Understanding the Healthcare Claim Lifecycle: From Patient Care to Payment
A single healthcare claim can pass through as many as 12 different systems before final adjudication occurs. A typical claim can touch an EHR or practice management system, a clearinghouse, one or more claim scrubbers, payer adjudication systems, and remittance processing tools. Industry studies show that 5-10% of claims are initially denied, and the average practice spends 15-20% of its revenue on administrative costs related to claims processing.
Understanding how claims move through this complex system matters. When a claim is denied or underpaid, you need to know where in the process the problem occurred. Was it a coverage or eligibility issue, contractually agreed upon adjustment or a true incorrect denial needing action? Knowing the claim lifecycle and making data-based decisions is a necessity.
The journey begins when a patient receives care. Our guide will focus on the business side, when the claims lifecycle commences.
EHR / Practice Management System
The provider documents the visit in an EHR or practice management system, assigning diagnosis codes (ICD-10) and procedure codes (CPT, HCPCS). These can be cutting edge systems which handle scheduling, clinical documentation, order entry, billing and coding, credentialing management, and patient registration. For most providers these large off the shelf software applications work well for day-to-day tasks and bridge the gap between clinical and business objectives.
The data captured here becomes the foundation for everything that follows. If the diagnosis code doesn’t support the procedure code, the claim will be denied for lack of medical necessity. If the date of service is incorrect, the claim may be denied for a coverage mismatch. If the provider’s credentials aren’t current, the claim may be rejected entirely. Reviewing these adjustments (underpayments) are essential to understanding the financial health of your organization. A periodic review of payment, adjustments, denial trends will help to identify efficiency opportunities.
High fees, strict requirements and lack of customization should encourage exploration of options outside the EHR ecosystem. Using a remittance analytics program outside of your normal flow can provide cashflow and profit-boosting information. The electronic remittance advice is the perfect data source to harvest.
Creating the Claim File
Once documented and coded, the billing system creates an 837 EDI claim file. All healthcare EDI (Electronic data interchange) files must follow a rigid standard governed by the X12 organization. X12 sets the Standards for Electronic Data Interchange. The 837 can come in various formats for different uses. All 837 formats are similar but have some key differences in their composition.
837 Professional (837P) 005010X222: is used by physicians and clinics. It includes provider information, patient demographics, diagnosis codes, procedure codes with modifiers, charges, and place of service codes.
837 Institutional (837I) 005010X223: is used by hospitals and facilities. It’s more complex, including facility information, admission and discharge dates, revenue codes, DRG codes, and both facility and professional components when applicable.
837 Dental (837D) 005010X224: is used by dentists with CDT procedure codes.
Most EHR systems generate these files automatically or with minimal effort. Keep in mind these formats are used for more than just fee for service payment requests. 837 files can be used in encounter reporting to State Medicaid or Medicare agencies for regulatory or audit purposes, population analytics and various reporting needs.
EMS healthcare informatics offers a standalone 837 generation software application, the “EDI Power Generator”. A customizable solution backed by years of implementation experience dealing with unique cases like this could be a viable option.
Prior to submitting a claim most healthcare providers should employ a patient eligibility verification check. This step can also give you details about the patient’s responsibility, including copays and deductible amounts.
This check is accomplished through the 270/271 EDI transaction (005010X279). The 270 inquiry asks the payer about coverage, benefits, and deductible status. The 271 response provides the information needed to determine whether to proceed with the claim, collect payment upfront and what benefits are eligible. These checks can be performed on a real-time basis (one at a time) typically through the practice management or billing software. Real time eligibility is often inexpensive but can be time consuming at a busy provider office. Batch eligibility verification is also an options using a program like the “EMS 270 Power Generator”.
Clearinghouses – The delivery man
Most providers don’t send claims directly to payers, although this is possible when dealing with limited payers to save costs. Instead claims go through clearinghouses that handle format translation, validation, routing, status tracking, and batch processing. Think of a clearinghouse like a mailman delivering the claim and managing the response between all parties.
Different payers require different formats, different connection methods (SFTP, direct EDI, portals), and different submission protocols. The clearinghouse can manage these variations and communications back and forth between the medical service provider and the insurance payer. The clearinghouse is a vitally important cog in the claim lifecycle, these organizations are responsible for security and enable the actual data and payment flow.
Before or at the clearinghouse, claims may pass through scrubbers that check for things like missing diagnosis codes, mismatched procedure and diagnosis codes, duplicate claims, and timely filing issues. A good claim scrubber can significantly reduce denial rates. These edits are typically specific to your organization and should have a level of customization.
A trading partner agreement (TPA) could be required between the Provider and Payer when submitting directly or the Provider and Clearinghouse. A Trading Partner Agreement (TPA) is a legally binding contract between entities that exchange HIPAA-standard electronic data and it can specify things like sender Identification, error handling and security standards.
Payer Adjudication
When the payer receives the 837 claim file, their system performs automated checks:
- Eligibility Verification: Is the patient covered? Is coverage active? Is the provider in-network?
- Medical Necessity Review: Does the diagnosis support the procedure? Is prior authorization required and obtained?
- Contract Application: What does the contract specify for this procedure? What’s the allowed amount?
- Benefit Application: What does the patient’s plan cover? What are deductibles, coinsurance, copays, and out-of-pocket maximums?
- Duplicate Check: Has this claim already been paid?
Most of this happens automatically. Hopefully the claim is approved and queued for payment. If something fails or there’s a discrepancy, the claim can be denied or adjusted.
Contractual rates determine payment amounts. A practice might bill $200 for a procedure, but the contract specifies an allowed amount of $150. The $50 difference is a contractual adjustment that’s written off. You can also have adjustments falling into these groupings: PR: Patient Responsibility, PI: Payor Initiated Reductions, OA: Other adjustments and CO: Contractual Obligations.
Knowing which adjustments are non-recoverable versus an adjustment or denial that needs to be reviewed and worked is the priority. After you know where the problem is you can intelligently set up processes and structures to stop the bleeding. Does the front desk staff need training on upfront payment collection, does EHR system need a tweak to a default setting? These are just two small examples of positive change you can make from knowing your data. Historical payment data from the 835 can also tell you where to focus by clarifying questions like: which payers have the highest reimbursement rate, or which procedure is driving the most revenue? Staying on top of the adjustment and payment trends and looking for outliers is essential to understand the financial health of the organization.
Getting Your Electronic Remittance (835)
After adjudication, payers send 835 Electronic Remittance Advice (ERA) files back through SFTP, direct connections, portals, email, or clearinghouses. The 835 file contains:
Payment Information: Total payment amount, check/EFT number, payment date, and payer information.
Claim Information: Claim status, charges, payments, patient responsibility, and claim control numbers.
Service Line Information: Individual procedure codes, charges per line, payments per line, and units of service.
Adjustment Information: CARC codes explaining why adjustments occurred, adjustment amounts, and group codes.
Provider-Level Adjustments: Adjustments applying to the entire payment, including corrections, offsets, and recoupments.
835 files contain extensive data that’s nearly impossible to read manually. Software that parses these files and presents the information in usable formats is essential for effective revenue cycle management. As a healthcare provider you are entitled to your 835 files, this is your data and should be provided by the clearinghouse or directly from the payer. Reviewing these files directly outside of your EHR or clearinghouse is advised, you want the full picture. We have found certain systems may call an adjustment a write off non-recoverable, but this is not the case.
Optimizing Your Payment Process
Effective revenue cycle management requires tracking key metrics: how long claims take to get paid, denial rates, payer performance, procedure codes most frequently denied, contractual adjustment rates, and trends over time. Most practices post payments and move on without analyzing what adjustment codes mean or tracking trends that could identify problems before they become expensive.
Tools like EMS Insights make this analysis practical. Instead of spending hours manually extracting data from 835 files, loading databases, writing queries and designing dashboards you can get back to providing care.
The Bottom Line
The healthcare claim lifecycle involves multiple systems, multiple payers, multiple formats, and multiple opportunities for problems. Practices that manage this well track their data, analyze trends and patterns, fix problems at the source, and use tools that make analysis practical. Those that don’t analyze 835 remittance files regularly miss opportunities to improve revenue cycle performance.
EMS Insights opens 835 files, extracts payment data, translates CARC/RARC codes into plain English, and shows trends and patterns in visual charts. Users can filter by date, payer, procedure code, or any other field, export to Excel, and see financial performance at a glance.
A free demo with sample data is available here.
About EMS Healthcare Informatics: We’ve been building software for the healthcare industry since 1997. We are the leader in healthcare EDI analysis, creation and editing. Our tools are used by practices, hospitals, and billing companies across the United States. EMS Insights is designed specifically to help healthcare organizations analyze their 835 payment files and improve revenue cycle performance. For questions, call 716-626-3310 or email productsupport@emscorp.biz.