How does medical billing work? The revenue cycle step by step

Medical billing works as a chain of steps that starts before the patient arrives and ends when the last dollar of a visit is collected or adjusted. The practice confirms the patient's insurance, the provider documents the visit, a coder assigns CPT or HCPCS procedure codes and ICD-10 diagnosis codes, and the billing team sends a claim to the insurance company, usually electronically through a clearinghouse. The payer reviews the claim and sends back a remittance showing what it paid, what it adjusted and what the patient owes. The practice posts that remittance, bills the patient for their share, and follows up on anything denied or unpaid. The full chain is called the revenue cycle.

Below is each step in order, with the transactions and documents involved and the problems that tend to show up at each one.

The revenue cycle at a glance

Before the visit

1. Provider credentialing and enrollment

Before a provider can be paid by an insurance plan, the provider has to be enrolled with that plan. For Medicare that happens through PECOS. Most commercial plans use the CAQH profile plus their own application and contract. If a provider sees patients before their effective date, those claims typically deny. Our article on how long credentialing takes covers the timelines.

2. Scheduling and registration

When the appointment is booked, the front desk captures the patient's name, date of birth, address and insurance details, including the member ID and the subscriber if the patient is a dependent. Small errors here, such as a misspelled name or wrong member ID, are one of the most common reasons claims get rejected later.

3. Eligibility and benefits verification

Before the visit, the practice checks that coverage is active and what the patient will owe. Electronically, this is an X12 270 eligibility inquiry and a 271 response from the payer. The response shows whether the plan is active and often the copay, coinsurance and remaining deductible. This is also when a practice learns that a patient changed plans or that another payer is primary. Our eligibility verification page explains this step in more detail.

4. Prior authorization

Some services need payer approval in advance, such as advanced imaging, certain procedures, some medications and many behavioral health or therapy services. Requirements vary by payer and plan. Without the authorization, the claim is likely to deny with CARC 197 (precertification, notification or authorization absent).

During and after the visit

5. Documentation

The provider documents the history, exam, medical decision making or time, and any procedures performed. Everything billed later has to be supported by this note. Charges usually wait until the note is signed, so slow note completion delays the whole cycle.

6. Coding

A coder or the provider assigns codes from the note. CPT codes describe services and procedures, for example 99213 for an established patient office visit with low medical decision making. HCPCS Level II codes cover supplies, drugs and some services, for example J-codes for injectable drugs. ICD-10-CM codes describe the diagnoses that explain why the service was needed. Modifiers add information, such as modifier 25 for a separate E/M on the same day as a procedure. Our medical coding services page covers this step.

7. Charge entry

The codes, units, charges, place of service, rendering and billing provider NPIs and patient details come together as a claim. Professional claims use the data set from the CMS-1500 form and are sent electronically as an 837P. Hospitals and other facilities use the UB-04 data set, sent as an 837I.

8. Claim scrubbing and submission

Before sending, claims are checked for errors: missing data, invalid codes, code pairs that NCCI edits do not allow together, units above medically unlikely edit limits, and payer-specific rules. The claim then goes to a clearinghouse, which runs its own checks and forwards it to the payer. The clearinghouse returns a 999 acknowledgment that the file was accepted, and a 277CA tells you whether each claim was accepted or rejected at the front end. A rejected claim never reached adjudication and needs to be fixed and resent.

After the claim is sent

9. Payer adjudication

The payer checks the claim against the member's coverage, the provider's contract, its medical policies and its coding edits. It then decides to pay all, part or none of each line. Many states have prompt pay laws that set deadlines for commercial plans to pay clean claims, and those deadlines vary by state.

10. Payment posting

The payer sends an electronic remittance advice (ERA, the X12 835 file) or a paper EOB, and usually deposits the money by EFT. The billing team posts each line: the payment, the contractual adjustment and the patient's share. A simple, illustrative example for an office visit:

• Billed charge: $150
• Allowed amount under the contract: $95
• Contractual adjustment (group code CO, CARC 45): $55 written off
• Patient copay (group code PR, CARC 3): $25 owed by the patient
• Insurance payment: $70

Posting is also where underpayments show up, when the allowed amount is lower than the contracted rate.

11. Denial management and appeals

Denied lines come back with a Claim Adjustment Reason Code (CARC) and often a Remittance Advice Remark Code (RARC). The billing team reads both, corrects and resubmits the claim when the issue was an error, or appeals with records when the payer's decision looks wrong. Our guide to why medical claims are denied walks through the most common codes.

12. Patient billing

Once insurance has paid, any copay, coinsurance or deductible amount not collected at the visit is billed to the patient on a statement. Clear statements and a way to pay online tend to shorten the time to collect.

13. A/R follow-up and reporting

Claims with no response are followed up, electronically with an X12 276 claim status inquiry and 277 response, through payer portals or by phone. Every payer has a timely filing limit (for Medicare, generally 12 months from the date of service), so unresolved claims have to be worked before those deadlines. Practices track the results with a few key numbers: days in A/R, percentage of A/R over 90 days, clean claim rate, denial rate and net collection rate.

Where the cycle usually breaks

• Registration errors that cause front-end rejections
• Eligibility not rechecked, leading to terminated coverage denials
• Missing authorizations
• Late note signing that delays charges
• Coding that does not match documentation
• Denials that are never worked and pass the filing limit

How SFA can help

SFA handles the revenue cycle from eligibility through A/R follow-up inside your existing EHR, with experienced billers supported by AI-assisted tools for eligibility, claim scrubbing and payment posting. You can see the full scope on our revenue cycle management page, or start with a free practice audit to see where your cycle may be losing revenue.

Frequently asked questions

What is the difference between a claim rejection and a denial?

A rejection happens before the payer processes the claim, usually at the clearinghouse or payer front end, because of missing or invalid data. The claim can be fixed and resent. A denial happens after adjudication, when the payer has processed the claim and decided not to pay all or part of it.

How long does it take to get paid for a medical claim?

It varies by payer, claim type and whether the claim was clean. Electronic claims to many payers are processed within a few weeks, and many states set prompt pay deadlines for commercial plans. Claims that need records, authorizations or corrections take longer.

What is an ERA in medical billing?

An ERA is an electronic remittance advice, sent as an X12 835 file. It lists what the payer paid, what it adjusted and why, and what the patient owes for each claim line, and it is used to post payments in the practice management system.