Medical Billing Codes & Their Impact on Supply Chain

Medical Billing Codes & Their Impact on Supply Chain

The medical landscape is full of classifications, codes, and acronyms. This creates a challenge for supply chain professionals in hospitals and health systems. In this blog post, we will outline the most common procedural codes in healthcare.

Medical codes will typically have two main functions:

  • Codes that describe the procedure or procedures performed
  • Medical billing codes

These codes are extremely important to receive payments correctly. If a medical biller does not accurately assign correct medical billing codes, there can be heavy consequences – or hassles, in the least. They can range from being reimbursed under what the facility should be to even fraud if payments are made in excess of what procedure was performed.

Medical Billing Codes Explained


The Diagnosis Related Group (DRG) is likely to be the medical code that most medical personnel are familiar with, especially those working in a hospital setting. The DRG medical billing codes are a 3 digit number that range from 001 to 999.

It is the reimbursement code for inpatient hospital settings and the basis of Medicare reimbursement. The DRGs also show the complexity in diagnosis, where DRGs that indicate major complication or comorbidity (MCC) will be reimbursed at a higher rate.


Current Procedural Terminology (CPT) is used in describing the procedures and services performed in a clinical setting. These codes are often used in billing outpatient procedures.

There are four different types of CPT codes: Category I (Procedures), Category II (performance measures), Category III (new technology), and Proprietary Laboratory Analyses (PLA) codes.

Category I will be the most familiar and commonly used type as it describes the procedure that was performed. The Category I CPT codes range from 0100–99499.


The latest version of the International Classifications of Diseases (ICD) is the ICD-10. The ICD code set, like the DRG, was not meant as a procedural or medical billing code. However, in the United States, the ICD has been used for the former methods mentioned.

The ICD-10-PCS (Procedure Coding System) and ICD-10-CM (Clinical Modification) – which replaced the ICD-9-CM (Clinical Modification) – are required for Medicare and Medicaid claims. The main difference between the ICD-10-CM and ICD-10-PCS is that the ICD-10-PCS is used for inpatient procedural coding only. So with this requirement, the ICD has been paired with procedural and billing codes especially in the US market.


Ambulatory Payment Classifications (APCs) are the codes used in outpatient settings and emergency settings. They were created by the Centers for Medicare & Medicaid Services (CMS) to reimburse outpatient services in the same manner as DRGs are used to reimburse inpatient services.


Healthcare Common Procedure Coding System (HCPCS) has two levels or codesets: Level I and Level II.

The Level I actually consists of the CPT code set. This was mandated in 1983 when the CMS merged with the CPT and required the CPT codes on Medicare billings.

The Level II codes are reserved for the items that are not present in the Level I codes such as equipment and drugs.

How Medical Billing Works

According to Continuum, the medical billing process follows these steps.

A clinician performs the procedure and notes the products that were used. A medical coder interprets and assigns the relevant CPT, ICD-10-CM and/or DRG associated with the procedure. Here, the accuracy of the code designation is important to allow for the correct reimbursement. For example, there can be more than one ICD-10-CM code, but the most relevant medical billing code needs to be listed first as that is the main diagnosis.

The claim is then sent to the payer, which can be a private insurance company or the government (usually Medicare for those who are over 65). The UB-04 form is the standard form used for medical billing. Though it was developed by CMS, it has become the standard across all payers. The payer then approves or denies the claims. Once the claim is approved for the designated medical billing codes, the provider will be reimbursed at the agreed amount of the codes.

Note: The reimbursement amounts of private insurers are not public information. The Medicare DRG and APC codes will have the reimbursement amounts listed available to the public. 

Why Medical Billing Codes Matter

Hospital revenue depends on payments from insurers. And hospitals make a profit from the difference of the cost of the procedure and the reimbursement amount. Because of this, hospital supply chain teams actively work to lower costs of devices, especially those in large profit-driving categories such as Orthopedics.

As a supply chain professional – or a financial analyst working in a clinic or hospital, knowing these codes and reimbursements – while also knowing the cost of your most common procedures in which your facility performs – can better help you and your team focus efforts on what will impact the bottom line.

Do you have spend visibility in categories such as total joints, trauma, spine, or CRM? Are you able to see the impact of market trends and physician utilization? Get to the next level of sourcing with procedure analytics.

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