# Estimated RAC Risk: Doing the Math

Instead of waiting for a denial letter to come their way without becoming aware of their risk exposure to RAC recoupments, facilities should paint a picture of that exposure by using internal data and knowledge of the RAC program.

Many of our recent articles have focused on the team structure and the processes necessary to operate a working audit response program, but in this article, we focus on the analytics – the math, if you will. One caveat, though: while it’s important to determine your risk, don’t stop there. Continue to work on your RAC assessment, readiness, response and appeals activities, as they are critically important in reducing overall risk and improving financial standing.[1]

Throughout the article, I will source the 2012 first quarter’s American Hospital Association (AHA) RACTrac report, which aggregates RAC-related data from more than 2,000 facilities across the U.S. To learn more about the program and how you can participate, go online to http://www.aha.org/advocacy-issues/rac/ractrac.shtml. First-quarter results can be found at http://www.aha.org/content/12/12Q1ractracresults.pdf[2] and are referenced here by report page number.

Calculate How Much is Being Reviewed

When evaluating risk, consider that for complex reviews,  every 45 days a RAC can request the equivalent of up to 2 percent of your prior year’s Medicare claims, divided by eight per campus (in order to equate to a 45-day period). The limit is capped at 400 records for facilities billing less than \$100 million to Medicare in the prior year, and 600 records for facilities billing more than \$100 million.[3] If your limit falls below 35, RACs can request 35. Review your total number of 2011 Medicare claims to determine your limit. Staff at many facilities already may know that limit because the RACs may be requesting that number of records every 45 days. If the medical requests are not hitting the maximum for your facility, do not assume it will stay that way.

Calculate Risk of Denied Claims

Now attempt to calculate risk of denial for the medical records being reviewed under a complex audit. There are more ways than one to do this:

• Consider your experience to date with denials issued after RAC complex audits of medical records – how many records were denied?
• Consider your internal error rates on retrospective, internal chart reviews or other assessments on your last three years of claims.
• Consider the national AHA RACTrac figure of 33 percent of complex reviews resulting in denials during the first quarter of the current year, or consider the following AHA RACTrac regional numbers:
• Region A: 29 percent
• Region B: 27 percent
• Region C: 38 percent
• Region D: 42 percent

Now you have an estimate for how many records may be reviewed under a complex audit, and how many that might be denied, but what about automated reviews? It is impossible to tell how many claims are being reviewed under automated review. However, you can consider either your own experience of automated denials (how many, how often, etc.) or consider that AHA RACTrac reporting facilities received two automated denials for every five complex review denials (p. 25 and 35). This varied greatly by region, as the table below illustrates.

 Region Q1 Automated Denials Q1 Complex Audit Denials Ratio of Complex to Automated Denials Region A 1,979 30,105 15.2 Region B 8,950 28,903 3.2 Region C 32,417 31,382 1.0 Region D 7,049 33,665 4.8 Nationwide 50,395 124,055 2.5

Calculate Estimated Denied Amount

For complex and automated reviews, attempt to determine a reasonable average recoupment per denial in order to calculate your totals for the 45-day periods. Remember, claims may be denied in total or in part, and consider the following in estimating an appropriate amount:

• Look at the total average revenue per claim across all Medicare patients.
• Focus on high-risk claims by reviewing RAC vulnerability issues lists, Centers for Medicare & Medicaid (CMS) notices and AHA RACTrac reports (more on this is below).
• Focus on claims for your organization’s highest-volume and/or highest-revenue DRGs.
• Consider claims denied to date as a result of activities of RACs or other audit programs.
• Consider the AHA RACTrac data regarding average reviewed medical record value and the average denied amount for automated and complex denials.

 RAC Average Automated Denial (p. 22) Value of Medical Records Reviewed for Complex Audit (p. 16) Average Complex Denial (p. 22) Region A \$435 \$9,754 \$5,815 Region B \$454 \$10,136 \$5,515 Region C \$515 \$9,461 \$5,426 Region D \$654 \$9,078 \$6,522 Nationwide \$521 Not given \$5,839

When determining what areas at your facility are subject to high risk of audit, review the vulnerability issues list for your region by regularly visiting your RAC’s website. The lists are long and getting longer, but they should provide valuable information about what can and will be reviewed. Another good source is the quarterly AHA RACTrac; for information on high-risk areas go online to http://www.aha.org/advocacy-issues/rac/ractrac.shtml.

In the report from the first quarter of the current year, AHA indicated that three-quarters of automated denials are for outpatient claims and that 97 percent of complex denials are for inpatient claims (p. 23). AHA also reports that outpatient billing and coding errors make up more than half of automated denials overall (p. 26). For complex audit denials, medical necessity for short stays is cited for almost two-thirds of the total, and other (non-short stay) medically unnecessary claims made up an additional 16 percent. CMS also publishes tracked program data that sheds light on risk areas.[4] In the August 2012 update, CMS indicated that the top denial for regions A, B, and C was medical necessity for cardiovascular procedures. For region D, it was medical necessity for minor surgery and other treatment billed as an IP stay (short-stay denial).[5]

At this point you should have an estimate (or range) of your RAC audit exposure and risk based on reviews occurring every 45 days. Unfortunately, it’s not as simple as multiplying by eight to arrive at an annual risk figure. You may or may not be receiving requests for records every 45 days, and your requests may be increasing or decreasing in frequency. You also need to understand and consider extrapolation – that denied amounts can be extrapolated across all similar claims in a three-year time period based on a statistically calculated error rate and certainty.

There are also other costs to consider, such as overhead in your organization to manage a risk mitigation and response program – which for more than half of reporting AHA RACTrac facilities was more than \$10,000 in just the first quarter of this year.

Even with all of this uncertainty built in, however, it is still important to calculate risk. That’s because doing so launches the conversation about potential losses you may face and whether it makes sense to set up a reserve to prepare for those losses. It also may help you evaluate and determine what tools and resources you need to put in place to mitigate risk, such as AHA RACTrac compliance tracking tools, data mining tools to identify your high-risk areas or vendor services to help you improve compliance and implement a strong audit response program.

Finally, to end on a positive note, there is some revenue you can add back into your risk assessments – the amount retained due to successful appeals. AHA RACTrac data indicates that, of reporting hospitals, one-third of denials were appealed, with a 75 percent success rate on decided cases.

Amanda Berglund, MS, MBA, is a partner in PACE Healthcare Consulting. Prior to joining PHCC, Amanda was Associate Administrator and Chief Business Development Officer at North Fulton Regional Hospital near Atlanta, GA.  She is a former Manager of Business Development for Tenet Healthcare Corporation. Amanda received a BS from Columbia University and an MS from Georgia Institute of Technology. She also has an MBA in entrepreneurial leadership from Nova Southeastern University.

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[1] This article does not discuss or attempt to quantify claims of underpayments as underpayments, which currently represent only a small portion of the payment corrections in the RAC program.

[2] AHA RACTrac website. “Exploring the Impact of the RAC Program on Hospitals Nationwide: Results of AHA RACTrac Survey, 1st Quarter 2012”. http://www.aha.org/content/12/12Q1ractracresults.pdf. Accessed Aug. 23, 2012.

[3] CMS RAC website. “Medicare Fee-for-Service Recovery Audit Program