By selecting a more severe Secondary Diagnosis Code for a patient, a physician may increase the reimbursement due from Medicare. If a hospital intentionally changes codes across its patient population, the increased revenue can be substantial. Is that legal? A federal district court in Texas faced this question when a relator filed suit under the False Claims Act.

The court decided that maximizing value is legal. In fact, the court reached its conclusion by relying upon guidance from the Centers for Medicare and Medicaid Services (“CMS”). The court also cautioned about violating the False Claims Act.

Medicare Reimbursement

Medicare determines the proper reimbursement for services rendered to patients by grouping patients with similar clinical problems into Diagnoses Related Groups (“DRG”). In turn, a DRG is determined primarily by (1) the principle diagnosis code, (2) any surgical procedure code, and (3) any secondary diagnosis code. The secondary diagnosis code represents “all conditions that coexist at the time of admission, that develop subsequently, or that affect the treatment received and/or length of stay.” CMS publishes a list of codes each year that, when added to a claim, result in the claim being considered a “Complication or Comorbidity” (“CC”) or a “Major Complication or Comorbidity” (“MCC”). The relator alleged that the hospitals fraudulently used these codes to defraud the government.

The Alleged False Scheme

According to the relator, hospitals created a complex fraudulent scheme to train doctors to document the medical record in a way that would permit coding for CCs and MCCs. In addition, the hospitals trained staff to be on the lookout for opportunities to code for CCs and MCCs. Further, the hospitals provided doctors with tip sheets and diagnosis clarification sheets that encouraged the doctors to diagnose in ways that could permit coding for CCs and MCCs.

CMS Permits Improving Hospital Revenue

The court concluded that data supported the relator’s allegations. However, the court continued:

such a scheme is not in and of itself one to submit false claims and is equally consistent with a scheme to improve hospital revenue through accurate coding of patient diagnoses in a way that will be appropriately recognized and reimbursed by CMS commensurate with the type and amount of services rendered.

The court supported its conclusion by relying upon CMS’s comment in the Federal Register in 2007 that

we believe it is important to address the notion in some of the public comments that CMS believes changes in how services are documented or coded that is consistent with the medical record is inappropriate or otherwise unethical. We do not believe there is anything inappropriate, unethical or otherwise wrong with hospitals taking full advantage of coding opportunities to maximize Medicare payment that is supported by documentation in the medical record


The court recognized that changed codes could support a qui tam action if the relator specified how the coding changes were fraudulent or unnecessary. Mere increases in reimbursement, however, has an “obvious alternative explanation that is legal.”