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Revenue Cycle Management Basics for Anesthesiologists



Revenue cycle management (RCM), including coding and claims submission, is a significant function within any healthcare organization or practice, and has given birth to an entire industry. A brief review of the history of billing and insurance over the past 50 years, along with the development of various methods to control costs, is useful to understand our current state.

Concerns about upcoding and other attempts to game the system are discussed, along with changing demographics of patient populations, payer bias, EHR integration, and legal pitfalls.

Clinical documentation integrity teams as well as professional coding teams play a large role, particularly in electronic health record (EHR) templates and other tools designed to facilitate RCM.

Numerous False Claim Act actions have been taken or are in progress. The media is looking at bias from payers (both contracts and research), and various quality measurements appear to not be valid.

It’s all about that data… An ever increasing amount of data is created as we continue to specify, systemize, and specialize. Understanding how we got here, and where we are likely to be going, is an important part of what physicians, and particularly clinical informaticians, need to know.

This multipart post was originally created as a term paper for the course “Business of Healthcare” in the Department of Medical Informatics and Clinical Epidemiology at Oregon Health & Science University. The complete document will be posted in the Practice Management section.

Part 1: A Brief History of Payment for Medical Services
Part 2: The Evolution of Billing into Revenue Cycle Management (RCM)
Part 3: Documentation, Upcoding, and DRG Creep
Part 4: Business Models, Mergers & Acquisitions, and Legal Issues

A Brief History of Payment for Medical Services

A long time ago, in a land far far away… through most of US history, until the 1960s, payment for a physician’s services was very unstructured.  There was some sense of a “sliding scale” adjusted by the physician based on what the patient could pay, and some cost-shifting such that more well-off patients were subsidizing care for less well-off patients. 1

The California Medical Association (CMA) first created the Relative Value Guide (RVG), in conjunction with the California Society of Anesthesiologists (CSA) in the 1950s.  Other specialty and state associations followed a similar path in the 1960s.  The Federal Trade Commission (FTC) began challenging these RVGs, alleging conspiracy to fix prices in violation of the Sherman Antitrust Act.  Although most of the RVGs were retracted due to these challenges, they led to the American Medical Association’s (AMA) development of the Current Procedural Terminology (CPT) in 1966. 2

In 1965, President Lyndon Johnson signed into law the bill that led to Medicare and Medicaid. 3  At that time, there was no specific structure to the payments, or fee schedule.  However, federal regulation prohibited physicians from waiving the portion payable by Medicare patients  “lest patients be encouraged to overuse Medicare.” 1,4

Facing concerns about rising physician fees and increasing Medicare Part B reimbursements, in 1972 Congress mandated an additional fee limit be included in the calculation of “reasonable” charges as opposed to the “prevailing” charge.  This is often called the Medical Economic Index, which is released annually, and is based on the full calendar year prior to the prior fiscal year (so data is from 18-30 months prior to the updated MEI). 5

In the first decade of Medicare (1966-1976), hospital costs increased by nearly 350%, against a consumer price index increase of 89%. 6  Congress mandated the creation of a prospective payment system (PPS) in 1982 specifically to control costs. 7,8  The mechanism chosen to do this was use of a flat-fee hospital payment based on the Diagnosis Related Group (DRG).

DRGs were originally created as a research project to define and measure a hospital’s case mix, segmenting clinically similar groups of patients by their hospital resource requirements.  The underlying assumption of the research was that the amount of hospital resources consumed was a function of the length of stay (LOS).  Patients are categorized into one of 25 major diagnostic categories (MDC), then further divided based on variables strongly associated with resource consumption (e.g., surgical or medical treatment strategy, patient age, presence of co-morbidity), and then further down a decision tree to one of the 518 current categories.

So while “…efficient hospitals are rewarded for their efficiency and inefficient hospitals have an incentive to become more efficient,” 7 not everything can be accounted for as simply as that.  In addition to the diagnosis itself, cost variation includes hospital size, locale (urban vs rural), local wage index, and teaching or not.  This still only explains about 72% of the variation in costs. 6,9

DRGs capture the complexity of disease, but do not capture the severity of disease.  “They are a crude, gigantic set of averages forcing standardization of care without an adjustment for severity within a diagnosis.” 6  While intended to be very homogeneous, there is a growing body of research that finds heterogeneity within a single DRG. 10-13

Look for part 2 next Monday. 

References List

  1. Hall MA, Schneider CE. Learning from the Legal History of Billing for Medical Fees. J Gen Intern Med. 2008 Aug;23(8):1257–60.
  2. Pauker KY. A History of RBRVS as a Perspective on P4P — Part I. CSA Bulletin. 2006;(Spring):7.
  3. History | CMS [Internet]. [cited 2021 Jul 31]. Available from:
  4. Hall MA. Making Sense of Referral Fee Statutes. Journal of Health Politics, Policy and Law. 1988 Aug 1;13(4):623–33.
  5. Dutton BL, McMenamin P. The Medicare Economic Index: Its Background and Beginnings. Health Care Financ Rev. 1981 Sep;3(1):137–40.
  6. Chilingerian J. Origins of DRGs in the United States: A technical, political and cultural story. The Globalization of Managerial Innovation in Health Care. 2008 Jan 1;4–33.
  7. Medicare Hospital Prospective Payment System [Internet]. OIG; 2001 Aug [cited 2021 Aug 25]. Report No.: OEI-09-00-00200. Available from:
  8. Cacace M, Schmid A. The role of diagnosis related groups (DRGs) in healthcare system convergence. BMC Health Services Research. 2009 Nov 5;9(1):A5.
  9. Pettengill J, Vertrees J. Reliability and Validity in Hospital Case-Mix Measurement. Health Care Financ Rev. 1982 Dec;4(2):101–28.
  10. Donaldson C, Magnussen J. DRGs: The road to hospital efficiency. Health Policy. 1992 May;21(1):47–64.
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