Payer Downcoding: 10 Tips to Avoid It

  The American Medical Association recently warned, 

“Much to the frustration of physicians, payers are increasingly implementing E/M downcoding programs that inappropriately reduce payment for claims billed… Payers are downcoding claims unilaterally with growing frequency and without notice—and doing so in ways that make it extremely difficult to identify in coding audits.” 

Downcoding in medical billing directly reduces payer reimbursement rates. One study published in Exploratory Research in Clinical and Social Pharmacy estimates that downcoded outpatient office visits in Florida for Medicare alone led to $113.9 million in annual revenue losses. In Crowe LLP’s report, Hospital double whammy: Less cash in, more cash out, researchers found that “takebacks” – which include payer downcoding – cost their hospital and physician clients $1.6 billion monthly.  

Beyond the financial impact, downcoding interferes with operations,  increasing administrative burdens. If a downcode is caught, providers must allocate resources to identify, appeal, and correct these claims—an often time-consuming and costly process. It also disrupts cash flow, making it difficult for organizations to cover operational expenses like payroll and supplies. 

Moreover, downcoding can pose compliance risks by triggering audits from regulatory bodies or private payers, even when unintentional errors occur due to poor documentation. These challenges underscore the critical need for healthcare organizations to address downcoding proactively. 

Review the nuances of payer downcoding so you can avoid it whenever possible. 

What is payer downcoding?

Downcoding in medical billing is the payer assignment of a lower-level code to medical services, minimizing services actually provided to the patient. Specifically, it’s the use of a less complex CPT code or ICD code than what accurately reflects the care delivered. For example, a level 4 office visit (CPT 99214) may be downcoded to level 3 (CPT 99213), resulting in reduced payment. Payers may argue that the documentation does not demonstrate moderate complexity MDM or that the diagnosis is insufficient to warrant a level 4 office visit. CPT 99214 requires at least 30 minutes of total time spent on the encounter. If time is not adequately documented or the payer disputes its medical necessity, the claim may be downcoded

Differences between payer downcoding and underpayments

Payer downcoding and underpayments are two distinct revenue challenges that healthcare providers face. While both result in reduced reimbursements, they differ in their underlying causes, mechanisms, and resolution strategies. Both can occur due to either intentional action or mistakes on the part of the payer. 

Where payer downcoding lowers the complexity or level of care proposed, underpayments stem from differences between actual reimbursements and those listed in the contracts. 

The 6 medical classifications most commonly downcoded 

Downcoding disproportionately affects certain procedures and classifications, often due to their complexity, documentation requirements, or payer scrutiny. Below are the most commonly downcoded areas:

 1. Evaluation and Management (E/M) Services

Why payers downcode: E/M services, such as office visits and consultations, are frequently downcoded because they involve subjective coding decisions based on the complexity of care provided. Payers often use algorithms to automatically reduce higher-level codes (e.g., Level 4 or 5) to lower levels (e.g., Level 3), claiming insufficient documentation to justify the higher complexity.  

Example: New patient visit for COPD management
A 68-year-old new patient with severe chronic obstructive pulmonary disease (COPD) presents with worsening dyspnea and fatigue. The physician conducts a comprehensive history, reviews prior pulmonary function tests, orders a chest X-ray, adjusts medications, and refers the patient to a pulmonologist. The visit involves 45 minutes of total time (meeting Level 4’s 45–59 minute requirement for new patients).

Coding:
The physician bills 99204 (Level 4) based on moderate MDM:

• Problems: 1 chronic illness with exacerbation (COPD flare-up).
• Data: Reviewed prior test results, ordered imaging, and analyzed new symptoms.
• Risk: Prescribed corticosteroids and referred to a specialist.

Downcoding:
The payer automatically adjusts the claim to 99203 (Level 3), arguing the diagnosis (COPD) does not justify moderate MDM. The algorithm flags COPD as a "low-complexity" condition, ignoring the exacerbation and specialist referral. The physician is reimbursed at the lower rate ($120 vs. ~$180 for 99204) without a code change.

 2. Surgical procedures

Why payers downcode: Surgical procedures are often downcoded when documentation does not fully support the complexity of the surgery or additional components performed.  

Example: A partial mastectomy with axillary lymph node dissection (CPT 19302) is downcoded to a simpler partial mastectomy (CPT 19301), resulting in reduced reimbursement. Payers often argue that the operative report lacks sufficient detail to confirm the complexity of the procedure, specifically the removal of axillary lymph nodes. For CPT 19302, documentation must indicate that a complete axillary lymphadenectomy was performed, including the removal of all identifiable axillary lymph nodes.

If the report only mentions the removal of sentinel nodes or fails to specify the extent of lymphadenectomy, payers may downcode to CPT 19301, which excludes axillary dissection.

 3.  Colonoscopies and endoscopic procedures

Why payers downcode: These procedures are downcoded when payers interpret them as less extensive than what was performed.  

Example: A full colonoscopy (CPT 44406) may be downcoded to a sigmoidoscopy (CPT 45341), which only examines a portion of the colon. CPT 44406 requires visualization of the entire colon, including the cecum or colon-small intestine anastomosis. Payers downcode to 45341 if the operative note lacks explicit confirmation that the scope reached these landmarks. 

 4. Anesthesia services

Why payers downcode: Anesthesia billing depends on precise time tracking and complexity. If documentation does not align with the recorded time or complexity, payers may downcode the service.  

Example: Anesthesia time is documented incorrectly, leading to a lower reimbursement rate than deserved. Payers downcode claims when records lack clarity or omit phases like pre-operative sedation or post-operative monitoring. If only intraoperative time is documented, payers may exclude additional time spent on patient preparation or recovery. 

Payers may also challenge whether the procedure warranted the billed base units. For example, if modifiers for emergency conditions or patient health status (e.g., ASA physical status) are absent, payers may reduce the complexity level and associated reimbursement.

 5. Chronic disease management

Why payers downcode: Chronic conditions like diabetes or bronchitis are often downcoded when generic codes are used instead of more specific ones that reflect complications or severity.  

Example: Billing for Type 2 diabetes mellitus without complications (ICD-10-CM code E11.9) instead of diabetic ketoacidosis with coma (E11.11). Payers may argue that the documentation provided does not support the use of a higher-specificity code like E11.11 (diabetic ketoacidosis with coma). They might claim that the medical record lacks explicit mention of complications such as ketoacidosis or coma, even if the clinical situation warrants it.

If the documentation only describes "uncontrolled diabetes" or "high glucose levels," payers may default to E11.9, which represents diabetes without complications.

Further, Many payers use automated systems to flag claims with higher-specificity codes for review. If keywords like "ketoacidosis" or "coma" are absent from the documentation, these algorithms may automatically adjust the claim to a generic code like E11.9.

 6. Radiological and imaging services

 Why payers downcode: Imaging procedures may be downcoded when payers determine that a lower-level study was sufficient based on the diagnosis provided.  

Example: A provider bills for an MRI with contrast, but it is downcoded to an MRI without contrast due to insufficient documentation supporting the need for contrast. Payers require clear evidence in the medical record to justify the use of contrast agents. This includes indications such as suspected tumors, vascular abnormalities, or detailed evaluation of specific structures.

If the documentation does not explicitly state why contrast was necessary or fails to link it to clinical findings, payers may downcode the procedure to a non-contrast MRI (CPT 70551).

Issues fueling payer downcoding 

Above, we cover payers’ thinking behind their decisions to downcode. Payers present these rationales as reasonable and verifiable. You may disagree. Nevertheless, if payers can pin a misstep on the healthcare organization, they’ll run with it to pay less. 

You should be aware of two other common reasons behind downcoding that verge on ethical grey areas. 

AI-driven claims review

Payers were among the first to adopt automation technologies and now utilize artificial intelligence (AI) to manage claims more assertively, often without offering transparency. They possess greater financial resources than providers, enabling them to invest in advanced AI systems..

The growing use of AI by payers has led to higher claim denials because AI systems can scrutinize claims with greater precision. AI tools are also conducting retroactive audits, revisiting claims post-payment, often overturning previously approved claims by reassessing medical necessity. The speed and minimal oversight of these audits make them highly cost-effective for payers. Finally, healthcare organizations remain unaware that their claims are being evaluated by AI systems, making it difficult to challenge the denials they generate. 

Further, automated systems often flag the highest cost codes for intense review. These algorithms may downcode claims based on certain keywords.

The number of stories we’ve heard about payers downcoding and underpaying prompted us to write, Payer Management for Providers: How to Optimize Contracts to Prevail over Payers. It provides several powerful ways providers can push back against downcoding, underpayments, denials, retroactive reviews, and lack of transparency. 

Know, too, that lawmakers are not looking favorably on AI review and reimbursement of claims. A recent court ruling against UnitedHealth Group states that AI tool use should be included in coverage agreements issued by healthcare insurers. 

More encouragingly, legislators are watching AI use in eligibility determination. California's Senate Bill 1120 (SB 1120), which took effect this year, regulates how healthcare service plans and disability insurers use artificial intelligence, algorithms, and other software tools. 

Cost-control measures

In the past few years, payers have instituted strategies that claim to improve healthcare efficiency and affordability.  However, when an emphasis on cost-cutting goes past a certain point, it undermines patient well-being and adds strain on healthcare providers. Balancing financial accountability with equitable access to care remains a critical challenge in the healthcare ecosystem.

You should maintain awareness of how payers are increasingly transferring financial responsibility to providers and patients through these tactics:

• Patient cost-sharing: The rise of high-deductible health plans (HDHPs) has shifted a significant portion of healthcare costs onto patients. This trend forces providers to invest more in patient collections.
• Utilization management: Payers implement strict prior authorization requirements and utilization reviews, delaying care while reducing their own costs. These processes add administrative burdens for providers and negatively impact patient access to timely care.
• Data access and contract negotiation:  Payers leverage their access to vast data resources and analytics capabilities to negotiate lower rates with providers. They analyze cost trends and provider performance data to identify high-cost providers and implement targeted cost-containment strategies. 

Payers also use price transparency rules to encourage patients to select lower-cost care options, further pressuring providers to reduce prices

The payer-driven focus on cost reduction creates an uneven playing field for healthcare organizations. Providers must allocate significant resources toward navigating complex claims processes, appealing denials, and managing patient collections. Patients face delays in care due to prior authorizations and increased out-of-pocket costs under HDHPs.

10 tips to avoid payer downcoding

Given the many angles payers use to reimburse at lower rates, healthcare organizations must adopt proactive measures to protect their revenue. Minimize the risk of downcoding with the following tactics

1. Ensure accurate coding

Use the correct CPT and ICD-10 codes that reflect the complexity and level of care provided. Avoid undercoding or using generic codes, as these can invite downcoding by payers.

Example:  A physician treats a patient with uncontrolled Type 2 diabetes complicated by diabetic ketoacidosis (DKA) and altered mental status. Instead of billing ICD-10 code E11.9 (Type 2 diabetes mellitus without complications), the provider correctly uses E11.11 (Type 2 diabetes mellitus with ketoacidosis with coma). This specificity ensures the claim reflects the severity of the condition and avoids payer adjustments to a less complex diagnosis.

2. Maintain comprehensive documentation

Ensure medical records are detailed, complete, and justify the level of service billed. Clear documentation is critical for substantiating claims during payer reviews or audits.

Example: A surgeon performs a partial mastectomy with axillary lymph node dissection (CPT 19302). The operative report explicitly states "complete removal of all identifiable axillary lymph nodes" and includes detailed descriptions of the procedure’s complexity. This thorough documentation prevents payers from downcoding the claim to CPT 19301 (partial mastectomy without lymphadenectomy).

3. Conduct regular internal audits

Perform routine audits of coding practices to identify errors or inconsistencies. This proactive approach helps address potential issues before they result in downcoded claims.

Example:
An internal audit reveals that several claims for Level 4 office visits (CPT 99214) were submitted without sufficient documentation supporting moderate medical decision-making (MDM). The provider implements training for staff to ensure future claims include detailed MDM notes, reducing the risk of downcoding to Level 3 (CPT 99213).

4. Stay updated on coding guidelines

Keep up with changes to CPT, ICD-10, and payer-specific rules. Regular training and updates for coding staff can help avoid discrepancies that lead to downcoding.

Example:
In 2021, CMS revised E/M coding guidelines to emphasize time and MDM rather than history and physical exams. A practice updates its coding protocols to align with these changes, ensuring accurate billing for prolonged office visits based on documented time spent counseling patients.

5. Train staff on coding best practices

Educate billing and coding teams on the importance of accuracy, documentation completeness, and compliance with payer guidelines to reduce errors.

Example:
A hospital conducts quarterly training sessions for its coding staff on payer-specific requirements for imaging studies. Staff learn how to document medical necessity for contrast-enhanced MRIs (CPT 70553), preventing claims from being downcoded to non-contrast MRIs (CPT 70551).

6. Monitor claims proactively

Regularly review remittance advice and payment details to identify discrepancies between billed codes and reimbursed amounts. Address any patterns of downcoding promptly.

Example:
A practice notices that multiple claims for anesthesia services are being reimbursed at lower rates due to discrepancies in recorded time units. After identifying this pattern, they adjust their documentation processes to ensure accurate start and end times are recorded for all anesthesia procedures.

7. Appeal downcoded claims

Develop a robust process for appealing inappropriate downcoding decisions. Provide supporting documentation to justify the original codes submitted.

Example:
A provider bills CPT 44406 (colonoscopy through stoma) but receives payment for CPT 45341 (sigmoidoscopy). The provider submits an appeal with operative notes confirming cecum visualization, successfully overturning the downcoding decision.

8. Use advanced coding software

Leverage technology to streamline coding processes, detect inconsistencies, and ensure compliance with payer requirements. Automated tools can help flag potential downcoding issues before submission.

Example:
A clinic adopts advanced coding software that automatically flags claims missing required modifiers or specific diagnosis codes linked to higher-level procedures. For example, it alerts staff when a claim for CPT 99204 lacks documentation supporting moderate MDM complexity, allowing corrections before submission.

9. Communicate with payers

Establish clear communication channels with payers to understand their policies and coding expectations. This can help resolve disputes more efficiently and prevent future issues.

Example:
A provider contacts a payer after noticing frequent denials for MRI claims involving contrast agents. By discussing medical necessity criteria directly with the payer, they adjust their documentation practices to meet requirements, reducing future denials or downcoding.

10. Partner with external auditors or consultants

Engage external experts to validate internal audits, provide insights into payer behavior, and recommend strategies to minimize revenue losses from downcoding.

Example:
A hospital hires a consulting firm specializing in revenue cycle management to review its claims data. The firm identifies patterns in payer denials related to high-level E/M codes and recommends improved MDM documentation practices, resulting in fewer downcoded claims.

In addition, the AMA advocates that healthcare organizations act on these specific principles when managing downcoding. 

By applying these strategies consistently, healthcare providers can mitigate the risks associated with payer downcoding while improving their overall revenue cycle performance and operational efficiency.

Finding downcoded claims with automated software

If your organization keeps finding downcoded claims, but you don’t have the staff or the expertise to address them, using a software platform could be an affordable solution. Your current billing software may already have these features. It’s time you use them. 

These tools rely on automation, artificial intelligence (AI), and real-time analytics to ensure accurate coding, improve documentation, and protect revenue. Review this list of the types of software commonly used to detect downcoding. Connect with your IT department to determine which would be best to identify downcoded claims. 

Code Auditing Software

• Functionality: Coding auditing software analyzes claims before submission to ensure that the codes assigned align with clinical documentation and payer guidelines.
• Benefits: These tools identify discrepancies between the level of service provided and the codes submitted, flagging potential downcoding issues and ensuring claims are billed at the appropriate level.

 Claim Scrubbing Tools

• Functionality: Claim scrubbing tools review claims for errors, including coding inaccuracies, before they are submitted to payers.
• Benefits: These tools compare billed codes with payer-specific guidelines to detect inconsistencies that could lead to downcoding. They also flag undercharges or mismatches between billed and expected reimbursement rates.

  Electronic Health Record (EHR) Systems with coding features

• Functionality: Many EHR systems include built-in coding validation tools that analyze clinical documentation and track claim adjustments.
• Benefits: These systems can identify discrepancies between the codes submitted and the payments received, alerting providers to potential downcoding. They also allow users to generate reports based on claim adjustments or denial patterns.

Denial management software

• Functionality: Denial management software tracks claim denials and adjustments, including those related to downcoding.
• Benefits: By analyzing trends in claim adjustments, this software helps providers identify patterns of payer behavior, such as frequent downcoding of specific procedures or services. It also streamlines the appeals process by organizing data for resubmissions.

Revenue Cycle Analytics Tools

• Functionality: Revenue cycle analytics software provides insights into financial performance by analyzing claims data, payment trends, and coding accuracy.
• Benefits: These tools highlight areas where revenue is being lost due to downcoding or other payer adjustments, enabling providers to take corrective action.

 Natural Language Processing (NLP) tools

• Functionality: NLP tools analyze clinical documentation for keywords and phrases that support accurate coding.
• Benefits: These tools ensure that clinical notes align with coding requirements, reducing the likelihood of payer adjustments due to perceived insufficient documentation.

Limits of manual downcoding identification

Payers keep doing anything they can get away with. 

Healthcare leaders warn that payers depend on RCM staff overwhelm, hoping that downcodes and underpayments slip by. 

And RCM staff is overwhelmed. It’s just that overwhelm that saps revenue and spurs you to consider AI-driven solutions. 

With thousands of claims to process, each with complex coding requirements, manually reviewing claims for downcoding becomes a time-intensive and error-prone task. The frequent changes to CPT codes and payer rules make it challenging for staff to stay updated. Missing or outdated knowledge can result in overlooked discrepancies in reimbursement rates, namely, downcoding. 

Human errors in coding drive payer downcoding. Mistakes such as incorrect modifiers, unbundling, or undercoding can mask downcoding issues and often go unnoticed until they significantly impact revenue. Additionally, manual processes lack real-time analytics capabilities, making it hard to detect patterns or trends in downcoded claims promptly. This delay in identifying issues leads to preventable revenue leakage and missed opportunities for corrective action.

These challenges underscore the need for healthcare organizations to adopt advanced tools like those listed above. These mitigate the negative impact of downcoded claims on the organization’s financial health.

MD Clarity catches payer downcoding and underpayments

You don’t have to let your earned revenue slip through your fingers and back into payers’ pockets. With proactive revenue cycle management, you can identify and rectify downcoded claims, underpayments, and unfavorable contract terms.

MD Clarity’s contract management platform, RevFind, ingests, digitizes, and analyzes all contract data, consolidating it in a single, accessible location. When payments, downcodes, and denials come in, it compares these to payer contract terms and aggregates them in a report. Appealing inappropriately downcoded claims and pursuing underpayments can result in millions of dollars in cash recovered and improved margins.

Get a demo to see how RevFind helps you capture more revenue by identifying downcoded and underpaid claims. 

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