Understanding Medical Claims Adjudication

Purpose of this Article

This knowledge base article explains how medical claims are processed (“adjudicated”) by health plans, what outcomes to expect, how to read remittances, and how to prevent and resolve denials. It’s written for front-office, billing, and revenue cycle teams, as well as clinicians who order services.

What Is Claims Adjudication?

Claims adjudication is the payer’s end-to-end review and decision process to determine:

• Whether the service is covered by the member’s plan.
• Whether it was billed correctly and is medically necessary.
• How much the payer will allow and pay.
• The member’s responsibility (deductible, copay, coinsurance).
• Whether any part of the claim is denied, reduced, or pended.

A “clean claim” is a complete claim with all required data elements, correct coding, and necessary documentation that can be processed without manual intervention.

Claim Lifecycle: Step-by-Step

1. Documentation and Coding

   • Clinical documentation captured in the chart.
   • Codes assigned: ICD-10 diagnosis; CPT/HCPCS (and units); modifiers; revenue codes (facility).
   • Key attributes: date(s) of service, place of service, ordering/rendering/billing provider NPIs, taxonomy, TIN.

2. Claim Creation and Submission

   • Professional: 837P; Facility: 837I; Dental: 837D (or paper CMS-1500/UB-04 where permitted).
   • Sent directly to payer or via clearinghouse.

3. Front-End Validation (Clearinghouse/Payer Gateway)

   • HIPAA X12 syntax checks (999), business edits (277CA).
   • Common rejections: invalid member ID, missing NPI, DOB mismatch, invalid diagnosis-to-procedure linkage, invalid modifiers.

4. Payer Intake and Eligibility/Benefits Verification

   • Confirms active coverage, plan type, network status, coordination of benefits (COB) order, benefit limits, and prior authorization/pre-cert requirements.

5. Pricing

   • Contracted fee schedules or methodologies:
     • Professional (RBRVS/RVU-based, fixed fee schedule).
     • Facility: DRG for inpatient, APC/OPPS or per-diem/case rates for outpatient.
     • Carve-outs, implants, high-cost drugs; PPO/TPA repricing.
   • Out-of-network allowed amounts follow plan rules or state/federal requirements.

6. Clinical and Payment Edits

   • National Correct Coding Initiative (NCCI) bundling, modifier validation (e.g., 25, 59, 24, 57, 26/TC).
   • Medically Unlikely Edits (MUEs) and frequency limits.
   • Medical policy guidelines, prior authorization match, site-of-service appropriateness.
   • Duplicate claim checks, global surgical periods, age/gender edits, experimental/investigational rules.
   • Medicare LCD/NCD, plan-specific coverage policies.

7. Coordination of Benefits and Third-Party Liability

   • Determines primary vs secondary payers (e.g., Medicare Secondary Payer rules, employer plans).
   • Workers’ compensation, auto liability, subrogation when applicable.
   • Passes paid amounts and adjustments to secondary claims.

8. Determination and Calculation

   • Allowed amount calculated.
   • Split into payer payment and patient responsibility (deductible, copay, coinsurance).
   • Outcomes: paid (in full/part), denied (in full/part), pended (awaiting info).

9. Remittance and Payment

   • ERA/835 or paper EOB explains payment, adjustments, and denial reasons using:
     • Group codes (PR: patient responsibility; CO: contractual; OA: other adjustments; PI: payer-initiated).
     • CARC (Claim Adjustment Reason Codes) and RARC (Remittance Advice Remark Codes).
   • Payment via EFT or check; posting to the patient account.

10. Post-Payment Activities

• Patient billing per balance rules and contracts.
• Appealing denials, corrected claims, reconsiderations.
• Refunds/recoupments for overpayments; audit responses.

How to Read an ERA/EOB (At a Glance)

• Billed charge vs Allowed amount: Allowed is what the plan recognizes under contract/policy.
• Adjustments:
  • CO-45: Charge exceeds fee schedule/maximum allowable.
  • CO-16: Claim/service lacks information or has submission/billing error.
  • PR-1/2/3: Deductible/Coinsurance/Copay.
• Paid amount: Actual payment issued.
• Patient responsibility: Amount you may bill the member (subject to network and balance-billing rules).
• Remark codes: Narrative context (e.g., information missing, documentation needed).

Typical Timelines and Status Checks

• Electronic clean claims: ~7–30 days (commercial); Medicare typically pays clean electronic claims within 30 days.
• Paper claims: ~30–45 days.
• Pended claims: Timelines vary; often depend on receiving requested documentation.
• Check status using payer portals or HIPAA 276/277 claim status transactions.

Note: Timely filing limits vary by payer (e.g., 90–180 days from date of service). Always verify.

Clean Claim Checklist

• Patient: Full name, DOB, member ID, plan, coverage active on DOS.
• Provider: Billing and rendering NPIs, taxonomy, TIN, address; network status correct.
• Coding: Accurate ICD-10, CPT/HCPCS, units, modifiers; diagnosis-to-procedure pointers valid.
• Claim details: DOS, POS, charges, authorization/certification number when required.
• Attachments: Clinical notes, op reports, pathology, imaging, and forms if policy requires.
• COB: Other insurance details included; primary EOB attached when filing secondary.
• Compliance: Within timely filing window; no duplicate submission.

Common Denial Reasons and Fixes

• Eligibility/coverage not active
  • Fix: Re-verify eligibility; correct plan ID; obtain updated card; move to correct payer.
• Missing/invalid authorization or pre-cert
  • Fix: Provide authorization; submit retrospective review if allowed; appeal with clinical support.
• Coding/billing errors (invalid modifier, NCCI bundle, wrong POS)
  • Fix: Correct coding; add appropriate modifier with documentation; submit corrected claim.
• Medical necessity not met
  • Fix: Align with policy; include failed conservative therapy, test results; peer-to-peer or appeal.
• COB/TPL issues
  • Fix: Update other coverage; submit with primary EOB; resolve subrogation questionnaire.
• Frequency/duplicate/MUE
  • Fix: Validate units and frequency; ensure distinct services with documentation/modifiers.

Corrected Claims vs Resubmissions vs Appeals

• Corrected Claim: Fixes coding or data (same claim number where required; use payer-specific “corrected” indicator).
• Resubmission: Re-sending an identical clean claim after a front-end rejection (not an adjudicated denial).
• Appeal/Reconsideration: Challenges a denial or payment reduction with clinical and contractual support; follow payer timelines and levels.

Primary, Secondary, and Tertiary Billing

• Primary payer adjudicates first; secondary uses the primary’s ERA/EOB to calculate remaining liability.
• Include paid amounts and adjustments in secondary submissions.
• Some services exhaust benefits or hit maximums; check benefit accumulators (deductible/out-of-pocket).

Special Topics

• Global surgical periods: Post-op visits often bundled; use modifiers (24, 25, 57, 79) appropriately with documentation.
• Site-of-care and place-of-service: Affects coverage and pricing (e.g., hospital outpatient vs office).
• No balance billing where prohibited by contract or regulation; follow applicable surprise billing rules.
• Capitation/encounters: Paid via capitation with encounter reporting; denial logic still applied to data quality.

Best Practices to Improve First-Pass Yield

• Verify eligibility and benefits at scheduling and again before service.
• Confirm prior authorization/pre-cert requirements by code and site of service.
• Use coding edits (NCCI/MUE) and payer policy checks before submission.
• Submit electronically with complete data and required attachments.
• Track claim status; respond quickly to requests for information.
• Standardize ERA posting and denial management workflows; maintain a denial reason library with playbooks.
• Monitor KPIs: clean claim rate, first-pass payment rate, days in AR, denial rate, appeal overturn rate.

Frequently Asked Questions

• Is an approval a guarantee of payment?
  • No. Final payment depends on eligibility at the time of service, coding accuracy, contract terms, and benefit accumulators.
• What’s the difference between denied and rejected?
  • Rejected: Failed front-end edits; not adjudicated. Denied: Adjudicated but not paid.
• Can I bill the patient for denied services?
  • Only as allowed by contract and law, and after applying group/code logic (e.g., PR vs CO). Some denials (CO) are contractual and cannot be billed to the patient.
• How do I know if a claim was bundled?
  • Review CARC/RARC and code pair logic; NCCI edits often indicate inclusions. Use appropriate modifiers only when distinct and supported.

Glossary

• Allowed Amount: Maximum the payer recognizes for a service.
• CARC/RARC: Standard codes explaining adjustments and remarks on remittances.
• COB: Coordination of Benefits; determines payment order among multiple coverages.
• DRG/APC: Facility payment groupers for inpatient (DRG) and outpatient (APC/OPPS).
• ERA/835: Electronic remittance advice; electronic version of an EOB.
• Global Period: Post-surgical timeframe where related services may be bundled.
• MUE: Medically Unlikely Edits; limits on units per day per code.
• NCCI: National Correct Coding Initiative; bundling and edit rules.
• 837/277/999: HIPAA transactions for claim submission and status.