Downcoding: What It Is and How to Prevent It

Insurance claim

Upcoding and downcoding are flip sides of the medical coding coin, and both can have seriously detrimental effects for healthcare providers and patients. Upcoding is a fraud that involves billing payers for more expensive procedures and treatments than those provided. It can violate a number of federal and state laws and lead to severe legal and financial consequences for providers. It can also taint the patient medical record with incorrect information. Conversely, downcoding has traditionally been defined as billing a payer for a lower level of medical service than the care actually delivered. This could be attributed to errors in transcription, inadequate documentation, a misunderstanding of how to bill certain types of cases, or as a misguided tactic on the provider’s part to avoid denials and audit scrutiny. 

Things have changed considerably in recent years, in part due to COVID and the disruptive, anomalous impact it has had on revenue and costs for both providers and payers. Many healthcare revenue cycle leaders now see downcoding more in the context of what they consider inappropriate business practices by payers than as an internal quality issue to be resolved by training coders in best practices and error reduction.  

The Impact of Downcoding 

The American Hospital Association (AHA) considers the issue of payer downcoding and claims denial so serious that it issued a white paper in December 2020 rather pointedly titled, Addressing Commercial Health Plan Abuses to Ensure Fair Coverage for Patients and Providers. That AHA report found that 89 percent of hospitals and health systems surveyed experienced an increase in claim denials over the past three years, with 51 percent calling the increase significant. 

The report frames the concerns the provider community has with payer downcoding and denial behaviors as such: “Not only are private health insurance plans the dominant source of healthcare coverage for most Americans, but employers, as well as the Medicare and Medicaid programs, rely on private health plans to provide or administer their health benefits… Coverage through these plans is eroding as some health insurers restrict access to health care services by abusing utilization management programs…” 

From a denials management perspective, there is discernable method behind insurance plans’ efforts to incrementally downcode claims and downgrade diagnostic related groups (DRGs). Because DRGs determine reimbursement rates based on case severity and risk of mortality, with more severe and critical cases reimbursed at higher rates, payers tend to scrutinize those higher DRGs and look for opportunities to achieve lower-tier DRGs.  

Sarah Mendiola
Sr. VP Denials Management
Sarah Mendiola

According to Sarah Mendiola, senior vice president of Denials Management at Cloudmed, third-party auditors working for the plans have incentives to downcode claims and come in looking specifically for opportunities that do not justify a higher reimbursement rate. “Auditors will target those conditions that they know affect reimbursement, usually diagnosis codes that carry an MCC (major complications or comorbidities) or CC (complications or comorbidities) designation and look for physician documentation deficiencies or inconsistencies that they can use to justify removal of the diagnosis,” says Mendiola. “They are strategic in their reviews and most often target secondary diagnosis codes for removal. We see the same top 5-10 diagnosis codes consistently removed or revised throughout the country.”

Recent Developments in Downcoding 

While payers leverage advanced analytics and big data to target high-value claims, healthcare providers struggle to push back against more and more partial and line-item denials and downcoded claims they must review, update, and appeal. For payers, the calculus is simple and strategic — it costs very little to downcode claims and DRGs, and much more for health systems and hospitals to appeal them. While steering clear of challenging medical necessity outright, the claim denial or downcoding often questions the clinical evidence supporting the initial DRG determination.  

“The bulk of what we’re seeing now is based on a clinical validation review by the payers,” Mendiola reports. “So, it’s not just questioning the way a claim is coded and billed, it’s questioning the provider’s adherence to clinical guidelines and indicators that support a specific diagnosis or course of treatment.”  

The American Academy of Professional Coders (AAPC) also sees DRG downgrades resulting from clinical validation reviews as an issue and addresses it in a recent article, Take Steps to Reduce Payer DRG Denials, by Dorothy Steed. As that article states, “Payers have been increasingly scrutinizing codes that raise the DRG and accompanying payment to determine whether the stated condition is supported by evidence. Claims that are high risk for scrutiny and denial often contain one diagnosis code that is a complication or comorbidity, serving to raise the DRG and reimbursement.” 

Countering Payer Downcoding Practices 

For health systems and hospitals, responding to payer downcoding is a strategic imperative for maintaining financial stability. But because it costs providers so much more to appeal than for payers to downcode, an ounce of prevention can be worth a pound of cure. Sarah Mendiola suggests four things that providers can do to help reduce partial denials, and downcoded claims and DRGs: 

  • Improve Clinical Documentation: “I would have a specialized CDI team for inpatient and outpatient to capture all appropriate documentation for all patient encounters,” says Mendiola, “especially surgical procedures and inpatient admissions that relate to DRG downgrade targets like sepsis.”
  • Focus on high-severity cases: “High-cost MCC and CC cases like malnutrition, respiratory failure, renal failure, and other severe conditions are downcoding targets and need to be the focus of the CDI program,” Mendiola says. “Coders and clinicians need to work as a team to improve documentation for those types of conditions.
  • Create clinical treatment policies: “Providers need to be consistent about how they diagnose and code high-target cases like sepsis and persistent in communicating to the plans that they have a uniform policy regarding clinical treatment and coding of those cases based on specific guidance,” advises Mendiola.
  • Leverage your data: Statistical analysis can deliver important insights into payer behaviors around denials and downcoding, according to Mendiola. “Those insights can prove valuable when negotiating terms of the next payer contract or when dealing with arbitration or considering legal action to recoup revenue.” 

Additional Resources:  

Implementing Denials Management Best Practices 

Smart Hospital Denials Management