Department of Health and Human Services 

OFFICE OF 

INSPECTOR GENERAL 

JUNE GIBBS BROWN 

Inspector General 

MARCH 

OEI-05-99-00100 

MEDICAL BILLING SOFTWARE AND 

PROCESSES USED TO PREPARE 

CLAIMS 

2000 
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 
EXECUTIVE SUMMARY 

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 patient’s 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 

Billing Software 1 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 physician’s or medical supplier’s 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 provider’s 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 patient’s medical record may not support the claim 

submitted to Medicare. The claim will be incorrect, resulting in an overpayment or 

underpayment. 

Billing Software 2 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. 

Billing Software 3 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 HCFA’s response 

can be found in Appendix A. 

Billing Software 4 OEI-05-99-00100 
TABLE OF CONTENTS 

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

Billing Software 5 OEI-05-99-00100 
INTRODUCTION 

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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OEI-05-99-00100 6 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 Medicare’s 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 provider’s 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 HCFA’s 

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 HCFA’s 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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OEI-05-99-00100 7 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 

Office’s (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 Officer’s 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 thirdparty 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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OEI-05-99-00100 8 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 provider’s 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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OEI-05-99-00100 9 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 carrier’s 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 physician’s 

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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OEI-05-99-00100 10 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 patient’s medical chart by the physician usually during the visit. Nearly all 

physicians make notes in the patient’s 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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OEI-05-99-00100 11 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 patient’s 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 physician’s 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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OEI-05-99-00100 12 BILLING SOFTWARE 
Completed source documents can be entered into the physician’s own billing system and 

forwarded directly to Medicare. They may be entered into the physician’s 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 physician’s 

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 patient’s medical chart. Decisions made during the data entry 

process may reduce a physician’s 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 patient’s 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 13 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 software’s 

data bases or dictionaries. As the user enters a code or service number, the system’s 

software automatically recalls the CPT codes, charge information and other pertinent 

information stored in the software’s 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 patient’s 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 14 BILLING SOFTWARE 
is not in the software’s 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 patient’s medical 

record. Ultimately it is the software user’s 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 patient’s 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 15 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 Medicare’s correct coding initiative. 

Software manufactures and others are also working to identify HCFA’s 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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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 17 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 HCFA’s response 

can be found in Appendix A. 

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APPENDIX A 

Health Care Financing Administration 

Response to this Report 

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BIBLIOGRAPHY 

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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