Direct Answer
Hospital billing — also called institutional or facility billing — uses the UB-04 claim form (transmitted electronically as an 837I) rather than the CMS-1500 used for professional claims. Inpatient facility billing is reimbursed by Medicare on a DRG (Diagnosis Related Group) basis, where a single payment covers all facility services for the admission. Outpatient facility services (hospital outpatient, ED, ambulatory surgery center) are paid under the Outpatient Prospective Payment System (OPPS) using Ambulatory Payment Classifications (APCs). Revenue codes — three- or four-digit codes that identify the department and type of service — are the key coding element unique to facility billing that has no equivalent in professional billing.
Table of Contents
The UB-04 Claim Form
The UB-04 (Uniform Billing 2004) is the standard paper claim form for institutional providers. It is the facility billing equivalent of the CMS-1500, and its electronic counterpart is the HIPAA X12 837I (Institutional) transaction. Institutional providers that use the UB-04: hospitals (inpatient and outpatient); critical access hospitals; skilled nursing facilities (SNFs); home health agencies; hospice providers; inpatient psychiatric facilities; ambulatory surgery centers (though ASCs may also use CMS-1500 in some contexts). Key data elements unique to the UB-04: Type of Bill (TOB) code: a three-digit code that identifies the type of facility, bill classification, and claim frequency; the first digit is the facility type (1 = hospital, 2 = SNF, 3 = home health, 8 = hospice); the second digit is the bill classification (1 = inpatient Part A, 3 = outpatient, 4 = other outpatient, 5 = intermediate care); the third digit is the claim frequency (1 = admit through discharge, 7 = replacement of prior claim, 8 = void/cancel); Revenue codes: four-digit codes (often presented as three digits with a leading zero) that appear on each service line to identify the department or type of service; Condition codes: two-character alphanumeric codes that describe the circumstances of the claim (e.g., condition code 04 = information only claim, condition code 07 = treatment of non-terminal condition, condition code 41 = partial hospitalization); Occurrence codes and dates: codes identifying significant events during the billing period (admission date, accident date, last menstrual period); Value codes and amounts: codes paired with dollar amounts representing specific values (deductible amounts, covered days, coinsurance amounts); Prior authorization number: the authorization number issued by the payer for the admission or service.
Revenue Codes
Revenue codes are three- or four-digit codes that appear on each service line of a UB-04 claim to identify the type of service or department. Revenue codes are maintained by the National Uniform Billing Committee (NUBC) and are required on all UB-04 claims. Major revenue code categories: 010x — Room and Board (inpatient): 0110 = medical/surgical room; 0120 = ICU; 0140 = coronary care unit; 020x — ICU and specialty care rooms; 030x — Ancillary services — nursery; 040x — Other ancillary (lab, radiology); 0250 — Pharmacy; 0260 — IV solutions; 0270 — Medical/surgical supplies; 0300 — Laboratory (general); 0301 — Chemistry; 0302 — Immunology; 0303 — Renal patient services; 0320 — Radiology (diagnostic); 0330 — Radiology (therapeutic); 0341 — Nuclear medicine; 0350 — CT scan; 0360 — OR services; 0370 — Anesthesia; 0380 — Blood; 0390 — Blood storage and processing; 0410 — Respiratory services; 0420 — Physical therapy; 0430 — Occupational therapy; 0440 — Speech-language pathology; 0450 — Emergency room; 0510 — Clinic (general); 0512 — Urgent care; 0550 — SNF services; 0636 — Drugs requiring detailed coding; 0710 — Recovery room; 0762 — Observation room; Revenue code + HCPCS pairing: for outpatient claims, revenue codes are paired with HCPCS/CPT codes on each service line to specify both the department and the specific service; inpatient claims typically do not include CPT codes — the revenue codes and ICD-10-PCS procedure codes describe services; chargemaster relationship: the hospital's chargemaster (CDM — Charge Description Master) maps every service/item to a revenue code, a charge amount, and (for outpatient services) an associated HCPCS code.
Inpatient DRG Reimbursement
Medicare inpatient facility claims are paid under the Inpatient Prospective Payment System (IPPS) using DRGs: DRG payment calculation: the Medicare DRG payment = the DRG weight × the hospital's wage-adjusted base rate; the base rate is adjusted for local labor costs (the wage index), teaching hospital status (IME — indirect medical education adjustment), and Disproportionate Share Hospital (DSH) payments for hospitals serving high proportions of low-income patients; DRG assignment is determined by: the principal diagnosis (the condition primarily responsible for the admission after study); significant comorbidities and complications (CCs and MCCs) that are present on admission (POA indicator "Y"); procedures performed (ICD-10-PCS codes); patient age and discharge disposition (discharged to home vs. discharged to SNF affects some DRGs); ICD-10-PCS procedure codes: inpatient facility billing uses ICD-10-PCS (Procedure Coding System) codes rather than CPT codes; ICD-10-PCS is a 7-character alphanumeric code that describes the root operation (excision, fusion, bypass, etc.), the body system, the body part, the approach (open, endoscopic, percutaneous), the device used, and the qualifier; only hospital-based coders use ICD-10-PCS — professional billing uses CPT; Inpatient cost outliers: for cases with extremely high costs relative to the DRG payment, CMS makes additional outlier payments to protect hospitals from financial losses on unusually complex cases; the outlier threshold is updated annually; Length of stay and geometric mean LOS: each DRG has a geometric mean and arithmetic mean LOS — cases significantly shorter than the geometric mean LOS may receive a reduced payment (short-stay outlier); cases with LOS exceeding the arithmetic mean LOS by more than a defined threshold may trigger an outlier payment; transfers: when a patient is transferred to another acute care hospital, the discharging hospital receives a per-diem payment for each day, not the full DRG payment.
Outpatient OPPS and APCs
Medicare outpatient hospital services (including hospital-based clinics, ED visits, ambulatory surgeries, and observation) are paid under the Outpatient Prospective Payment System (OPPS) using Ambulatory Payment Classifications (APCs): APC basics: each separately payable outpatient service is assigned to an APC based on the CPT/HCPCS code; the APC payment rate is the relative weight × the conversion factor; multiple services in the same visit may each generate separate APC payments (unlike inpatient DRGs, which bundle all facility costs into one payment); Packaging: OPPS "packages" payment for many ancillary items into the APC payment for the primary service — items like routine supplies, most drugs and biologicals below a packaging threshold, and certain diagnostic services are packaged and not separately payable; Status indicators: every CPT/HCPCS code has an OPPS status indicator that determines how it is paid: SI = S: paid separately under OPPS APC; SI = N: packaged, not separately paid; SI = Q1/Q2: conditionally packaged (packaged if performed with a significant procedure); SI = T: significant procedure where only the highest-weighted APC pays; Outpatient E&M billing (Clinic Level assignments): hospital outpatient departments (HOPDs) and emergency departments bill E&M visits using HCPCS Level II G-codes (G0380–G0384 for ED visits), not CPT E&M codes; HOPD clinic visits use CPT E&M codes 99201–99215; APC 5011 (Level 1 outpatient hospital clinic visits) through APC 5015 (Level 5) are assigned based on the E&M code; Observation services: observation is billed using revenue code 0762 and CPT 99218–99220 for initial observation care, or HCPCS G0378 (per hour); the 2-midnight rule determines when a patient in observation should be admitted as inpatient (and switched to an inpatient IPPS claim) vs. remaining in outpatient observation status.
Facility vs. Professional Billing
When a physician sees patients in a hospital-owned clinic, hospital outpatient department, or hospital ED, two separate claims are generated for the same encounter: the facility claim (from the hospital for the room, equipment, nursing staff, and ancillary services) and the professional claim (from the physician for their cognitive and procedural work): Facility claim: submitted by the hospital on a UB-04/837I; paid under OPPS (outpatient) or IPPS (inpatient); revenue codes and HCPCS codes describe the services; typically includes charges for nursing care, supplies, equipment, and ancillary services; Professional claim: submitted by the physician (or physician group) on a CMS-1500/837P; paid under the Medicare Physician Fee Schedule; CPT codes describe the physician's work; the physician is separate from the hospital billing entity — the hospital does not capture the physician's professional fee; Place of service and non-facility rates: professional fee schedule rates are higher when the service is delivered in a non-facility setting (POS 11 — office) because the physician is absorbing the overhead; when the service is delivered in a hospital outpatient setting (POS 22) or inpatient (POS 21), the professional rate is lower (the facility rate) because the hospital absorbs the overhead; Hospital-employed physicians: even when the physician is employed by the hospital, the professional claim is billed separately under the physician's NPI with POS 22 for HOPD services; the physician's professional fee flows to the physician group or hospital physician enterprise, not to the hospital facility; Provider-based billing status: for a hospital-owned clinic to bill as an HOPD (and receive the higher facility payment), it must be registered as a provider-based department with CMS; provider-based status requires the clinic to meet specific integration, supervision, and geographic criteria.
FAQ
What is the difference between the hospital chargemaster and the actual reimbursement a hospital receives?
The hospital chargemaster (Charge Description Master or CDM) is the hospital's internal price list — a database of every service, supply, drug, and item the hospital bills, along with the charge amount for each item. The chargemaster charge is the billed amount — what the hospital submits on the claim. The actual reimbursement the hospital receives is almost always significantly lower than the chargemaster charge. The gap is explained by: Contractual adjustments: Medicare pays based on the IPPS DRG rate or OPPS APC rate, not the chargemaster charge; commercial payers pay based on their negotiated contract rate (which may be a percentage of Medicare, a percentage of charges, or a per-diem or case rate); the difference between the chargemaster charge and the contracted payment rate is written off as a contractual adjustment and does not appear in the hospital's net revenue; Uncompensated care: patients without insurance or with Medicaid may pay less than the chargemaster charge or nothing at all — the difference is uncompensated care (charity care and bad debt); Why chargemaster rates are set high: historically, some commercial payer contracts were based on a percentage of charges (e.g., 45% of charges) — in this model, higher charges produce higher reimbursement; most large payer contracts have moved away from percentage-of-charges models, but the historical practice of setting chargemaster rates high persists; Price transparency regulations: CMS's Hospital Price Transparency rule requires hospitals to publish their chargemaster rates and negotiated rates for 300+ common shoppable services; while chargemaster charges rarely represent what any payer actually pays, they are now publicly visible; the Gross Collection Rate (net revenue ÷ gross charges) at most hospitals is 20–40% — meaning hospitals collect 20–40 cents of every dollar they charge; the Net Collection Rate (net revenue ÷ net allowable revenue) is the more meaningful measure of collection efficiency, typically 95–98% for well-managed hospitals.
When should a patient be admitted as inpatient vs. placed in observation status?
The inpatient vs. observation admission decision is one of the most complex and financially significant decisions in hospital billing. It determines whether the hospital bills an IPPS DRG claim or an OPPS outpatient claim — and it determines whether the patient's Medicare cost-sharing is under Part A (inpatient) or Part B (outpatient). The 2-midnight rule: CMS's primary criteria for inpatient admission: a physician may appropriately admit a patient as inpatient when the physician expects the patient to require medically necessary hospital care spanning at least two midnights (an inpatient stay); if the expected length of stay is less than two midnights, observation (outpatient) status is generally appropriate unless the patient has a condition on the "inpatient-only" list (procedures that CMS requires to be performed inpatient); if the patient is admitted as inpatient but does not meet the 2-midnight expectation, the claim is at risk for RAC denial and rebilling as outpatient; Financial implications for the patient: under Medicare Part A (inpatient): the patient pays the Part A deductible ($1,676 in 2025) for the first 60 days with no per-diem; no Part B cost-sharing applies to facility services; under Medicare Part B (observation): the patient pays 20% of the Medicare-allowed amount for each individual service under observation; observation stays do not count toward the 3-day inpatient stay requirement for SNF benefit eligibility — this is the most significant financial disadvantage of observation status for patients; NOTICE act requirement: hospitals must provide the Medicare Outpatient Observation Notice (MOON) to patients who are in observation status for more than 24 hours; the MOON informs the patient that they are outpatient (not inpatient) and explains the SNF eligibility implications; physician order requirement: a physician order for inpatient admission must be present in the medical record for a claim to be billed as inpatient; the admission order is a billing compliance requirement, not just a clinical one.
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