Hospital industry pushes back against the RACs

Scrutiny coming from all directions

After years of being frustrated by the Centers for Medicare & Medicaid Services Recovery Audit Contractor (RAC) program and other audit programs, the hospital industry is taking action. Here’s the latest:

• The American Hospital Association (AHA) and four hospital systems have filed a lawsuit against the U.S. Department of Health and Human Services, asking the U.S. District Court for the District of Columbia to “set aside CMS’s Payment Denial Policy on the grounds that it is contrary to federal law, arbirtrary and capricious, and invalid for failure to undergo notice and comment. Plaintiffs also seek an order that CMS must repay hospitals for the reasonable and medically necessary services they provide to patients,” according to the complaint. (To read the entire complaint, go to

• The U.S. Department of Health and Human Services’ Office of the Inspector General (OIG) has included a review of the various Medicare contractors in its Work Plan for Fiscal Year 2013. The AHA wrote a letter to Inspector General Daniel R. Levinson supporting the review and asking the OIG to pay particular attention to “the extent to which RAC determinations result in inappropriate denials of payment for services that are medically necessary and reasonable for the care of patients.” The AHA also recommended that the auditors be required to improve their accuracy or face financial penalties.

Coping With CMS Auditors

The alphabet soup of auditors from the Centers for Medicare & Medicaid Services (CMS) has frustrated hospitals for years, but there may be some relief on the way. In the final months of 2012, CMS’ audit programs have come under fire from several fronts. In the first of a two-part series, we’ll tell you about how the American Hospital Association, the Office of the Inspector General, and a Congressional resolution are tackling the issue. We’ll look at other CMS audit initiatives and how you can help your hospital be prepared when it’s targeted. Next month, we’ll tell you about the current focus of the RACs, what you can do to minimize the financial impact on your hospital, and why it’s important to appeal your RAC denials.

• In October, Rep. Sam Graves (R-MO) and Rep. Adam Schiff (D-CA) introduced the Medicare Audit Improvement Act of 2012 in the U.S. House of Representatives. The AHA supports the bill, which it says would limit the number of medical records the RACs can request, implement financial penalties, require medical necessity audits to focus on widespread payment errors, require physician review for Medicare denials and allow denied inpatient claims to be billed as outpatient claims when appropriate.

“The American Hospital Association is concerned that auditors are overly aggressive, are not following CMS rules in regard to the audits, and that the audit process is subject to persistent operational problems,” says Rochelle Archuleta, senior associate director of policy for the AHA.

“We believe that there needs to be oversight of the RAC activities. Having checks and balances is very important. We want to see a fair and transparent audit process, and we don’t think the agency is there,” she says.

It’s clear that the audit crisis faced by hospitals and other healthcare providers has caught the attention of the American Hospital Association, the Department of Health and Human Services, and the public in general, says Deborah Hale, CCS, CCDS, president and chief executive officer of Administrative Consultant Service, a healthcare consulting firm based in Shawnee, OK. “Hopefully, we will see some meaningful improvement in the level-of-care determination audit process, but it may be a while in coming. Hospitals that have carefully researched the regulations and have taken time to build a strong infrastructure to support accurate level-of-care determinations at the point of entry into the hospital should ‘stay the course,’” she says.

Hospitals of all sizes are burdened by requests from RACs and other auditors, Archuleta says. However, smaller hospitals have greater difficulty because they don’t have an in-house counsel or the personnel needed to pull the medical records and prepare for the audit.

For instance, according to the lawsuit filed by the American Hospital Association, Missouri Baptist Sullivan Hospital in Sullivan, a hospital with fewer than 26 beds, has received 418 requests for medical records since Jan. 30, 2010, and the hospital has had to repay Medicare $226,501.

Requests from the various Medicare contractors place real burdens on the healthcare industry, which already operates on narrow margins, adds Brian Flood, CHC, CIG, AHFI, CFS, an attorney specializing in healthcare issues and partner with Brown McCarroll, LLP, in Austin, TX. The increased burdens to prepare for and respond to the RACs and other auditors, lower reimbursement amounts, and inefficiencies caused by cumbersome healthcare regulations are a recipe for system failure, he says.

“There comes a point in every industry in history when they say ‘enough’ and take a stand for reasonable markets to operate in or they go out of business or abandon their mission to serve in the market. That moment has come for health care and every person who relies on it,” Flood says.

The fact that 75% of cases that are appealed are overturned in favor of the hospital is an indication that the RACs are off the mark, Archuleta says. RACs receive as much as 12.5% of the denied claims, which they have to return after a successful appeal, but they get to keep the money in the meantime.

Appeals are costly and time-consuming and take resources away from providing care for patients, she says. Not all hospitals have the wherewithal to develop an efficient process for appealing and don’t have the extra resources to fund the appeal, she says. If the appeal goes in the hospital’s favor, it will be 18 months or longer before the money taken away by the RACs is refunded, Archuleta adds.

Hospitals have the expense of answering RAC requests, providing documents, then hiring experts to help them argue through three levels of appeals. They pay the costs of going to court, and 75% of the time they win back what they have argued from the beginning was a valid claim, Flood says.

“So far, the RACs are wrong 75% of the time. In what industry would we ever say that it was a success to accomplish your mission one out of four times?” Flood says.

According to data collected by the AHA, in the second quarter of 2012, 55% of the hospitals that participated in the organization’s RACTrac Web-based survey “reported spending more than $10,000 managing the RAC process.” It adds, “33% spent more than $25,000 and 9% spent over $100,000.”

“The hospitals and providers have to create real systems, with real costs, and pull in other resources that could be used elsewhere to respond to RAC requests, litigation, and recovery of funds. It would be interesting if those real costs were allowed to be passed onto the Medicare program and what Congress and the General Accounting Office would think if they had to pay the full bill,” Flood says.

The RACs are clearly violating Medicare rules when they use nurses to audit claims retrospectively to determine if they meet medical necessity criteria, Hale says. CMS has emphasized time and again that nurses are not allowed to make the final decision of medical necessity and patient status, she adds.

“This is a fundamental unbalance in the audit process. We recommend that whenever an auditor determines a potential denial that the denial should be determined by physician review. Decisions are being made by second-guessing the physician. CMS should make sure a qualified person conducts the review,” Archuleta says.

In theory a claim should not be audited twice, but in some cases, the same claim is being audited twice for very similar purposes, Archuleta says. There are three types of complex audits: DRG validation, coding validation, and medical necessity. Medical necessity audits make up 80% to 90% of all complex audits.

For instance, a RAC could request records for a claim and review it to make sure the hospital assigned the right DRG. If the RAC denies the claim and the hospital appeals and has the denial overturned, then the RAC may pull the claim again and review it for medical necessity.

This means that two years or more after the hospital supplied medical records for the first audit, it receives a second denial on the same claim, she says.

America’s hospitals have a long-standing commitment to establishing programs and committing resources to ensure that they receive only the payment to which they are entitled, AHA executive vice president Richard J. Pollack wrote in letters to Rep. Sam Graves and Rep. Adam Schiff supporting congressional action to rein in the RACs.

The letters state that “[n]o one questions the need for auditors to identify billing errors” but later adds that “[r]edundant government auditors are wasting hospital resources and contributing to growing healthcare costs.

“While the AHA has zero tolerance for real fraud and abuse, these recovery auditors are paid contingency fee payments, a potential conflict of interest, leading to concerns that they focus on claims and services that have the highest likelihood of error, in order to increase their fees. Hospitals are experiencing a significant number of inappropriate denials amounting to hundreds of thousands of dollars in unjust recoupment payments for medically necessary care,” the letters state.

The AHA believes that CMS should do a better job of overseeing contracts, addressing operational problems with audits, keeping the level of records requests reasonable, and mitigating confusion caused by multiple auditors, Archuleta says.

“If the RACs continue to cast their nets too widely, they will dilute the effort to ensure accurate payments. The hospital ends up with a tremendous burden, but the end result is the effectiveness of the audits is diluted. If CMS really wants to improve Medicare accuracy, the agency should make sure the RACs are more targeted,” she says.