How the Medical Billing Industry Works

If you aren't currently employed in the medical billing industry, it may seem like a vast and complicated topic, perhaps even too complicated to worry about learning. But the medical billing and coding is actually easy to understand, as long as you can grasp the basics.

The medical billing industry is a three-party system. The three parties are:

  1. the patients
  2. the insurance companies
  3. the medical providers.

Although there are other parties involved in healthcare, these three parties are the driving forces behind the way the entire system works. All working together, patients, insurance carriers, and providers make up the medical billing industry.

Medical Billing Basics

Medical Billing Basics
Want to quickly get to grips with the fundamentals of medical billing? We recommend the ebook The Basics of Medical Billing, a guide to the industry written by a mother/daughter team of billers. Learn more about it here.

Brief overview

A claim form

Patients are the individuals who pay premiums to an insurance company, which in turn provides them with health care insurance.

An individual may pay $300 a month to an insurance company. In return, the company pays the doctor or hospital who sees them if they get sick, suffer and injury, or need any other type of medical care.

Learn how health insurance companies calculate premiums.

Patients may also choose to pay a larger premium for the insurance company to cover their spouse, children, or both.

Usually these types of insurance packages are offered through the individual's employer, who also pays a portion of the premium, in order to help the patient pay for the cost of the insurance plan.

These plans and their premium amounts vary greatly, and depend on the contract negotiated by the insurance plan buyer (usually the employer) and the insurance company.

Insurance companies are the businesses that cover the cost of patient medical care. They stay in business by insuring the medical care of individuals, who pay them monthly premiums (as above).

Medical providers are the doctors, nurse practitioners, surgeons, or other medical staff that see a patient when he or she goes into the office for any type of medical service.

They examine, diagnose, and prescribe medication. They also perform any necessary medical procedures on the patient, such as removing stitches or lancing abscesses.

After the doctor sees the patient, his or her billing and coding staff will create a medical claim. This uses a special set of codes used by the medical billing community, and include charges for the procedures performed by the provider.

This is where the medical billing and coding staff fit into the equation.

The doctor's office sends this claim to the patient's insurance company, who determines whether or not the patient was covered for the services provided, and pays the doctor for the claim.

Other Instances

Sometimes the insurance company won't pay the claim, if they think that the patient wasn't covered for those services.

They may also determine that the claim will go towards the patient's deductible or coinsurance, meaning that the procedures were covered, but the insurance won't pay anything until the patient pays a certain amount first.

This all depends on the patient's individual insurance policy.

Putting it all together

Outline of the entire medical billing industry

Here's an example of how these systems operate together in the medical billing industry...

John Doe pays Insurance Company ABCD a $300 insurance premium each month.

John has recently fallen ill and gone to the doctor. At the office visit, his insurance plan required him to help pay with a $20 copay.

The doctor determined that he had pneumonia, and had to be admitted into the hospital for observation. After two days in the hospital, John was discharged and sent home.

All of the doctors, nurse practitioners, or specialists who saw John while he was seeking care each bill his insurance company individually. What this means is that his insurance company will receive multiple claims from multiple providers for all of the services that were performed while he was sick.

The insurance company reviews each of these claims individually. They determine whether or not to pay on the claim, or if John also has to pay for some services.

In this case, John paid the $20 copay to the doctor's office, and the insurance paid the rest of his claim. So John doesn't owe anything else to the doctor's office.

The hospital, on the other hand, checked the extent of the pneumonia by performing an x-ray on John's lungs.

John's insurance plan does not cover any type of imaging services, including x-rays, so they won't pay for this exam. In this case, they put the x-ray towards his deductible, and allowed a payment amount of $250.

Because the insurance plan did not pay for the x-ray, John has to pay the hospital for the exam. The medical billing department at the hospital has to bill John directly for the x-ray by sending him monthly statements until the claim is paid in full.

Other parties involved

From the above example, you can see how the three parties working together complete a cycle.

These three parties are the most involved in the actual medical billing process, but they are far from being the only parties involved in the medical billing industry.

There are many other associations, businesses, and organizations that are all involved in treating and diagnosing patients. Some associations are more involved in the way doctors work, and other organizations are involved in the way insurance companies operate.

The patient's Human Resources (HR) Department is the part of his or her company that negotiates between the patient and the insurance plan, in order to determine premium amounts, patient coverage, and effective dates of coverage.

There are many Medical Associations that are made up of doctors and specialists throughout the country. These associations help communicate important advancements in the medical industry to doctors and insurance companies.

State and Federal departments of health work to govern the medical industry, and to make sure that patients, providers, and insurance companies all work together to ensure the prompt payment and processing of claims, as well as the correct treatment of patients by providers.

Pharmaceutical companies are also a large part of the medical industry. They often perform the majority of new research on specific diseases or conditions, and their scientists are involved in the majority of new scholarly findings.

No matter how you're involved in the medical billing industry, understanding the three major parties, and how they all work together, will help you decode the vastly complicated ways this system works.

We also recommend the ebook The Basics of Medical Billing for getting a good grasp of the industry.

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