Billing, Upcoding and Hospital Revenues

by James A. Bacon

As the investigation into alleged management abuses at the University of Virginia Health System and School of Medicine gathers momentum, several physicians have detailed their allegations to The Daily Progress. Perhaps the most damning charge is that senior Medical Center executives pressured physicians into “upcoding” procedures to overcharge patients and their insurers.

Upcoding is fraud. Sadly, the practice is widespread in the healthcare industry. Whether it occurred at UVA remains an open question. The Jefferson Council trusts the Board of Visitors investigation to appraise the validity of the charges leveled by 128 UVA Medical Center professionals over the past several months.

But I was curious about the business context in which upcoding might have occurred. Might financial pressures have incentivized senior management to take a more aggressive approach to billing? Such background information would be useful to the investigation.

Several major events have roiled the UVA health System since 2020 when Craig Kent became CEO and 2021 when Melina Kibbe took the helm as dean of the medical school: the COVID epidemic, the jettisoning of litigious debt-collection practices, and accounting misstatements stemming from the acquisition of three community hospitals.

After a close review of Medical Center finances here is my bottom line: Allegations that UVA began billing more aggressively two to three years ago coincides with a surge in revenue per patient beginning in fiscal 2022. But many factors affect hospital revenues, so I am reluctant to draw any conclusion beyond suggesting that accusations of upcoding warrant a closer look.

The criticism of UVA’s medical leadership focuses on events that allegedly transpired at the UVA Medical Center, not the community hospitals in Culpeper, Manassas and Haymarket that are part of the UVA Health System. Accordingly, I skip over the consolidation of the community hospitals with UVA Health, which resulted in deficiencies in accounting standards and a re-statement of financials. I focus instead on COVID and debt collection, which are very much part of the Med Center story.

The last four years have been a financial roller coaster ride. The UVA Medical Center saw depressed earnings in 2020, a spike in 2021, and then a loss in 2022 before rebounding strongly in 2024.

Unlike publicly traded companies, UVA provides no “management discussion of financial results” to explain the earnings volatility. The minutes of the Health System Board of Visitors meetings make no mention of billing practices. If the Board discussed them, the conversations took place in closed sessions inaccessible to the public. What follows is stitched together primarily from information found in Health System minutes and the UVA Board of Visitors minutes.

Medicare reimbursements and medical coding

Among the roughly 6,100 hospitals in the U.S., the UVA Medical Center is one of only 216 academic medical centers. Joined at the hip with the UVA School of Medicine (SOM) and the UVA School of Nursing, the UVA Health System does more than provide patient care. It exists also to teach aspiring physicians, nurses and medical professionals and to conduct medical research.

The governance structure is unusual. UVA Health reports to the University of Virginia Board of Visitors, which oversees three divisions: the academic division in Charlottesville, the Health System, and the UVA campus at Wise. But UVA Health has its own governing board, which functions like a “committee” within the UVA Board of Visitors structure. Unlike other committees, which are comprised exclusively of BoV members, the Health Systems board includes five “public” members.

With a service territory extending far beyond the Charlottesville-Albemarle County area, the UVA Medical Center is one of Virginia’s largest and most highly ranked hospitals. Thirty percent of its revenue comes from the federal Medicare program and 20% from federal/state-funded Medicaid. The balance of Medical Center revenues comes mostly from private insurance. The enterprise also provides tens of millions of dollars of “charity care” and writes off tens of millions more annually in bad debts.

Like other acute care hospitals, UVA Medical Center finances are under relentless pressure from Medicare and Medicaid rates that reimburse the hospital less than the cost of providing medical services. Nationally, contends the American Hospital Association, Medicare payments covered only 82% of hospital costs in 2022, short-changing the industry by $99 billion. Medicaid is likewise criticized for reimbursing hospitals less than the full cost of services provided. One way of dealing with the shortfalls is to shift costs to private insurers, which drives up the cost of private insurance.

Another approach is to “upcode” — bill for more complex and highly reimbursed services than the hospitals actually provided. A 2021 investigation by the Office of Inspector General found that the number of inpatient stays billed at the highest severity codes nationally increased nearly 20% between 2014 and 2019, even as the length of stay was decreasing.

The Phillips & Cohen Healthcare Whistleblowers Guide explains how upcoding works:

One type of upcoding occurs when hospitals bill for inpatient stays at the highest severity level even though the patient’s care was actually more routine. A high severity level requires that there be at least one secondary diagnosis that is considered a major complication or comorbidity, such as acute respiratory failure and sepsis.

A hospital also engages in upcoding when it bills for care as if provided by a physician when it was actually provided by a nurse or physician’s assistant, which is a lower-paying service.

In essence, this is what the dissident physicians are accusing UVA of doing. Doctors told the The Daily Progress they were told to use the CPT code 99291, which indicates a doctor spent 30 to 74 minutes administering critical care services. As evidence of the pressure they faced to upcode, the physicians offered a recording of a conversation of a division meeting that occurred last November:

“The message was, ‘You guys don’t bill enough, and there’s clear evidence that you could be billing more because this other group bills a ton. They bill double what you guys are billing,’” said one of the surgeons, who has since left UVa. “And we said, ‘For us to bill more would be fraud, because we’re already billing more than we think we should.’”

Improper or aggressive billing is not necessarily fraudulent. Billing and coding are complex tasks that require a significant knowledge base — people actually can earn college degrees in medical coding — so some improper billings may be caused by the difficulty in interpreting the rules and the DRGs (diagnostic related groups) upon which they are based. Furthermore, when gray area exists, there can be legitimate disagreements over how to code a particular procedure. The allegations described in The Daily Progress do not make it clear if the exhortations to bill more were a blanket order, applied to certain situations only, or were based on some defensible data.

The newspaper has filed a Freedom of Information Act request to determine if UVA billing for “critical care” jumped after Kent’s arrival at UVA Health on Feb. 1, 2020. The implication is that an increase in billing for complex cases would buttress the dissident physicians’ charges that upcoding was occurring. But many factors — most notably the COVID epidemic — affect the types of patients entering the hospital and the kinds of procedures billed for their care. Caution in drawing conclusions from the volume of “critical care” is advised.

The financial data

When Kent arrived at UVA, the financial situation at the Medical Center was challenging. The $24.7 million in earnings reported for the half-year ending Dec. 31, 2019 — a month before he got there — was running significantly behind budget. The profit margin was 2.7%, less than the 3.0% considered desirable for nonprofit hospitals to maintain long-term financial health.

And things would get worse. The first COVID patient would enter the UVA Medical Center the same month, and directives from the Virginia Governor’s Office restricted the admission of patients for discretionary procedures to ensure that enough hospital beds were available for those afflicted by the virus. Overall admissions plummeted.

Then a year later, UVA Health would come under fire for aggressive billing and collection policies. A Kaiser Health News report in 2019 showed that UVA had sued 36,000 patients over six years for more than $100 million, seizing wages and savings and even pushing families into bankruptcy. In April 2021, according to UVA Today, the health division announced that it would release all liens and judgments for patients at or below 400% of the federal poverty level — basically, any patient in a family of four with income $106,000 or less.

UVA Today did not say how much addressing the PR nightmare would cost the health division, and board minutes provide no clue. We can get a sense of the potential magnitude of the financial hit, however, from the Virginia Health Information Foundation (VHIF), which includes some “bad debt” data on Virginia hospitals in the fiscal 2022 year.

On paper, the UVA Medical Center’s bad debt amounted to $162 million. That number represented “gross” billings, however, which are wildly inflated as they are at most hospitals. After discounts for contractual allowances, UVA patients and insurers paid only 27% of nominal (gross) charges on average. Applying the same ratio to the reported “bad debt,” we can conclude that UVA incurred some $40 million to $50 million in bad-debt write-offs that year. VHIF does not publish data for earlier years, so we cannot say if that represents a jump due to the change in collections policy. But the loss of potentially tens of millions of dollars in revenue undoubtedly constituted a challenge to hospital management.

Judging from Health System board minutes, though, Health Systems management was more preoccupied with the fast-spreading COVID epidemic that had gripped the nation’s attention. The minutes summarized Kent as saying that the UVA Health team “worked around the clock, first to manage COVID-19 related matters and then to manage the financial consequences of COVID-19 within UVA Health.”

The patient mix changed drastically as patients with discretionary procedures were bumped to make room for a flood of COVID patients. The hospital also incurred significant additional costs such as hiring expensive traveling nurses to offset staffing shortages (aggravated by the decision to terminate dozens of employees who refused to take the COVID vaccine). Operating earnings collapsed from $94.4 million in fiscal 2019 to $17.4 million in 2000.

The Medical Center managed to revive operating earnings in 2021, reporting a $66.6 million profit. Financial reports also show a mind-blowing $525 million gain in non-operating profits. I could find no explanation of this massive number in the minutes. One possibility: The sum stemmed from an infusion of cash as UVA’s share of the Coronavirus Aid, Relief, and Economic Security Act and other federal programs that showered the U.S. healthcare sector with an estimated $175 billion in subsidies.

The source of non-operating earnings, whatever it was, dried up the next year. Non-operating income took a $131 million hit in 2022 — again for reasons undisclosed. But operating profits remained robust. In remarks to the Health System board, Kent said, as the minutes summarized them, that “finances are doing well.”

In the minutes, the Medical Center finances cited the following positive factors influencing operating income: high inpatient acuity, strong ambulatory volumes, and growth in outpatient pharmacy business. The “all-payor case mix,” the minutes noted specifically, was 2.37, an increase from the previous year.

Inpatient acuity is a critical variable in hospital revenues and profitability. Sicker patients present more complex medical challenges and require more intensive care. The Centers for Medicare and Medicare Services adjusts hospital payments according to patient acuity, as measured by a number called the Case Mix Index (CMI). A higher CMI translates into greater revenue in recognition of the fact that intensive care requires more resources.

UVA tracked the CMI metric in its quarterly statistical summaries to the Board, which I have compiled in the graph below.

As can be seen, the CMI at the UVA Medical Center has increased significantly — from 2.10 in 2019 to 2.37 when it peaked in 2023 — before easing off in 2024. In other words, the hospital has been handling an increasingly acute caseload.

The rise in CMI at the Medical Center overlapped with a surge in net-patient revenue, as shown below.

Medical Center revenue leaped an extraordinary 82% between 2001 and 2004. The Consumer Price Index rose 21.4% over that period but inflation accounted for only a quarter of the increase.

What explains the stupendous boost in revenue over and above inflation?

Increasing patient acuity is an incomplete explanation. The correlation between CMI increases and revenue increases is far from perfect. The CMI jumped in 2020, for example, but revenues actually fell slightly that year. Similarly, CMI fell in 2024, but revenues hit new highs. Something else was going on.

One contributor to revenue growth was an increase in the number of patients. UVA reports several metrics for measuring patient load: the number of discharges, the number of patient days, and the average daily census. I looked at the average daily census. As shown in the graph below, the average number of patients in the hospital bottomed out at 479 during the COVID epidemic and then soared to 568 in 2024.

After the initial COVID crisis the Medical Center, it seems, did a good job of filling beds with paying patients. Why the dramatic increase? One possible explanation is that consolidation with the community hospitals in Culpeper, Prince William, and Manassas was paying off. Integration into the UVA health system might have changed the patient mix as the community hospitals fed their sickest patients to the Medical Center.

However, the picture gets more complicated if we look at one more metric, which is not found in the Medical Center’s financial presentations. From UVA’s data, we can calculate revenue per visit (or more technically, net patient revenue per discharge). That looks like this:

The key discontinuity here occurs between fiscal years 2021 and 2022. Revenue per patient visit jumped from $70,000 to almost $102,000 — a 46% increase in a single year. Given the stability of revenue per patient before and after, that leap requires explanation. Did the Medical Center begin upcoding around that time?

When did physicians start objecting?

The UVA Physicians Group (UPG) has listed numerous complaints with senior Medical Center management: compromised patient safety, featherbedding in the C Suite, a culture of fear and retaliation, and this: “failure to be forthcoming on significant financial matters.”

UPG’s first letter to the Board of Visitors offers a few details: Concerns include audit performance, the communication regarding the recent transition of the Chief Financial Officer, Community Health acquisitions, UPG funds flow, and Revenue Cycle.

“Revenue cycle” refers to the workflow of managing the financial aspects of patient care: patient registration, insurance verification, service documentation, accurate coding and billing, claim submission, payment posting, resolving disputed claims, patient billing, and collections.

The physicians do not detail in public correspondence what “revenue cycle” concerns they had. However, their timeline of expressing grievances seen here indicates that they sent an email to President Jim Ryan in September 2021 expressing “no confidence” in Kent, and followed up with a meeting in October to discuss their complaints. The timeline did not disclose the reasons for expressing no confidence.

In December 2022, the UPG also sent a letter to the Clinical Staff Executive Committee, which overseas clinical staff in the UVA Health System, regarding “Revenue Cycle and Culture.” In February 2023, the UPG sent a “follow up” letter to the committee on the same matter.

Thus, the physicians’ complaints coincided in time with (1) a jump in per-patient revenue at the Medical Center, (2) a leap in total patient revenue, and (3) a rebound in operating profits. It should be a simple matter for Board of Visitors investigators to refer to the letters of complaint in and around 2022 to see if upcoding had become an animating issue for the doctors at that time. If so, the surge in per-patient revenue suggests that the practice was widespread, not a few isolated instances.

One thing I have learned in my career as a journalist, however, is that there are two sides to every story. With a high-profile investigation underway, no one in UVA senior management is spilling their guts to the media to tell their side. There may be reasonable explanations for the operating trends I have highlighted here. Furthermore, Medicare encourages whistleblowers to report fraudulent billings. One might ask why physicians would wait until 2024 to go public about fraudulent billing that allegedly took place in 2022.

The Jefferson Council is confident that the Board of Visitors will explore all angles before rendering judgment.

James A. Bacon is contributing editor to The Jefferson Council.

Republished with permission from Bacon’s Rebellion.