Editor’s Note: Steven J. Meyerson, MD., was a guest panelist on the Aug. 27 broadcast of Monitor Monday, and he responded to a key issue facing Critical Access Hospitals and other providers. The following is a transcription of his remarks.

In the coming year, Medicare auditors will take back from hospitals somewhere around $2 billion due to alleged billing errors. This money will come out of hospital operating budgets and make it harder for them to maintain the quality of care they provide or to be able to afford to give free care to those without insurance who can’t afford to pay. This is more of a threat to CAHs (Critical Access Hospitals) due to their smaller size, smaller cash reserves and smaller cash flow. For these reasons, they cannot tolerate the financial losses caused by aggressive RAC audits and this explains why Oklahoma Representative Dan Boren has called for a federal investigation and moratorium on what he calls RAC “predatory” auditing practices that are threatening the financial viability of small rural hospitals in his state.

Just to step back for a minute and look at why this is happening: 

Medicare has a complex set of regulations that govern when a patient can be admitted to a hospital as an inpatient and when treatment should be provided in an outpatient hospital bed. Since there are two totally separate and distinct payment systems for inpatients and outpatients, with hospitals receiving five to 10 times as much for inpatients, CMS (the Centers for Medicare & Medicaid Services) wants to make sure hospitals are not being overpaid by inappropriately treating patients on an inpatient basis instead of as outpatients.

There are some serious problems with the regulations themselves that contribute to this apparently high error rate.  The rules are often ambiguous and open to widely different interpretations. The Medicare Program Integrity Manual (Chapter 6, Section 6.5.2) for instance says that “the medical record must contain sufficient documentation to demonstrate that the beneficiary’s signs and/or symptoms were severe enough to warrant the need for inpatient medical care,” but there is no guidance on how to judge the level of severity that qualifies for admission.  The attending physician that writes an inpatient order may have a different view of the severity of the patient’s condition and need for inpatient care than a RAC auditor (who is likely to be an RN) looking at the record two years later.

An article from the Medicare Learning Network (MLN Matters No. SE1027) says that “inpatient care rather than outpatient care is required only if the beneficiary’s medical condition, safety, or health would be significantly and directly threatened if care was provided in a less intensive setting.” Yet WPS Medicare (WPS Medicare, LCD L32222) wrote that “in many institutions, there is no difference between the actual medical services provided in inpatient and outpatient observation settings; in those cases the designation still serves to assign patients to an appropriate billing category.” So hospitals are expected to make a distinction when there is no difference. 

With this degree of ambiguity, this is a system that one could predict would be fraught with disparate interpretations and errors.

For all these years under Medicare, hospitals have been providing care thinking they were compliant with billing regulations and in fact, Medicare rarely raised an objection to the way they billed. Then the RAC auditors came along with a strict retrospective interpretation of the guidelines and have been able to take back billions of dollars that they claim were billed and paid incorrectly. 

Under Medicare guidelines it is up to the admitting physician to determine admission status but physicians are trained to provide medical care, not to interpret complex billing rules; physicians don’t get education in Medicare regulations in their training. The Medicare Conditions of Participation for hospitals (Code of Federal Regulations, Title 42, Volume 3, Sec. 482.30, Conditions of participation: Utilization review) place a responsibility on the hospital to screen patients and ensure that they bill for the correct level of care. Hospitals have had to invest in extensive case management infrastructure in order to meet this requirement, yet budgets are limited, and it’s impossible to screen every patient and check every Medicare bill.

On top of this, the contingency fee payment structure for RAC auditors encourages denials. After all, RACs are profit-making corporations. They are paid a contingency fee of 9 to 12.5% for recovering money for Medicare, but there is no penalty for overzealous application of the regulations. The auditors seem to be saying lately that just about every patient in the hospital for two days or (fewer) should be treated as an outpatient, and they are denying many short inpatient stays that appear to meet admission guidelines even though the regulations (Medicare Benefit Policy Manual, Pub 100-2, Chapter 1, Section 10) say that “admissions … are not covered or non-covered solely on the basis of the length of time the patient actually spends in the hospital.”

When the first RAC audits started in 2005, many hospitals were unaware that they were violating technical billing regulations and were blind-sided by the demands for repayment. But now, seven years later, although they are acutely aware of their areas of vulnerability and are actively engaged in programs to improve compliance, they find it very hard to consistently get it right.

Medicare requires that hospitals use screening criteria as the first step in establishing medical necessity for admission: “…screening criteria must be…used by the UM staff to screen admissions…The criteria used should screen both severity of illness (condition) and intensity of service (treatment). Cases that fail the criteria [for admission] should be referred to physicians for review.” (Medicare Hospital Payment Monitoring Program Compliance Workbook, Jan 2006, Revised March 2008). So for those patients that don’t meet the screening criteria, Medicare requires a physician to review and apply clinical judgment above and beyond the basic criteria. Physician advisors, trained in the intricacies of Medicare regulations, provide this second level of review. Some hospitals develop their own physician advisory programs and others outsource, but it’s important to have a physician knowledgeable in the regulations to help the admitting physician determine proper admission status for those cases that don’t pass the first level of screening.


One of the biggest challenges has been to educate practicing physicians on the facts of life of Medicare admission requirements.  Physicians are generally not aware of these regulations or have misconceptions about them, but they are for the most part eager to learn and want to know what they need to do to comply. The fact that MACs have recently targeted physician fees for recovery when an admission is denied has certainly gotten their attention and encouraged them to learn about regulatory compliance. 

Case managers serve as consultants to physicians and work with them on a daily basis to help them apply the regulations and screening criteria to individual patients. More and more hospital resources are being devoted to case management as they try to ensure correct billing status early in the stay. But even when they meet the screening guidelines, RACs may still deny payment. 

Hospitals are aware of the new auditing trend to deny payment to the hospital for various types of surgery if the physician didn’t provide enough documentation to justify the medical necessity for surgery (such as joint replacement, spinal surgery and cataract removal). They have educated their surgeons on documentation requirements and implemented new forms and checklists to obtain all the required information before the surgery is performed. These efforts should reduce the number of prepayment denials in this area. The focus on this has been driven by CERT (Comprehensive Error Rate Testing) audits finding inadequate documentation of medical necessity for surgery. According to CERT Notice #14632, “CERT uses decision screening criteria (such as those contained in InterQual) to determine appropriateness of hospital care and operative procedures. Unfortunately, hospital records often do not contain enough detail about the patient’s condition to satisfy screening criteria.” The documentation is often in the surgeon’s office notes and can be supplied on appeal. It is unclear at this point that any significant amount of truly unnecessary surgery has been or will be prevented.

Hospitals have used self-audits in areas where RACs and MACs have been exploiting vulnerabilities. These audits help the hospitals focus education efforts and improve documentation. They are often done in collaboration with counsel, keeping in mind the requirement for self-reporting and return of any overpayments detected. 

Small critical access hospitals have not been able to keep up with the growing need for providing complex case management, following the ever-changing regulatory environment, providing education, and performing self-audit.  Now they are suffering serious financial losses from aggressive retrospective audits that according to Rep. Boren don’t take into consideration their limited resources and financial fragility. 

It is clear that hospitals have been working hard to understand and comply with Medicare’s ambiguous regulations. They have invested a great deal of resources, but they are still suffering significant financial losses that can apparently threaten the survival of the smaller facilities.  The problems won’t go away until the regulations are simplified and clarified. In fact, CMS has acknowledged all the problems referred to above and in the 2013 OPPS Proposed Rule (Federal Register /Vol. 77, No. 146) has asked for suggestions from the medical community for how the regulations can be improved. Many providers and organizations are submitting ideas hoping that CMS will find a way to improve the regulatory process so hospitals can get back to the business of providing the best medical care possible for their patients and not have to worry about getting paid for the services they provide.

About the Author

Steven J. Meyerson, MD, is a Vice President of Accretive Physician Advisory Services®. He is Board Certified in Internal Medicine and Geriatrics. He has recently been the medical director of care management and a compliance leader of a large multi hospital system in Florida. He has distinguished himself by creating innovative service lines and managing education for Accretive PAS®.

Contact the Author


To comment on this article please go to editor@racmonitor.com


An article on Rep. Boren’s call for an investigation of the RAC and its auditing of small rural hospitals is at http://newsok.com/oklahoma-u.s.-rep.-dan-boren-calls-for-federal-investigation-of-hospital-auditors/article/3702161

Read the 2013 OPPS Proposed Rule at http://www.gpo.gov/fdsys/pkg/FR-2012-07-30/pdf/2012-16813.pdf (page 45155)

Unintended Consequences: RACs Hurting Small Rural Hospitals

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