by Dr. Bart Caponi MD, FHM
“Inpatient” and “Observation” are terms familiar to every hospitalist, and to increasing numbers of patients and lawmakers. The difference can be significant–while “inpatients” are covered by Medicare Part A, people in “observation” are not; nor do they gain access to other benefits, like nursing home rehabilitation. Until recently, no one paid any attention to status, but now patients and doctors are oppressed by it. Why? Recovery Audit Contractors (RACs).
A limited pilot by the CMS revealed substantial overpayments to hospitals—mostly patients who should have been “observation” but were “inpatient.” As a result, RACs were established nationally in 2006. They can pull a number of closed patient charts from hospitals, review them for “medical necessity” of services provided or for coding issues. They focus on extremes of length-of-stay and certain diagnoses. In FY2012, 64% of short-stay denials for “medical necessity” were for “inpatient versus observation” issues rather than “medically unnecessary” care.
The auditor can deny the claim, in which case the hospital has to return money paid by Medicare and choose whether or not to appeal. The contest is heavily weighted in favor of the RAC, which can audit services that are up to three years old. However, hospitals can only rebill RAC denials for services from the prior 12 months. Hospitals must fund appeals, and RACs pay no penalty if a denial is overturned. Importantly, RACs are paid entirely on contingency, earning ~10% of what they deny. The more they deny, the more they profit.
Are patients impacted? Between 2006 and 2011, the percentage of “observation” stays rose from 3% to 8% of all Medicare encounters. Medicare blames this on RAC denials, which have prompted close attention to status determination; hospitals apply RAC standards, which means patients shoulder more of the cost burden. However, in one large Midwestern medical center, a stay under observation was associated with a $331-per-encounter loss, belying the profit motive. More importantly, patients and lawmakers are beginning to ask questions about observation.
As a response to concerns with observation status, CMS dramatically revised status determination on October 1, 2013–the “Two-Midnight Rule”. Because of confusion regarding implementation of the new law, CMS delayed RAC audits of the new rule through October 1, 2014. On April 1, 2014, The Protecting Access to Medicare Act of 2014 was signed into law. This 17th SGR patch also extended the RAC hiatus by another six months. Organizations including the AMA, the AAMC, and the AHA have all supported modifications of the new law. One group, the American Coalition for Healthcare Claims Integrity (ACHCI) issued a letter to Congress, claiming that the RAC audit hiatus weakens Medicare.
ACHCI is made up of Medicare auditors, particularly RACs. This lobbying group profits if aggressive audits are continued. When they say that RACs have recovered more than $8 billion in misused taxpayers funds since 2009, the truth is that RACs have pocketed about $800 million of that sum. The more they deny, the more they make, regardless of the validity of the denial. These purported savings don’t include the enormous costs to hospitals or the hidden costs to Medicare beneficiaries, like increased observation rates. ACHCI uses CMS data to show RAC accuracy, claiming that only 7% of all Recovery Auditor determinations have been challenged and overturned on appeal, but the same CMS report immediately follows that statement with “Medicare providers appealed…26.3% of all claims with overpayment determinations…99,476 claims were overturned with decisions in the provider’s favor (26.7%).” When CMS reports an average 95.6% RAC accuracy score; how that reflects a 26.7% overturn rate is unclear.
Finally, the appeals process is broken; Congress mandates that third-level appeals should be decided within 90 days of receipt, but it routinely takes over 200 days to decide an appeal. Why is CMS tolerating such a dysfunctional system, even though it pays lip service to fairness and transparency? Simply put, Medicare has already paid out the claim. Anything a RAC auditor takes back and can keep is free money for CMS. Care was provided to a beneficiary who needed it, and the hospital that provided it can’t even rebill if the care was provided more than a year prior. Any risk in the audit is borne by the RAC, and the cost is borne by hospitals. Of course, that cost trickles down to patients in many ways. While CMS has made some concessions, the system is still broken.
Medicare fraud is a crime and should not be tolerated. Other arms of CMS are actively auditing for systematic fraud. Healthcare providers are not resisting audits or looking for elimination of oversight; we are requesting a fair, transparent, logical process that reflects the rule of law, rather than the current approach used by private RAC bounty hunters.
Dr. Bart Caponi MD, FHM graduated from the University of Illinois at Rockford College of Medicine in 2005 and completed his internal medicine residency at the University of Wisconsin in 2008. He has been practicing hospital medicine at the University of Wisconsin since then. In 2012, Bart became a utilization review advisor, and is primarily responsible for provider education and policy interpretation.