Medical billing is the procedure of submitting and following up on claims to insurance companies in order to receive payment for services supplied by a health care provider. A similar procedure is used for most insurance companies, whether they are private companies or government-owned.

The billing procedure is an interaction between a healthcare provider and the insurance organization (dissemburser). The interaction begins with the office visit: a doctor or their staff will typically create or update the patient's medical record. This record contains a summary of treatment and demographic information related to the patient. Upon the first visit, the provider will usually give the patient one or more diagnoses, in order to better coordinate and streamline his/her care. In the absence of a definitive diagnosis, the reason for the visit will be noted for the purpose of claims filing. The patient record contains highly personal information, the nature of illness, examination details, medication lists, diagnoses and suggested treatment.

The extent of the physical examination, the complexity of the medical decision making, and amount of background information (medical history) obtained from the patient are evaluated to determine the correct level of service that will be used to bill the insurance. The level of service, once determined by qualified staff, is translated into a five digit procedure code from the Current Procedural Terminology. The verbal diagnosis is translated into a numerical code as well, drawn from the ICD-9-CM. These two codes, a CPT and an ICD-9-CM, are equally important for claims processing.

Once the procedure and diagnosis codes are determined the biller will transmit the claim to the insurance organization (dissemburser). This is usually done electronically by formatting the claim as an ANSI 837 file and using Electronic Data Interchange to submit the claim file to the payer directly or via a clearinghouse. Historically claims were submitted using a paper form — in the case of professional (non-hospital) services, and for most payers, the CMS-1500 form was used. The CMS-1500 form is so named for its originator, the Centers for Medicare and Medicaid Services. To this day about 30% of medical claims get sent to payers using paper forms which are either manually entered or entered using automated recognition or OCR software such as by ComCom Systems.

The insurance organization (dissemburser) processes the claim. The insurance organization has medical directors to review claims and evaluate their validity for payment, using rubrics for patient eligibility, provider credentials, and medical necessity. Approved claims are reimbursed for a certain percentage of the billed services. Failed claims are rejected and notice is sent to provider.

Upon receiving the rejection message, the provider must decipher the message, reconcile it with the original claim, make required corrections, and resubmit the claim. This exchange of claims and rejections may be repeated multiple times until a claim is paid in full or the provider relents and accepts an incomplete reimbursement.

The frequency of rejections, denials, and overpayments is high (often reaching 50%)(HBMA 7/07 [1]), mainly because of high complexity of claims and data entry errors.