Research reveals upcoding in hospital stays leads to billions in extra payments

In five states over nearly a decade, hospitals have increased how frequently they document patients as needing the highest intensity care, which has led to hospitals receiving billions in extra payments from health plans and government programs, according to a new RAND study.

Among thousands of cases involving hospital stays for 239 conditions, researchers examined how often hospitals upcoded patients to the sickest end of the care spectrum, where hospitals charge payers at the highest rate.

The study found that from 2011 to 2019, the number of patient discharges documented as needing the highest intensity care increased by 41%. Adjusting for changes in patient demographics, pre-existing comorbidities, length-of-stay and hospital characteristics, researchers estimated that the increase would have been 13% in the absence of changes in coding behavior.

The study estimates that in 2019, the increase in upcoding (relative to 2011 coding practices) was associated with $14.6 billion in hospital payments, including $5.8 billion from private health plans and $4.6 billion from Medicare. The study is published in the journal Health Affairs.

“These findings add to the evidence that hospitals may move patients into the highest billing category in order to increase the amount they are paid for patient care,” said Daniel Crespin, lead author of the study and an economist at RAND, a nonprofit research organization. “This suggests that government programs and private payers are paying billions more each year than what would be expected based on historical rates.”

As a way to control costs, the Medicare system in 1983 created a system where hospitals are paid for patient care in a lump sum rather than for each individual service or procedure performed. These diagnosis-related groups are paid on on the basis of a principal diagnosis and the presence of complications and additional illnesses. Along with Medicare, most private insurances now use diagnostic related groups for payments to hospitals.

Researchers say that diagnosis-based payment systems can create incentives to upcode patients to a higher level of severity to increase payment. In some instances, upcoding can be a form of fraud if providers code patients to a higher complexity than is appropriate, whereas in other instances, upcoding can accurately reflect the severity of a patient’s illness.

RAND researchers examined state inpatient databases prepared by the Healthcare Cost and Utilization Project for Florida, Kentucky, New York, Washington State, and Wisconsin. The information includes approximately 15% of all U.S. community-based hospitals and nearly 20% of discharges nationwide.

The condition with the largest number of upcoded discharges was heart failure and shock, with an additional 27% of all heart failure and shock discharges being upcoded in 2019 compared with 2011. Other illness with large increases in upcoding were simple pneumonia and pleurisy, chronic obstructive pulmonary disease, septicemia or severe sepsis without mechanical ventilation for ninety-six or more hours, and bronchitis and asthma.

Researchers say that further research is needed to increase understanding of the proportion of upcoding that represents fraudulent coding practices versus accurate and more complete coding.

“These findings can contribute to the growing body of evidence supporting the design of payment models that limit distortions in payment and resource allocation,” Crespin said.

Other authors of the study are Michael Dworsky, Jonathan S. Levin, Teague Ruder, all of RAND, and Christopher M. Whaley of Brown University.

In five states over nearly a decade, hospitals have increased how frequently they document patients as needing the highest intensity care, which has led to hospitals receiving billions in extra payments from health plans and government programs, according to a new RAND study.

Among thousands of cases involving hospital stays for 239 conditions, researchers examined how often hospitals upcoded patients to the sickest end of the care spectrum, where hospitals charge payers at the highest rate.

The study found that from 2011 to 2019, the number of patient discharges documented as needing the highest intensity care increased by 41%. Adjusting for changes in patient demographics, pre-existing comorbidities, length-of-stay and hospital characteristics, researchers estimated that the increase would have been 13% in the absence of changes in coding behavior.

The study estimates that in 2019, the increase in upcoding (relative to 2011 coding practices) was associated with $14.6 billion in hospital payments, including $5.8 billion from private health plans and $4.6 billion from Medicare. The study is published in the journal Health Affairs.

“These findings add to the evidence that hospitals may move patients into the highest billing category in order to increase the amount they are paid for patient care,” said Daniel Crespin, lead author of the study and an economist at RAND, a nonprofit research organization. “This suggests that government programs and private payers are paying billions more each year than what would be expected based on historical rates.”

As a way to control costs, the Medicare system in 1983 created a system where hospitals are paid for patient care in a lump sum rather than for each individual service or procedure performed. These diagnosis-related groups are paid on on the basis of a principal diagnosis and the presence of complications and additional illnesses. Along with Medicare, most private insurances now use diagnostic related groups for payments to hospitals.

Researchers say that diagnosis-based payment systems can create incentives to upcode patients to a higher level of severity to increase payment. In some instances, upcoding can be a form of fraud if providers code patients to a higher complexity than is appropriate, whereas in other instances, upcoding can accurately reflect the severity of a patient’s illness.

RAND researchers examined state inpatient databases prepared by the Healthcare Cost and Utilization Project for Florida, Kentucky, New York, Washington State, and Wisconsin. The information includes approximately 15% of all U.S. community-based hospitals and nearly 20% of discharges nationwide.

The condition with the largest number of upcoded discharges was heart failure and shock, with an additional 27% of all heart failure and shock discharges being upcoded in 2019 compared with 2011. Other illness with large increases in upcoding were simple pneumonia and pleurisy, chronic obstructive pulmonary disease, septicemia or severe sepsis without mechanical ventilation for ninety-six or more hours, and bronchitis and asthma.

Researchers say that further research is needed to increase understanding of the proportion of upcoding that represents fraudulent coding practices versus accurate and more complete coding.

“These findings can contribute to the growing body of evidence supporting the design of payment models that limit distortions in payment and resource allocation,” Crespin said.

Other authors of the study are Michael Dworsky, Jonathan S. Levin, Teague Ruder, all of RAND, and Christopher M. Whaley of Brown University.