Hospitals can improve their revenue capture by implementing an automated internal audit function that identifies the root causes of denials, thereby helping to prevent the denials from occurring in the first place.


At a Glance

  • Hospitals should routinely perform internal audits of all functions affecting billing accuracy to mitigate the effects of payer audits and to protect revenue by improving billing processes.
  • A primary focus for internal audits should be on coding accuracy, because coding errors leading to denials often reflect gaps in coders’ knowledge or training.
  • Effective communication between coding and denials management professionals is a critical success factor. Audits should support appeals processes, and audit findings should be used in educational initiatives aimed at improving coding accuracy.

Payers continue to actively pursue hospital dollars today, with actions ranging from disputing the medical necessity of services to asserting that services qualify for bundled payment. Medicare’s Recovery Audit Contractor (RAC) program, for example, is still scouring healthcare organizations for instances of improper payment. Moreover, the risk that payer audits will uncover errors will only increase as hospitals complete the transition to ICD-10, which will complicate the issues of coding accuracy with its requirements of new codes and greater specificity in documentation.

Hospitals can mitigate the effects of payer audits and protect revenue by conducting proactive internal audits to root out process deficiencies leading to denied or recovered payments. Maximizing internal audit capabilities and processes reduces errors and denials by helping to ensure mistakes are caught before claims are submitted. It also provides a basis for improving coding and billing accuracy, thereby lessening a hospital’s exposure to payer audits and enabling the hospital to capture revenue to which it is entitled.

Effective internal auditing requires a formal tracking mechanism and an automated system that provides analytics and information to structure the audit in real time to avoid denials. Unfortunately, many hospitals lack these capabilities, relying instead on user-generated computer spreadsheets simply to manage submission timelines, without capturing the data necessary for meaningful analysis. As the volume of payer audits continues to grow, this kind of informal and manual audit tracking process quickly becomes unsustainable.

A formal payer audit management function based on automation allows hospitals to reduce the number of separate actions required for the tracking and denial process, thereby reducing staffing requirements. For example, automation allows a hospital to save correspondence and track appeal letters that have resulted in successful appeals so it does not need to replicate these efforts from scratch. Also, automation allows a hospital to trend reasons for denials and to implement mitigation plans to prevent them from occurring. 

A primary focus for internal coding audits should be on ensuring coding accuracy to prevent denials, and for that reason, much of the discussion here addresses this concern. However, responsibility for denials is shared across many other areas of the organization, including the nursing department, IT, patient accounting, and medical records—and the internal audit function should give appropriate attention to all of these areas. 

The Importance of Communication

The success of internal audits depends in large part on how well an organization promotes communication between those responsible for coding and those accountable for managing denials and appeals. Hospitals should consider how best to connect the two functional areas and ensure ongoing collaboration between them in managing claims information.

The internal audit management process can facilitate communication across functions while also improving the quality of coding. For example, an analysis of denial reasons by an audit manager might disclose a consistent denial trend, such as a specific coder coding a diagnosis that has been treated and no longer fits the definition of a reportable diagnosis. If, for example, a patient has a history of cancer that was resected five years previously and no longer is under active treatment, and the coder codes this historical condition as the only CC (referring to complications and comorbidities), the claim would be denied and result in a refund. 

Indeed, this money was not rightfully the organization’s to begin with. But with profit margins at an all-time low, hospitals need to be able to rely on the collectability or realization of revenue reported to accurately manage operations. The audit manager, with the appropriate systems, could establish quality check rules to avoid such erroneous coding practices by performing an up-front quality check on all claims that fit the “commonly denied” profile. Coders then could be educated on why the denial is occurring and how to prevent its recurrence. Only with such communication can the cycle be broken.

Understanding an organization’s unique set-up is critical to this success, as every hospital tracks trends differently and starts the audit/denial tracking process at different points within the organization. For example, many organizations have a decentralized process for handling audits. Different audits, such as RAC and private payer audits, are handled by different departments, thereby complicating the process because the various departments may have different processes and do not always use the same tracking system to trend the root cause and mitigate the issues. 

Whatever area is charged with tracking denials—whether it is the quality department, health information management (HIM) team, patient accounts group, or another area—the process should include the department or functional area where the denials are originating. Then, audit findings should be communicated to the hospital’s HIM team to ensure appropriate follow up and education to prevent the same error from occurring again. As a first step to centralizing the tracking of audits through technology, hospitals should map the departments targeted for audits and processes they currently use.

The Role of Dashboards

Although every claim is unique, denials typically are not. After identifying the cause of a denial, an internal audit can reveal trends that represent opportunities for reducing similar denials, enabling a hospital to capture revenue more efficiently. This process is best accomplished by using an automated system that pinpoints and tracks coding and billing deficiencies. Encoders are useful, but they do not specifically identify where potential coding and billing problems lie. An automated system can monitor the coding data for trends and identify where problems occur most frequently so the hospital can develop training accordingly.

For example, an internal audit can use dashboards to monitor factors such as DRG accuracy, lists of CCs and major CCs (MCCs) lists, dispositions, secondary diagnoses, and more. Dashboards can help identify specific areas requiring attention, such as where DRG changes occurred, which DRGs most often surfaced as a concern, and whether the DRGs appeared on medical or surgical claims. By monitoring the data for trends, it becomes easier to identify problem areas. 

As an example, a dashboard can help pinpoint where a certain coder might be having recurrent denials with specific procedures due to incorrect coding, or where a certain physician is experiencing denials for a certain procedure due to insufficiently specific documentation to support the use of the procedure. Trending information identified using the dashboard can be used to educate the coder or physician, and a future internal audit can verify that the education addressed the issue. On the auditing side, dashboards don’t show the financial impact of upcoding and downcoding. However, dashboards will show denials by DRG that require human intervention to identify
reasons for their occurrence.

By providing a comprehensive snapshot, dashboards support the audit process. A dashboard can facilitate monitoring of both the denial and the appeals processes, and promote improved management of the coding process. For example, if inaccurate DRG assignments are causing denials, the coding manager can set up a dashboard to monitor the input quality and workflow, reviewing denials by coders, reason codes, and denials by DRG to see which coders and DRGs might require further education or quality review before bill submission. These analytical tools allow managers to track specific problem areas or areas that are frequent targets of payer audits.

Audit Points of Focus

An internal audit should start by using data to establish indicators that can be used to highlight areas where the application of coding and educational resources is likely to produce the greatest financial benefit. Such indicators include:

  • The number of appeals won or lost
  • The risks posed by denials in terms of dollars that might be lost
  • The dollar amount that the organization expects to recover from correcting errors
  • The dollar amount that the organization has recovered in the past

The primary focus of the internal audit function then should be to conduct random preliminary and retrospective audits across all codes and coders to pinpoint where coders are having quality problems and denials are more frequent.

Factors to consider during the audit process include the complexity of the denials incurred—i.e., those requiring the most time and resources to appeal—and the relationship of the denials to medical necessity issues or DRG assignment. These items can provide a basis for developing a dashboard that provides a global view and enables coding and billing managers to focus on key areas. For example, by drilling down on reason codes, medical facilities can configure dashboards based on users to examine specific details, such as medical necessity denials.

A critical part of any successful internal audit process, however, is to adapt the organization’s automation capabilities to the organization’s specific situation. Each hospitals application of automation will be configured based on workflow and analytics tied to key performance indicators specific to that organization. 

The payer audit management function also can help reduce denials in ways that extend beyond coding. With the ability to trend information, a hospital can begin to determine root causes of denials, such as clinical documentation and compliance with medical necessity. For example, a RAC auditor might seek to deny payment because a physician diagnosed a condition as respiratory failure but did not describe any clinical indicators (e.g., blood gases), leading to an appeal process to defend the diagnosis and subsequent coding. Payer audit managers can begin tracking audit requests tied to this physician and use analytics to detect any continuing trends in denials associated with the physician that might indicate a need for educational intervention. 

The internal audit function can help ensure compliance with filing deadlines and requirements for different levels of appeal. For instance, automated systems can be set up to issue alerts—either through the tracking system or by email—about due dates, denial status, and appeal information. Many systems also can calculate due dates based on the type of payer audit, allowing for customized follow-up dates with other departments that are providing documentation.

Internal auditors should keep apprised of appeal and denial issues identified by the U.S. Office of Inspector General (OIG), the Program for Evaluating Payment Patterns Electronic Report (PEPPER), and other compliance-oriented reports. With this foundation, a hospital’s internal audit function can target issues that mirror the areas payers are targeting for audits, including areas other than DRG accuracy. The internal audit also might zero in on insufficient clinical documentation for certain services or individual CCs or MCCs. DRGs will not be the sole focus for audits of value-based payments.

Use of Data to Drive Educational Focus

Data obtained through internal audits can be used to raise staff awareness of steps to take to avoid errors leading to denials. Such data can be used, for example, to develop educational initiatives for coders aimed at promoting high-quality coding and avoiding costs of denial processing, appeals, and resubmissions. 

In short, internal audits supported by automated systems can unearth data that can be used to educate staff and improve workflow. Quality rules can be built into automated systems, allowing codes or bill types with the greatest potential for errors to be automatically routed to a pre-bill audit team for further review and real-time correction, as needed, before the claim is processed.

Drilling down on data reveals precise details, such as the number of coding errors made on a specific DRG. These details can be broken down across the hospital, by facility or by coder. The data might show an unusually high percentage of denials in a specific clinical category, indicating a need for additional instruction for the entire team. Or it might show repeated denials linked to an individual coder’s skill set. In some cases, it might indicate problems with physician documentation or legibility.

Whatever the analysis shows, the findings can be used to develop focused educational programs to improve coding and billing accuracy and limit audit exposure. 

Proactive Strategies Reduce Revenue Pitfalls

Internal audits are more than simply a way to measure compliance and accuracy. Although they promote those outcomes when performed retrospectively, a proactive internal audit produces greater results by combining improved compliance with better cash flow and limited audit exposure.

Automation is a critical part of this process. Continued reliance on manual or user-generated means of tracking coding issues and claims denials can only hamper an organization’s ability to capture revenue. By using automation to support internal audits, particularly within coding workflow, an organization can build quality rules for processes that occur before billing and realize revenue in a timelier manner. With real-time information, hospitals can quickly identify billing problems, validate the issues, adjust the coding, and send out correct bills the first time. Then, they can follow these steps with targeted education and training to promote process improvements and greater billing accuracy.


Barbara Allen is general manager, HIM Services, at IOD Incorporated, Green Bay, Wis., and a member of HFMA’s Wisconsin Chapter.


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Case Example: Reducing Denials Related to Influenza

A recent flu outbreak provides an example of how data and analytics can be used within workflow to improve coding and billing. During the outbreak, hospitals that experienced a dramatic increase in the number of flu and flu-related admissions also saw an increase in claims denials for these admissions. Using analytics, one hospital determined which codes were driving denials and where that coding originated. The hospitals quickly undertook an educational campaign to help coders understand the proper coding for this diagnosis, reducing the number of denials and improving revenue collection. 

This scenario illustrates why it is important for hospitals to monitor national, regional, and local health trends with an eye on their potential impact on coding and claims. When a flu outbreak is expected, a hospital can prepare for it by checking coding data and ensuring that coders understand the expected claims and the appropriate codes. If the predicted outbreak actually occurs, the hospital can track admissions against claim coding success. The internal audit can be used to understand why denials are occurring and where additional educational efforts should be focused.

Publication Date: Sunday, September 01, 2013

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