Medical Coding Business of Medicine: 17 Things Every Medical Coder Needs to Know

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What Is the Medical Coding Business of Medicine?

Healthcare is a business. Like physicians, medical coders (and billers) need to understand the business of medicine, as they play an essential role in the success of medical practices and facilities. That means complying with conventions, guidelines, and state and federal laws. When a practice or facility follows state, federal, and international laws and regulations, they are in regulatory compliance. And that’s good for business. 

If that sounds like a lot, that’s because it is.

According to AAPC, there are five questions on the CPC exam on the business of medicine, which they cover under the “Compliance and Regulatory” series. These five questions pertain to:

  • Services covered under Medicare Parts A, B, C and D
  • Applying coding to payment policy
  • Place of service reporting
  • Fraud and abuse
  • NCCI edits
  • ABNs
  • RVUs 

Since more than five topics are listed, we can assume that we don’t have to know about all of these. But which ones? And the topics are pretty broad.

The good thing is that there are only five questions, and you don’t have to know much about each. However, you do need to know — what you need to know.

So, in the 17 things you need to know, I’ve covered the important points about each topic, so you should do very well on that portion of the exam. Don’t worry if you don’t already know it all. That’s why I’m here. I didn’t know any of this either. I did not know what I did not know.

17 Things Every Medical Coder Should Know About the Business Aspect of Medicine

1.  What is medical coding, how is it performed, and who performs it?

Medical coders explain what took place during a patient visit by assigning codes to services and diagnoses. They do this by translating information documented in the medical record into numeric and alphanumeric codes.

In the real coding world, they abstract pertinent information from the patient’s medical record and apply their coding guidelines and reimbursement knowledge to receive the best reimbursement possible. Coders need to keep up with coding updates and insurance payment policies, as they can change as often as quarterly.

A medical record is what is kept when a patient sees a physician. It includes observations, medical or surgical interventions, diagnostic tests and studies, and treatment outcomes.

Either the physician performs the coding, and the coder acts as an auditor, or the coder performs the coding of services provided based on the physician’s documentation. If the coder acts as an auditor, he or she will verify that the codes assigned by the physician are supported by the documentation.

2.  Why must the information in the medical record be accurate and complete?

If the information is not accurate and complete, the codes will be inaccurate. And that leads to inappropriate reimbursement. Therefore, the medical coder must review the medical record for its accuracy and completeness. The coder should query the physician or other healthcare professional if additional patient information or clarification is needed.

3.  What are code sets, and how do they differ?

code sets that are used in healthcare and their relationship with medical coding business of medicine

Code sets are what the medical coder uses to classify medical diagnoses, procedures, diagnostic tests, treatments, and equipment and supplies. 

The different code sets are:

  • CPT, HCPCS Level II, and ICD-10-CM. Outpatient coders use these code sets and work in physician offices, outpatient clinics, and outpatient facility departments. Their focus is on physician professional services. Outpatient facility coders also use Ambulatory Payment Classifications (APCs). 
  • ICD-10-CM and ICD-10-PCS. Inpatient coders use these code sets and work in a hospital setting. They also assign medical severity diagnosis-related groups (MS-DRGs) for reimbursement.

These code sets are used for billing, tracking public health trends, and research.

4.  What is a Place of Service (POS) code?

business of medicine and a partial table from CMS on POS codes
A partial table from the Centers for Medicare & Medicaid Services (CMS) shows the POS code, name, and description.

A Place of Service (POS) code is a 2-digit code that should be used on professional claims to indicate where the service was rendered, such as in a physician’s office, hospital, nursing facility, or facility outpatient department.

For example, if a patient is seen in the physician’s office for a right ankle fracture and received treatment, the POS code would be 11, because the service was rendered in the office. This is the POS code that would go on the claim form. The individual payers should be checked for their individual policies on these codes.  

5.  How do you define fraud and abuse?

Fraud is defined as “to purposely bill for services that were never given or to bill for a service that has a higher reimbursement than the service produced,” according to AAPC.

Abuse is “payment for items or services billed by mistake by providers, but should not be paid for by Medicare.”

The Office of Inspector General (OIG) is mandated by law to fight waste, fraud, and abuse in Medicare, Medicaid, and other Department of Health and Human Services (HHS) programs. According to the OIG, under the False Claim Act, “It is illegal to submit claims for payment to  Medicare or Medicaid that you know or should know are false or fraudulent. The OIG goes on to state, “no specific intent to defraud is required.”

6.  What is a compliance plan, and what are its benefits?

A compliance plan is a written document outlining the coding and billing process, and what corrective actions will be taken when mistakes are made. A compliance plan also helps combat fraud and abuse. Every physician’s office and facility should have a compliance plan and should make active use of it.

Although patient care is the first priority, when an effective voluntary compliance program is in place, it can also enhance patient care by increasing the accuracy of documentation.

According to the OIG, an effective compliance program can benefit the physician’s office or facility by:

  • Increasing the number of accurate payments of claims
  • Reducing the number of billing mistakes
  • Lessening the chances that an audit will be conducted by the Health Care Financing Administration (HCFA) or the OIG
  • Preventing conflicts with the self-referral and anti-kickback statutes

The key elements of an effective compliance program for individual and small physician practices include:

  • Conducting internal monitoring and auditing
  • Implementing compliance and practice standards
  • Designating a compliance officer or contact
  • Conducting appropriate training and education
  • Responding appropriately to detected offenses and developing corrective action
  • Developing open lines of communication
  • Enforcing disciplinary standards through well-publicized disciplinary guidelines

7.  What does the OIG post on its website and update every month about the underway projects?

The OIG explains in the OIG Work Plan the various projects, including OIG audits and evaluations, that are in progress or planned to be addressed during the fiscal year and beyond. This Work Plan is updated on their website monthly and includes potential problem areas with claims submissions that they will focus on.

8.  Who are the medical providers that staff physician offices and hospitals?

There are different providers with different levels of education who work in physician offices and hospitals. They include physicians and mid-level providers. Mid-level providers are also called physician extenders, including physician assistants (PAs) and nurse practitioners (NPs). They often receive lower reimbursement than physicians and must have supervision.

Each state has a scope of practice guidelines for the different provider levels. These guidelines describe the procedures, actions, and processes a healthcare provider can take according to the terms of their professional license.

9.  What are the two different types of payers?

The two types of payers are self-pay (patients pay their medical bills) and insurance coverage. Insurance coverage is broken down into two main types: commercial and government.

  • Commercial carriers are private payers that offer group and individual plans. Private payers like Blue Cross Blue Shield may provide basic, hospitalization, and major medical coverage. Private payers vary but usually operate in the state where they are based.
  • Government insurers include Medicare, Medicaid, and state-funded insurance programs.
    • Medicare is the largest third-party payer and is provided by the federal government. They cover people who are over 65 years of age, younger people who are blind or disabled, and those with end-stage renal disease (ESRD) or kidney failure. CMS regulations determine the coding requirements for Medicare and non-Medicare payers.
    • Medicaid is a health insurance assistance program that is administered by federal and state governments. It is in place for some low-income people, particularly pregnant children and pregnant women. Coverage and benefits vary by state.
    • State-funded insurance programs, such as Crippled Children’s Services, Children’s Medical Services, Children’s Indigent Disability Services, and Children with Special Healthcare Needs, provide free or low-cost coverage for people up to 21 years of age.

Each of these payers may have unique requirements as to claim submissions that medical coders and billers need to be aware of.

10.  Which services are covered under Medicare Parts A, B, C, and D?

Medicare is broken into four parts and covers the following:

  • Part A: Covers inpatient hospital care and care provided in skilled nursing facilities, hospice care, and home healthcare.
  • Part B: Covers medically necessary physician services and other services not covered under Part A.
  • Part C: Also called Medicare Advantage, private insurers approved by Medicare manage these plans and cover Part A, Part B, and sometimes Part D.
  • Part D: Private companies approved by Medicare provide coverage for prescription drugs.

11.  What is the purpose of National Correct Coding Initiative (NCCI) edits?

Part of the Practitioner Procedure-to-Procedure (PTP) Edits Table provided by CMS 2020. For the entire table, refer to CMS

According to CMS, National Correct Coding Initiative (NCCI) edits, also known as CCI, were implemented to promote correct coding methodologies and prevent improper coding that leads to inappropriate payment. 

The NCCI edits basically tell professional coders when CPT codes should not be reported together during the same encounter for Part B covered services. 

The Column 1/Colum 2 table above is broken down as follows:

  • Column 1. CPT code 99215 is listed in Column 1. Codes listed in Column 1 are the payable codes. 
  • Column 2. CPT code G0101 and the other codes listed in Column 2 are typically components of 99215 and cannot be reported together unless a modifier is permitted and used. There are exceptions, however. 
  • Column 3. This column indicates if the edit was in existence prior to 1996.
  • Column 4. The effective date (year, month, and date) is listed here.
  • Column 5. The deletion date of the edit is given (year, month, and date).
  • Column 6. This column indicates if a modifier is allowed. 

A Correct Coding Modifier (CCM) indicator (in Column 6) will either be a “0,” “1,” or “9.” These CCM indicators and their meanings are:

  • 0 (Not allowed): No modifiers associated with NCCI are allowed to be used with this PTP code pair; there are no circumstances in which both procedures of the PTP code paid should be paid for the same beneficiary on the same day by the same provider.
  • 1 (Allowed): The modifiers associated with NCCI are allowed with this PTP code pair when appropriate.
  • 9 (Not applicable): This indicator means that an NCCI edit does not apply to this PTP code pair. The edit for this PTP code pair was deleted retroactively to the implementation date.

By looking at the Column 1/Column 2 PTP code pairs above, we can see that CPT code 99215 is the payable code, and the HCPCS codes listed in Column 2 are not separately payable when billed with 99215 (unless a modifier is allowed) based on the Column 1/Column 2 policies.

We can also see that a physician will not be reimbursed for HCPCS code G0102 (Prostate cancer screening; digital rectal examination) together with CPT 99215 (Office or other outpatient visit) based on the CCM indicator “0” shown in Column. This indicator means that a CCM is not allowed and will not bypass the edits.

12.  How is “medical necessity” defined, and what coverage policies help determine medical necessity of a procedure or service?

There are various definitions of medical necessity in the healthcare industry. Medicare defines medical necessity as “services or items that are reasonable and necessary for the diagnosis or treatment of illness or injury, or to improve the functioning of a malformed body member.” 

In fact, according to the CMS, Under Title XVIII of the Social Security Act, Section 1862 (a)(1)(A), as “No payment may be made under Part A or Part B for expenses incurred for items or services which…are not reasonable and necessary for the diagnosis or treatment of illness or injury or to improve the functioning of a malformed body member…”

So, when a physician treats a Medicare patient and then bills for those reasonable and necessary services based on Medicare’s definition, they expect to be reimbursed for those services. That is if sufficient documentation supports the medical necessity of the service provided and explains why the service was necessary. 

National Coverage Determinations (NCDs) and Local Coverage Determinations (LCDs) are the two coverage policies related to Medicare coverage. They fundamentally tell a physician when Medicare will cover an item or service.

National Coverage Determinations (NCDs) are developed by CMS and describe the circumstances for Medicare coverage nationwide for a specific procedure or device. An NCD generally lays out the conditions for when a service may be covered or not covered based on medical necessity. 

Local Coverage Determinations (LCDs) are determined by a Medicare Administrative Contractor (MAC). The MAC interprets the national policies into local (regional) policies. An LCD may provide specific codes that will be covered or not covered. The MAC determines coverage if there is no NCD for an item

Commercial payers may create their own set of reimbursement policies. It is important for medical coders to keep up with the different policies to ensure timely reimbursement.

13.  Is it HIPPA, HIPAA, or HIPPO, and what is this Act of 1996? 

physician holding HIPAA sign and medical coding business of medicine

HIPAA is the acronym for the Health Insurance Portability and Accountability Act of 1996. HIPAA is often misspelled as HIPPA. Maybe that’s because HIPPA looks more like HIPPO, and Harry the HIPAA Hippo, the unofficial mascot for HIPPA, is a hippopotamus. I don’t know.

According to the U.S. Department of Health & Human Services (, the HIPAA Privacy Rule was issued to restrict the use and disclosure of protected health information (PHI) when held by a covered entity.

A covered entity may be a healthcare provider, such as a physician; a health plan, such as Blue Cross Blue Shield; or a healthcare clearinghouse, which includes those entities that process care transactions electronically for another entity.

The Rule also gives patients rights over their health information, including rights to examine and obtain a copy of their health records, and to request corrections.

The covered entity is responsible for creating and implementing policies and practices to meet HIPAA requirements and protect the privacy and security of all data containing PHI.

The “Minimum Necessary” requirement is a key provision of HIPAA. It means that the minimum necessary protected health information (PHI) should only be shared to satisfy a particular purpose or carry out a function. Otherwise, it should be withheld.

The minimum necessary standard does not apply to the following:

  • Disclosures to or requests by a healthcare provider for treatment purposes
  • Disclosures to the individual who is the subject of the information
  • Uses or disclosures made pursuant to an individual’s authorization
  • Uses or disclosures required for compliance with the Health Insurance Portability and Accountability Act (HIPAA) Administrative Simplification Rules
  • Disclosures to the Department of Health and Human Services (HHS) when disclosure of information is required under the Privacy Rule for enforcement purposes
  • Uses or disclosures that are required by other law

14.  Why was the HITECH Act of 2009 signed into law?

The Health Information Technology for Economic and Clinical Health (HITECH) Act was signed into law as part of the American Recovery and Reinvestment Act of 2009 (ARRA) to promote the adoption and meaningful use of health information technology, according to the U.S. Department of Health & Human Services (HHS). 

Part of the HITECH Act addresses the concerns of privacy and security related to the electronic transmission of health information, partly through provisions that reinforce the process of ensuring civil and criminal compliance with the HIPAA rules.

Under the HITECH Act, according to the HHS, a patient has a right to receive an accounting of disclosures of protected health information made by HIPAA-covered entities made through an electronic record. The patient must be notified if there is any unauthorized use or disclosure of the patient’s health information.

15.  When is an Advance Beneficiary Notice (ABN) used?

An ABN is a notice issued by providers to Medicare beneficiaries when Medicare payment is expected to be denied, according to the CMS. The provider is not allowed to bill the Medicare patient for an uncovered service unless they inform the patient prior to providing the service or procedure and have them sign an ABN.

Providers must provide the patient with a reasonable estimate, which should be within $100 or 25% of the actual costs, whichever is greater.

Many non-Medicare payers have a “Hold Harmless” policy in their contracts that state that the member will not be held financially responsible for the cost of covered services except for copayments, coinsurance, or deductibles.

16.  What is the standardized physician payment system that Medicare uses based on resource costs, and what are relative value units?  

Medicare and most other payers use the resource-based relative value scale (RBRVS) to determine physician payment, according to the American Medical Association (AMA). Rather than basing payment on physician charges, as they once did, Medicare established a standardized physician payment schedule based on relative value units (RVUs). 

Relative value units (RVUs) are the basic components of the RBRVS and define the value of a service or procedure relative to all services and procedures. According to AAPC, this measure of value is based on the extent of physician work, clinical and nonclinical resources, and the expertise needed to provide the healthcare service to patients.  

There are three factors that play a role in how the RBRVS affects a physician’s payment for services. They include:

  • Total RVUs 
  • Geographic Practice Cost Indices (GPCIs)
  • Conversion Factor (CF)

The RBRVS is updated annually to reflect new and revised CPT codes.

RVUs are established for three categories of resources and are updated every year. These categories include:

  • Physician work: Includes technical skills, physical and mental effort, judgment and stress related to patient risk, and the time needed to perform the service or procedure. Physician work RVUs account for an average of 51% of the total relative value for each service.
  • Practice expense (PE): Includes medical and office supplies, clinical and administrative staff, and pro rata costs of building space, utilities, and medical and office equipment. Practice expense RVUs account for an average of 45% of the total relative value for each service. 
  • Professional liability insurance (PLI), sometimes known as Malpractice (MP) insurance: Reflects the cost of PLI based on an estimate of the relative risk associated with each CPT code. Professional liability insurance RVUs account for an average of 4% of the total relative value for each service.

Some services require a physician to spend more time and effort on them than on some other services and may require more clinical staff, and/or specialized equipment. Therefore, not all CPT and HCPCS codes are created equal.

An RVU is the total of the three component RVUs. Each of the three components is adjusted based on the geographic location of the physician’s practice and results in a total RVU for each CPT code. Then the total RVU is multiplied by the Conversion Factor that turns the RVU into a dollar amount. 

The formula for calculating the total RVUs for a CPT or HCPCS code is:

Work RVU + Practice expense RVU + Professional liability insurance RVU 

The total RVU for a given CPT code then needs to be geographically adjusted by using this formula:

(Work RVU x Work GPCI) + (Practice expense RVU x Practice Expense GPCI) + (Professional liability insurance RVU x Professional liability insurance GPCI)

The Conversion Factor, a set amount determined by Medicare, then needs to be multiplied by the total RVU that converts the RVU into a monetary amount. 

To calculate the complete formula to determine the physician’s final payment, follow this formula:

[(Work RVU x Work GPCI) + (Practice expense RVU x Practice expense GPCI) + (Professional liability insurance RVU x Professional liability insurance GPCI)] x Conversion factor

17.  What ethical principles of professional conduct are required under AAPC’s Code of Ethics?

AAPC's code of ethics policy as it relates to medical coding business of medicine

All members of AAPC have the responsibility to conduct themselves in all professional activities in a manner consistent with all of the following ethical principles of professional conduct:

  • Integrity
  • Respect
  • Commitment
  • Competence
  • Fairness
  • Responsibility

Failure to adhere to these standards may result in loss of membership with AAPC. 

Now that you’ve learned the 17 things related to the business of medicine, be sure to take the 10-question, compliance and regulatory quiz to check your knowledge.

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    1. You could well publish an “Idiot’s guide to medical coding” based on your talent of spoon-feeding complicated info to any readers interested in pursuing a career in medical coding.

      This is my 4th day doing recon into the profession. Thanks so much for your thoughtful posts. They really help.

      1. Hey Karl,

        Thank you for your very nice comment. I’m glad my posts are helping you. We all respond differently to things, so if I can make topics easier to grasp for even some of you, I will have done my job.

        Good luck to you, and have a great day!

    2. This information is very helpful. You should create a YouTube channel if you do not already have one.

    3. Starting my coursework and this is all really helpful. I wish I could download this blog entry as a PDF, though. When I try to save it as one I lose formatting. But thank you for all of this!

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