RAND Study Reveals Billions in Extra Hospital Payments 

A recent study published in Health Affairs by researchers at the RAND Corporation highlights a significant trend in hospital billing practices that has profound implications for healthcare costs. The study examined nearly a decade of data across five U.S. states and found that hospitals have been increasingly classifying patients under the highest-intensity care categories. This phenomenon, known as upcoding, resulted in billions of dollars in additional payments from private health plans and government programs. 

What is Upcoding? 

Upcoding occurs when hospitals document patients at a higher level of illness severity than their condition warrants. While upcoding can sometimes reflect an accurate representation of patient complexity, it may also be used to increase reimbursement rates. Payments to hospitals are typically based on diagnosis-related groups (DRGs), a system Medicare adopted in 1983 to control costs by paying a fixed sum for a patient’s treatment based on their principal diagnosis and additional complications. Many private insurers have since adopted similar payment models. 

The RAND study highlights how these payment systems, though designed to contain costs, can unintentionally incentivize hospitals to upcode, leading to increased healthcare spending. 

Key Findings from the RAND Study 

1. Dramatic Increase in High-Intensity Coding 

From 2011 to 2019, the proportion of hospital discharges documented as requiring the highest intensity care increased by 41%. After adjusting for factors such as patient demographics, pre-existing conditions, hospital characteristics, and length of stay, the researchers estimated that this increase would have been only 13% if not for changes in coding behavior. 

2. Billions in Additional Payments 

The study estimated that the increase in upcoding accounted for $14.6 billion in additional hospital payments in 2019. These payments broke down as follows: 

• $5.8 billion from private health plans 

• $4.6 billion from Medicare 

• The remainder is from other sources, including Medicaid and out-of-pocket payments. 

3. Conditions Most Commonly Upcoded 

The condition with the largest number of upcoded discharges was heart failure and shock, with an additional 27% of discharges upcoded in 2019 compared to 2011. Other conditions with significant increases in upcoding included: 

• Simple pneumonia and pleurisy 

• Chronic obstructive pulmonary disease (COPD) 

• Septicemia or severe sepsis without mechanical ventilation 

• Bronchitis and asthma 

The Financial and Ethical Implications of Upcoding 

Financial Impact 

The RAND study underscores the enormous financial strain upcoding places on the healthcare system. Public programs like Medicare and Medicaid, which are already under pressure to manage costs, bear a significant portion of these additional payments. Similarly, private health plans must absorb these costs, which are often passed on to employers and consumers in the form of higher premiums and out-of-pocket expenses. 

Ethical Concerns 

While some instances of upcoding may reflect accurate and more complete documentation of patient conditions, others may border on fraudulent behavior. Fraudulent upcoding occurs when providers deliberately code patients at a higher severity level than warranted to secure higher payments. Such practices undermine trust in the healthcare system and can divert resources away from necessary care. 

RAND researchers noted that further investigation is needed to differentiate between fraudulent and legitimate upcoding practices. 

Why Upcoding Happens 

The structure of diagnosis-based payment models inherently creates incentives for upcoding. By categorizing patients into DRGs, hospitals are paid a lump sum based on the severity of a patient’s condition. Higher severity categories translate to higher payments. While this system aims to encourage efficiency and reduce unnecessary services, it also creates opportunities for manipulation. 

Factors contributing to the rise in upcoding include: 

1. Increased Documentation Requirements: Hospitals face pressure to thoroughly document patient conditions for clinical and reimbursement purposes. This documentation can sometimes lead to an emphasis on capturing severity. 

2. Technological Advancements: Electronic health records (EHRs) and sophisticated coding algorithms have made it easier to identify opportunities for higher reimbursement categories. 

3. Financial Pressures: Declining reimbursement rates, rising operational costs, and competitive pressures push hospitals to seek additional revenue streams. 

4. Ambiguities in Coding Guidelines: Complex and occasionally vague coding rules can be interpreted in ways that favor higher reimbursement levels. 

The Role of Fraud vs. Legitimate Documentation 

The RAND study acknowledges the difficulty in distinguishing fraudulent upcoding from an accurate representation of patient severity. For example: 

• Legitimate Upcoding: A patient with multiple comorbidities who requires extended care may legitimately be categorized in a higher severity DRG. 

• Fraudulent Upcoding: A patient with a relatively straightforward condition might be documented as having additional complications to secure higher payments. 

The distinction is critical for policymakers and payers aiming to address the issue without penalizing hospitals that accurately document complex cases. 

Policy Implications and Recommendations 

1. Revisiting Payment Models 

The findings underscore the need to revisit payment models like DRGs to minimize unintended incentives for upcoding. Payment systems could be redesigned to incorporate more nuanced measures of patient complexity and resource utilization, reducing opportunities for gaming the system. 

2. Enhanced Auditing and Oversight 

Government programs and private payers can invest in better auditing mechanisms to identify and address fraudulent upcoding practices. Tools like AI-driven analytics can help flag patterns indicative of potential fraud. 

3. Incentivizing Accurate Documentation 

Policymakers and insurers could explore ways to incentivize accurate coding practices without penalizing providers for legitimate cases. For instance, reward systems for hospitals with a strong track record of accurate documentation could be introduced. 

4. Provider Education 

Many instances of upcoding may stem from unintentional errors rather than deliberate fraud. Educational programs for healthcare providers on coding guidelines and best practices could help reduce inaccuracies. 

What’s Next? 

The RAND study represents a significant contribution to understanding the financial and ethical dimensions of upcoding. It also highlights the need for ongoing research to quantify the extent of fraudulent practices and refine payment systems. As Daniel Crespin, the study’s lead author, noted, these findings can inform the design of payment models that limit distortions in reimbursement and resource allocation. 

Addressing the issue of upcoding will require collaboration among policymakers, insurers, providers, and researchers. By striking a balance between cost control and fair compensation, the healthcare system can work toward a model that prioritizes both financial sustainability and patient care. 

… 

Upcoding is a symptom of the broader challenges facing the U.S. healthcare system. While diagnosis-based payment systems like DRGs were designed to curb costs, their unintended consequences have led to billions in additional payments. The RAND study underscores the urgency of addressing these challenges to ensure a fair and efficient healthcare system. 

As stakeholders move forward, they must remain vigilant against fraudulent practices while supporting accurate documentation that reflects the true complexity of patient care.