The 
same tools used to ensure accurate billing can also be misused to maximize reimbursement 
and to submit false claims. 
The HCFA needs to evaluate its electronic claim safeguards and PECOS is a step in the 
right direction toward ensuring that only agencies authorized by a provider can submit 
claims.  As further work is done in this area, HCFA may want to consider: 
<	 Identifying and registering all clearinghouses and third-party billers.  The Internal 
Revenue Service requires preparers of tax returns to identify themselves. 
Medicare should require claim preparers to do the same.  This would provide an 
audit trail and ensure that claims enter the Medicare system from authorized 
sources. 
<	 Improving safeguards to ensure that electronic claims are accepted only from 
authorized sites and terminals.  Passwords and new technologies, such as caller 
identification, can be used to ensure that claims are received and processed only 
from known terminals. 
<	 Educating the provider community concerning their liability for erroneous claims 
submitted to Medicare using their provider number(s).  The HCFA currently relies 
on provider reviews of remittance notices to identify misuse of provider numbers. 
These notices can be re-routed to a billing company, or another address, and 
providers may never see them.  Providers should be made aware of their 
responsibility to review remittance notices. 
HCFA COMMENTS 
We received comments to this report from HCFA.  They concurred with all of our 
recommendations and provided technical comments.  Where appropriate, this report was 
revised to incorporate those comments and suggestions.  The full text of HCFAs response 
can be found in Appendix A. 
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OEI-05-99-00100  BILLING SOFTWARE  A P P E N D I X   A 
Health Care Financing Administration 
Response to this Report 
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OEI-05-99-00100  BILLING SOFTWARE  B I B L I O G R A P H Y  
Fitzgerald, Jerry.  Internal Controls for Computerized Systems.  Redwood City, CA: Jerry 
Fitzgerald & Associates, 1978. 
U.S. General Accounting Office.  Evaluating Internal Controls in Computer-Based Systems: 
Audit Guide.  Washington, DC, June 1981. 
Porter, W. Thomas and Perry, William E.  EDP Controls and Auditing, Third Edition.  Kent 
Publishing Company: Boston, MA, 1981. 
U.S. General Accounting Office.  Medicare Third-Party Billing Companies. 
GAO/HEHS-99 -127R.  Washington, DC, June 2, 1999. 
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