OIG Audit Finds Adjustment Codes not Clear Indicators of Denials

06 Mar, 2023 F.J. Thomas


Sarasota, FL (WorkersCompensation.com) - When an insurance company processes a claim for healthcare services, there is usually a certain amount written off. The amount written off is known as an adjustment, and is usually accompanied by an explanation or adjustment code that identifies the reason and type of write off. Additionally, insurance companies will include a remark or reason code on their explanation of payment or remit to further explain how a service item was adjusted. Based on that information alone, it would appear that healthcare offices would be able to audit their quality and manage their revenue by trending adjustment codes. Unfortunately, that is often not the case.

An adjustment doesn’t necessarily mean there is a denial or discount. Additionally, services may be written off or adjusted off with more than one informational reason code.

While providers have been under strict standards for filing claims for years, the requirements for payers have been somewhat more lenient in how they adjudicate provider claims. Under the Health Insurance Portability and Accountability Act (HIPAA), payers were required to use adjustment reason codes and remittance codes that were approved and standard. However, payers are not necessarily governed in how they use those codes, nor is there a strict standard for the additional information provided on an explanation of payment. 

Often times, provider billing staff are using a best guess when handling denied claims because they are working with limited information. For example, what may appear to be a bundled denial where a service item is included with another procedure, may actually be a denial with a root cause for another reason. When the information on the explanation of benefits is not absolutely clear or is conflicting, billing staff either work the claim incorrectly, or take the time to call the insurance company to get more details. Both scenarios unnecessarily cost providers and insurance companies time and money that are not a good use of resources. 

Quite frankly, the easy fix to save time and money is for information to be complete and clear. One hurdle to accomplishing that may be how software systems are set up where claims are adjudicated through a system of edit levels that audit the claim through several stages. While that system set up might not address a comprehensive reason for a denial, perhaps the solution would be to implement an adjustment and remark code system that takes a more comprehensive approach as has been done with diagnoses and ICD-10.  

While some might say the real problem lies with better education of provider staff or an improvement of processes and software, a recent audit from the OIG clearly indicates that providers are not the only ones having an issue managing the payment information received from insurance companies. 

OIG auditors reviewed 2019 encounter data and compared them to the adjustment codes received with them from the insurance company.  The auditors reviewed adjustment code descriptions, as well as payment amounts in an effort to identify denials. Additionally, the auditors reached out to CMS Medicare staff asking what methods they used to identify denials, and how the lack of a denied-claim indicator affects their work. Additionally, the auditors questioned the Medicare Plan Payment Group to establish the reasons why Medicare Advantage plans are not required to include a denied-claim indicator on their encounter records. 

According to the full report, the OIG found that the adjustment codes being used by the insurance companies were not a definitive way to identify denied claims. The audit found that some of the adjustment codes were too vague to clearly identify whether an item had been denied. One example given was adjustment code 261 – the procedure is inconsistent with the patient’s history. The auditors found that the code did not actually specify if the procedure had been denied. Additionally, the auditors found cases where the adjustment codes would suggest the item was denied when in fact the service item had been paid. 

Of the 2019 encounter records, most did contain at least 1 adjustment code, but 55 million of those also contained adjustments that indicated a potential denial. Without a good method to identity truly denied claims within the group of claims, the OIG conceded that the full scope of payment denials is unclear. 

The OIG indisputably concluded that a denied claim indicator would greatly reduce cost and accuracy by providing a clear way to identify denied claims. Additionally the OIG concluded that having such an indicator would allow analysts to easily determine fraud risks and inappropriate billing. 

As a result of their conclusion and inability to determine denial impact due to unclear information, the OIG recommended that CMS require Medicare Advantage plans to include a denial indicator on denied claims. CMS however, did not concur with their recommendation. 

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    About The Author

    • F.J. Thomas

      F.J. Thomas has worked in healthcare business for more than fifteen years in Tennessee. Her experience as a contract appeals analyst has given her an intimate grasp of the inner workings of both the provider and insurance world. Knowing first hand that the industry is constantly changing, she strives to find resources and information you can use.

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