Understanding Insurance Policies

Section 1

Insurance Carriers and Policies

Term	Definition
Actual Charge	The amount charged by the practice when providing services.
Adjudicate	A term for processing payment of a claim.
Adjudicator	Person who reviews the claim to determine payments.
Allowed Charge	The amount set by the carrier for reimbursement of services.
Assignment of Benefits	Request that money be paid directly to the physician for services rendered on a given claim. In some instances, accepting assignment may result in adjustments or write-offs.
BR	By Report. Based on the codes submitted, the claim may need to have a report sent explaining the charges.
Capitation	A form of prepayment in which a provider agrees to furnish services to members of a particular insurance program for a fixed fee. Capitations mostly affect monthly payments to primary care physicians in HMO groups.
CF	Conversation Factor. Dollar value multiplier for fee calculation.
COB	Coordination of Benefits. A clause that has been written into a health insurance policy stating the primary insurance will take into account benefits payable by a secondary insurance. Prevents overpayment of the charges billed to the patient.
Co-payment	The amount the insured has to pay toward the amount allowed by the insurance company for services.
CPT	Current Procedural Terminology. Nomenclature published by the American Medical Association as a means to describe services rendered to a patient using numerical codes.
Customary Charge	The amount representing the charge most frequently used by a physician in a given period of time.
Deductible	The dollar amount that must be paid by the patient before insurance will pay a claim based on coverage plans and benefits.
DOS	Date of Service.
DRG	Diagnosis-Related Group. Patient classification system to categorize patients who are medically related with respect to diagnosis, treatment, or statistically similar with regard to length of hospital stay.
EOB	Explanation of Benefits. Form accompanying an insurance remittance with a breakdown and explanation of payments for a claim; also referred to as a Remittance Advisory (RA).
HCPCS	Healthcare Common Procedure Coding System. More commonly referred to as “HCPCS” (sometimes pronounced hick pix). A coding system designed by the CMS to report patient services utilizing codes from CPT and other alphanumeric codes.
ICD-9-CM	International Classification of Diseases, 9th edition, Clinical Modification. The source of diagnosis coding required by insurance carriers and government agencies.
Indemnity Insurance	Traditional insurance programs referred to as “Fee for Service” programs.
PC	Professional Component. Defines services provided by a physician or other health care professional.
Percentile	The ranking of fees from all providers in a given area to develop a reimbursement base.
POS	Place Service Codes. Codes used on insurance claim forms to specify the location where services were provided. A complete list is found in the introduction section of the Professional Version of the CPT manual.
Precertification	A method for preapproving all elective admissions, surgeries, and other services as required by insurance carriers. Approval is essential before receiving payment for services.
Prevailing Charge	The charge most frequently used, in a specific area by physicians, based on specialty. The highest charge in the prevailing range establishes the absolute maximum limitation, or the highest amount a carrier will pay for a service.
PRO	Professional Review Organization. An organization of physicians that reviews services to determine medical necessity.
RBRVS	Resource-Based Relative Value Scale. A system of assigning values to CPT codes developed for Medicare to determine reimbursement amounts for services.
Relative Value Unit (RVU)	A method to calculate fees for services. A unit is translated into a dollar value using a conversion factor or dollar multiplier. The assigned value is generally based on three factors: physician work component, overhead practice expense, and malpractice insurance.
Remittance Advisory	Statement sent by an insurance company detailing how submitted claims were processed for payment along with payment amounts.
RVS	Relative Value Scale. The unit value attached to a code used to determine payment for services.
TC	Technical Component. The portion of a test or study that pertains to the use of equipment or technicians.
Third-Party Payer	A carrier that has an agreement with an individual or organization to provide heath care benefits.
Timely Filing Clause	The amount of time allowed by an insurance company for a claim to be submitted for payment from the date of the service.
UCR	Usual, Customary, and Reasonable. The reimbursement method that establishes a maximum fee an insurance company will pay for services.
Utilization Review	The process of assessing medical care services to ensure quality, medical necessity, and appropriateness of treatment.
Withhold Incentive	The percentage of payment held back for a risk account in the HMO program. Withhold arrangements are used to share potential losses or profits with providers of service.

Introduction

Before obtaining an understanding of accounts receivable or how to file an insurance claim, it is imperative that the coder understands the various insurance companies’ rules, regulations, and policy guidelines. A coder will need to understand the physician’s responsibilities and obligations to the patients, as well as any agreements he or she may have with insurance companies regarding:

Adjustments

Charges

Coding basics

Without this basic knowledge, a coder will find it difficult to address the common problems of claims submission.

Before beginning this section, the coder should take a few minutes to examine some of the basic terms used by commercial insurance companies, HMOs, PPOs, and federal and state programs.

In reviewing various insurance carriers, one needs to recognize the various ways in which a patient may obtain insurance coverage.

There are three ways a person may obtain insurance coverage:

Group Health Plan: A plan arranged by an employer or special interest group for the benefit of members and their eligible dependents. This plan provides maximum benefit packages based on desired coverage and cost factors.

Individual or Personal Plan: A plan issued to an individual. This type of coverage has a high premium with benefits based on the needs and financial factors of the individual policy holder.

Prepaid Health Care Program: A plan whereby services are rendered by physicians or facilities that elect to participate in a set program for services.

Defining Payment Methodologies

Private insurance companies, federal programs, and state programs use a variety of methods to determine the amount they will pay for services based on the submitted claim information. Methods vary based on the policy of the individual insurance company. However, some of the more commonly used methods include fee schedules, relative value studies (RVS); usual, customary, and reasonable plans (UCR); and diagnosis-related groups (DRGs). Another form of payment is ambulatory payment classification (APC), which pertains to outpatient hospital services.

To better understand payment policies, let’s review some basic information used by insurance companies to determine payment allowances.

Test Your Knowledge

1. Define the following abbreviations.

UCR: ___________________________ COB: ___________________________

PRO: ___________________________ POS: ___________________________

2. Define the term deductible.

_______________________________________________________________________________________________

3. What is a timely filing clause?

_______________________________________________________________________________________________

4. What are the three factors used to determine a relative unit value of a code?

_______________________________________________________________________________________________

5. Define DRGs.

_______________________________________________________________________________________________

Fee Schedules

A fee schedule is simply a listing of CPT and HCPCS codes that have been assigned a specific dollar value payable by the insurance company. A fee schedule designates the maximum amount or level of payment to be made by a carrier for a specific service. The physician’s payment is based on the lower of either the submitted charge or the fee schedule. Most HMO and PPO programs have established fee schedules to reimburse the physician for services he or she renders to patients.

EXAMPLE

Code	Allowed Amount
99201	$25
99215	$60
11040	$30

The patient’s co-payment may be a percentage or a set dollar amount (e.g., $5 or $10) based on the allowed amount for the submitted code and the insurance company’s contract with the patient.

Relative Value Study

The Relative Value Study (RVS) is the most popular method used to determine fees because it is the simplest. This system uses three factors to determine payment allowances, which then become a value or unit worth for a code. That unit worth or weight is then multiplied by a dollar amount (conversion factor) to determine payment allowances. Although there are several relative value studies available, the most widely accepted study is the Medicare RBRVS. Currently there are over 45 relative value studies available in the United States. Relative value studies incorporate the use of unit counts applied to a specific code in order to determine payment factors. This system takes into account the time, skill, and overhead expense of the physician as required by each service.

Conversion factors (CFs) or multipliers are used with the unit counts to arrive at a fee or reimbursement value for each procedure. By multiplying the conversion factor by the unit value the figures are translated into a dollar figure for use in calculating charges for services and payment allocable by insurance carriers.

Many insurance companies have developed relative value studies to use as reimbursement tables because they offer the most effective and efficient method to calculate pricing factors.

An RVS is based on the physician work component (the usual time it takes to complete the service), overhead practice expense, and the cost of malpractice insurance.

EXAMPLE

Code:	Description:	Physician work RVU:	Fully implemented nonfacility RVU:	Malpractice RVU:	Total RVU:
99201	Office/op visit/new	0.45	0.81	0.02	1.28
99241	Outpatient Consult	1.73	1.33	0.09	3.15