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Sep 2018

Prime Healthcare settlement demonstrates risks of “upcoding”

Earlier this month, Prime Healthcare, a California hospital system, reached a $65 million settlement with the federal government for its alleged practice of upcoding Medicare claims, as well as other allegedly unlawful billing practices.

“Upcoding” is the practice of using a billing code that provides a higher payment rate than the billing code that actually reflects the service rendered to the patient.

Depending on the payer and types of services provided, there are many ways that hospitals and other providers risk upcoding their claims. Here, Medicare was the payer and the claims were inpatient claims.

When Medicare is the payer, the diagnosis-related groups (DRGs) for inpatients and the ambulatory payment classifications (APCs) to outpatients determine what hospitals receive as reimbursement. The ICD-9 Procedure Code and the ICD-9 Diagnosis Code determine the appropriate MS-DRG classification under the Medicare Inpatient Prospective Payment System (IPPS). Further, ICD-9 procedures are categorized to a MSG-DRG which indicates: 1) with major complications and comorbidities (MCC); 2) with complications and comorbidities (CC); or 3) without complications and comorbidities (without CC/MCC). Complications and comorbidities typically increase the reimbursement for an MS-DRG. Thus, it is important that hospitals both accurately diagnose patients and maintain persuasive  and credible documentation that support their diagnoses.

As alleged, Prime Healthcare directed its staff to upcode by exaggerating complications and comorbidities. Some examples include:

  • Always adding encephalopathy for elderly patients (encephalopathy is a broad term for any brain disease that alters brain function or structure)
  • Adding fecal impaction in gastrointestinal (GI) bleeding cases
  • Diagnosing heart failure as “acute” rather than “chronic”

Prime Healthcare also allegedly billed for medically unnecessary inpatient short stay admissions which should have been classified as outpatient or observation stays. Further, Prime Healthcare allegedly refused to discharge patients who were eligible to transfer to post-acute care.

As demonstrated by the Prime Healthcare case, upcoding poses a serious compliance risk for hospitals and other providers; it is one of the bases of actions brought under the False Claims Act, the federal law that imposes liability on persons and companies who defraud governmental programs. Because many commercial insurers model their reimbursement after Medicare, it is also important for hospitals and other providers to accurately diagnose patients and maintain appropriate documentation to support all  diagnoses when seeking reimbursement from commercial payers. SAC highly recommends that hospitals and other providers maintain effective compliance programs to reduce the risk of upcoding and as an added benefit, reduce the frequency of payment disputes with commercial insurers.


1“Prime Healthcare Services and its CEO Agree to Pay $65 Million to Settle Medicare Overbilling Allegations at 14 California Hospitals”,

2Publication of the OIG Compliance Program Guidance for Hospitals, 63 Fed. Reg. 46, 8987 (Feb. 23, 1998)

3Fifth Amended Complaint, United States of America, et al. v. Prime Healthcare Services, Inc. et al. No. 11-08214 (C.D. Cal. August 8, 2014), ECF No. 195. Subsequent references to allegations are also from the fifth amended complaint.

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