Medical Billing Audit: Internal or External?

You’ve worked hard on your compliance plan. You’ve done your homework and are in the process of implementing the Office of Inspector General’s seven elements of an effective compliance plan. These elements include:

  1. Implement Compliance Policies and Procedures
  2. Designate a Chief Compliance Officer
  3. Develop an Education Program
  4. Provide a Hotline for Anonymous Disclosures
  5. Create a Response and Enforcement System for Disclosures
  6. Investigate and Correct Problems Identified
  7. Institute a Medical Billing Audit Plan

But what about number seven? Just what is a medical billing audit plan, and who should do it? Small practices with just one to four physicians may believe that internal auditing makes the most sense. After all, audits are costly and small practices must do everything they can to remain competitive – especially when healthcare systems are consolidating into ever-larger and more powerful organizations.

What’s In an Audit?

An audit can take two forms. Prospective audits are performed before claims submission and retrospective audits are performed after claims have been paid. Both forms of audit should be conducted regularly, and can be conducted by an internal staff or by paid, outside consultants.

In a medical billing audit, billing documentation and coding are two of the most important areas tested. If a bill is undercoded, revenue is lost. If this happens on a consistent basis, even a small mistake can become quite substantial to the practice financially. Overcoded bills generate more revenue than they should, and if discovered, that money must be returned to the payer. If overcoding is discovered by the OIG, the money will be demanded by Medicare, the practice may be fined and it may even be put on OIG pre-payment review. Transposed CPT numbers or even inaccurate patient data can also result in denied claims. The audit process can identify all of these errors.

Advantages of Internal Audits

While it may seem as though an internal audit would be less costly, a medical billing audit requires objective, dedicated resources. In large companies more resources are available to administer the audit process, and these resources may come from another part of the company with a less subjective viewpoint than a billing department employee might have. With a dedicated internal audit group, audits may be performed on a periodic or even ongoing basis, allowing the organization to continuously adapt its processes for improved accuracy. However, even a dedicated audit staff must be checked, so every practice should have an independent, external audit performed on an annual basis.

Advantages of External Audits

A small practice can be a busy place, and often there just aren’t enough hours in the day – or weekend – to attend to the task of a medical billing audit. It’s no surprise that there are companies that specialize in this area, providing education, consultation, exhaustive reports and recommendations for improvement.

External auditors are immune to conflicts of interest that may otherwise compromise an internal audit staff. An upcoded bill is often providing increased revenue, which, for most, is a huge problem. Experienced external auditors know where to look for issues such as this that may be missed by less objective eyes. And even when an internal auditor finds problems in the policies and procedures of its own practice, the auditor’s recommendations may go unheeded. Commenting about audit objectivity, Vice President Dan Schwebach of the external audit firm AAPC Physician Services said, “We find that when a practice pays for an outside service like ours, the feedback is considered valuable and is taken very seriously.”

Additional Services

With experience in medical billing audits comes experience in compliance, so many external audit companies also provide other compliance program services; offering policies and procedures, education, and the other OIG-recommended compliance program elements. Many of the companies that perform external medical billing audits also provide other healthcare consulting services, including HIPAA and OSHA compliance programs, ICD-10 implementation education and more.

Whether you choose to perform internal audits or not, hiring an external auditor for your annual medical billing audits is something to consider to ensure that your practice gets objective information about its billing accuracy. An objective audit is a crucial element in your compliance program that can help you to maximize your medical billing and spare you from exposure to the OIG.

For more information on CMS compliance, watch our archived webinar on "Medical Billing Compliance: How to Keep CMS Out of Your Business" or a short video by Betsy Nicoletti on "How to Avoid the Three Deadly Sins of Compliance in Medical Billing."


AMA – Physician Compliance: Federal Fraud Enforcement, Physician Compliance Planning

Physician’s Practice – The Art of the Internal Billing Audit

Health Care Compliance Association – Compliance Information

AMA – How to Perform a Physician Practice Internal Billing Audit

AAPC Physician Services – External Audit Services

OIG/DHHS – Elements of an Effective Compliance Program

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