Health care providers in Oregon and across the country are worried about a new practice by commercial insurance companies of using artificial intelligence to reclassify and “downcode” billing codes, leading to lower payments.
They say AI downcoding is done systematically and that insurers do not have a medical professional check patients’ medical records to confirm that a lower payment rate was appropriate.
They warn that the practice, which comes at a time of rising costs and workforce shortages, is unfair and threatens beleaguered hospitals and clinics, especially in rural areas.
The American Academy of Family Physicians has called on the Trump administration to investigate the practice, and lawmakers across the country have introduced bills that would require insurers to be transparent when using AI to downcode claims or even ban the practice altogether.
In Oregon, lawmakers considered a proposal on downcoding in the short session earlier this year. During a pre-session hearing in January, Maggie Hudson, CEO of Santiam Hospital, told lawmakers that downcoding amounts to a “money-making scheme,” and that insurers are intentionally reducing payments on claims to boost profits.
“Something cataclysmic is happening in Oregon right now,” Hudson said. “These are not targeted audits, but rather blanket denials – ignoring the clinical records.”
A Legacy Health spokesperson echoed her concerns in a recent email to The Lund Report.
“Patients are paying premiums for their care and this is a way for insurance companies to not pay for the member’s care,” it said.
According to Legacy, downcoding is not just a problem for emergency departments — the area Hudson highlighted — but also affected other services.
“We are seeing a wider perspective,” Legacy said, “including clinic and hospital professional services where payers are downcoding the level of service without any review of medical records.”
The Oregon legislation, House Bill 4054, would have required insurers to inform providers when they used AI to downcode a claim and tell them how to appeal. It had strong support from providers — but equally strong opposition from insurers.
Richard Blackwell, chief lobbyist for PacificSource Health Plans, said more thought needed to be put in the bill.
“Without clear definitions, we're going to be faced with confusing and inconsistent compliance obligations, increasing our costs without improving care,” Blackwell said in testimony.
Dean Johnson, spokesperson for Regency BlueCross BlueShield of Oregon, told The Lund Report the proposal was too broad and that insurers already use nationwide codes to alert providers to adjusted claims.
“There is currently no code to indicate whether software was used in identifying a claim adjustment,” Johnson said. “If every carrier creates its own method for indicating software use, it defeats the purpose of standardized codes.”
Insurers argue that providers use AI as well — to upcode claims to make more money. Recent research from Blue Health Intelligence for the Blue Cross Blue Shield Association found that AI coding by hospitals boosted claims by an additional $2.3 billion in claims in a two-recent period.
Insurers should also have the right to use AI, Regence argues.
“Given that providers are adopting AI tools at substantially higher rates than payers, transparency standards should apply equally to both,” Mary Anne Cooper, a Regence lobbyist, said in testimony.
The bill, backed by the Oregon Medical Association and a coalition of independent providers, died after one hearing, but providers may try again, according to Courtni Dresser, lobbyist for the medical association.
“We are concerned on a couple different fronts: One, there’s no justification for the (downcoding),” Courtni Dresser told The Lund Report. “The other piece is that it takes a ton of staff time to track all this and try to appeal and receive the payment that was indicated.”
Range of providers affected
Providers cannot go to the state for help. State insurance regulations, overseen by the Department of Consumer and Business Services, require timely payment for “clean claims” that contain all the necessary information. But the rules don’t get into issues like downcoding.
“We don't have a lot of authority over those issues because the insurance code primarily addresses the relationship between the insurance company and the consumer,” Jesse O’Brien, an agency policy manager, told The Lund Report.
He said he’s only heard about the problem anecdotally.
A range of providers filed testimony on House Bill 4054 against downcoding. They included Dr. Leah Reznick, a pediatric ophthalmologist; Dr. David Russo, a pain specialist and managing partner at Columbia Pain Management, an independent clinic; and Melissa Todd, a psychologist and president of the Western Oregon Mental Health Alliance.
Todd said that many insurers are now monitoring mental health providers with “coding advisor programs” like one developed by Optum, a division of the for-profit health care behemoth UnitedHealth Group, which is both an insurer and provider, employing a large number of physicians in the U.S. After these programs flag providers who are outliers in their use of certain codes, insurers warn them their bills will be reduced if they don’t change their billing behavior, Todd said.
Downcoding is the next step, Todd added.
“The codes being monitored are time-based office visits which are determined by time spent face-to-face with the patient,” she wrote, “or time spent with the patient and on supporting activities for medical providers.”
Russo said providers are left in the dark.
“Physicians learn of reimbursement changes weeks later, with no clear indication of whether the decision was based on clinical judgment, contractual language or a non-transparent algorithmic rule set,” he said.
Providers, including Hudson of Santiam Hospital, say downcoding has become a big problem in emergency departments, which, by law, have to evaluate everyone seeking care and at least stabilize them. Dr. Tom Sugarman, an emergency room physician and chair of the Emergency Medicine Policy Institute, a policy-focused group in the American College of Emergency Physicians, told The Lund Report that insurers downcode in different ways.
“That’s part of the problem,” he said.
They may shift the billed level of service to one that’s less expensive or decline to pay for diagnostic tests and imaging needed to figure out the patient’s problem, which might turn out to be something as simple as stomach flu, he said.
“We do what we think is necessary to take care of them,” he said, “and then after the fact, the insurance company says, ‘We don't actually think you provided the service that you said you provided or we don’t think it was necessary, so we're going to pay you less.’”
Appealing can be difficult because the downcoding is not transparent, and trying to figure why they’re paid less consumes administrative time, providers say.
“We cannot hire enough people to track and fight denials, appeals and downcoding because the volume is simply too great,” Hudson said.
Some critics have called for a ban on using AI to downcode invoices while others want a medical professional to review automated changes and be transparent about who that person is.
“We'd like to know that it's somebody who actually has the expertise and ability to do this,” Sugarman said. “And then secondly, I think that people tend to be more responsible when they're accountable.”
Emergency departments nationwide are under financial stress, and downcoding is making it worse, he said. A RAND report last year found that while emergency rooms have faced increasingly complex cases in recent years amid the opioid crisis and gun violence, reimbursement rates have dropped by single digits for federally backed insurance and up to 50% for commercial payers.
The American College of Emergency Physicians said the report shows the need for change.
“The findings underscore the urgent need for policy and payment reforms to preserve the essential role of emergency departments in the U.S. health care system, it said in a release.
Actions nationwide
Primary care practices are particularly affected by downcoding: They don’t perform expensive procedures and are paid among the lowest rates for services.
“When payors downcode these visits, payment significantly declines, with some practices experiencing six figure losses,” Dr. Jen Bruli, chair of American Academy of Family Practitioners, said in a letter to the Trump administration in November.
The letter — to the heads of the Federal Trade Commission, the Centers for Medicare and Medicaid Services and the U.S. Department of Justice — called for an investigation, saying downcoding might “run counter” to laws on open and fair markets.
The health care industry has become increasingly consolidated and vertically integrated, with companies like UnitedHealth both offering insurance plans and operating practices. Those companies could use downcoding against other providers while paying their own in full, giving them a financial advantage against competitors, Bruli wrote.
The lack of transparency around these practices raises concerns about conflicts of interest, she added.
There are no federal guidelines, standards or rules on the practice though several states across the country are considering proposals.
Arkansas is the first state in the U.S. with regulations that address downcoding. They went into effect last year and require insurers to tell providers when they’ve downcoded services on a bill. Virginia and Indiana also have new rules going into effect in July.
In Virginia, insurers will be required to have a clinician review downcoded services. They’ll also have to alert providers when services have been downcoded and set up a clear appeals process.
The Indiana regulations are similar and also prevent insurers from targeting physicians who treat complex patients.
A proposal in Illinois could be the next to be passed, experts say. It would ban insurers from using automated tools to downcode claims based only on the information on the invoice, requiring decisions on downcoding to be made by a licensed physician in the same specialty. It also would require insurers to notify providers about which codes were changed and by whom and inform them of the appeals process. Providers would have 180 days to appeal, and any insurer that has a pattern of improper downcoding could be fined.
A California proposal is similar: It would ban the use of AI to downcode claims based only on the information on the claim and would prevent discriminatory downcoding, such as targeting doctors who treat chronically ill patients. Any changed codes would need to be backed up by a review of the patient’s chart. Insurers would have to explain changed codes and providers would have a year to appeal.
Lawmakers in Maryland, New Jersey and New York are also considering proposals.
In Oregon, a bill could be introduced in the legislative session next year, though most legislators are still nailing down their priorities. Dresser said providers are overwhelmed by paperwork and addressing downcoding would provide needed relief. So another try is likely.
“That's what people want to do,” Dresser said. “It’s an important piece.”
