• The RAC demonstration program estimated that $10.8 billion in Medicare payments do not comply with Medicare coverage, coding or billing rules.
  • Hospitals were forced to pay money back, and the RAC program contractors received a chunk of the improper payments.
  • RAC initiatives will have a continuing impact on healthcare payments for services provided to beneficiaries of federal health insurance programs.

The healthcare system’s general reaction to the rollout of the RAC program has been similar to its reactions to the Outpatient Prospective Payments System (OPPS) in 2000 and MS-DRGs in 2007. We’d like to share our perspective on how the industry responded this year and give you our take on what may lie ahead.

First, though, let’s flash back to 2000, when OPPS was implemented. Because of the corresponding significant change in reporting requirements, providers were urged to proactively assess the many systems and processes critical to the outpatient revenue cycle. Areas of focus included:


  • Development of an OPPS Readiness Committee
  • Charge Master Data Accuracy and Usage
  • Registration and Data Capture
  • Clinical Documentation and Coding
  • Ancillary Services Utilization
  • Information System Functions
  • Financial Impact Techniques
  • Staff Training and Education
  • Purchase APC Grouper Software

Handwriting on the Wall

In order to survive under OPPS, organizations were told that they must define and comprehend their outpatient business, understand the financial implications of prospective payment, anticipate compliance exposure, improve outpatient data management and identify outpatient resource, quality and utilization issues.

Skip ahead to 2007. Because of another change in reporting requirements, providers were urged to proactively assess the many systems and processes critical to the inpatient revenue cycle. We were presented with the following “Strategies for Success with MS-DRGs:”


  • Creating an MS-DRG readiness committee
  • Identifying high-risk, high-volume, problem-prone DRGs
  • Developing documentation templates
  • Setting up a clinical documentation improvement program
  • Delivering medical staff education
  • Reviewing the physician query process
  • Using data to identify opportunities for improvement
  • Evaluating the effectiveness of improvement strategies
  • Purchasing MS-DRG grouper software


In order to survive the implementation of MS-DRGs, organizations were told that they must define and comprehend their inpatient business, understand the financial implications of MS-DRG prospective payment, anticipate compliance exposure, improve inpatient data management and identify inpatient resource, quality and utilization issues.

Guess what the industry response to the RAC rollout has been in 2009?

  • Form a RAC preparedness committee
  • Assess potential financial exposure
  • Assess coding/billing documentation accuracy
  • Educate physicians and employees about RACs
  • Develop an appeals process
  • Track claim denials
  • Respond to RAC communications
  • Pursue appeals vigorously
  • Purchase RAC denial/appeal tracking software

In order to survive the implementation of the permanent RAC program, organizations must define and comprehend their inpatient and outpatient business, understand the financial implications improper payments have, anticipate compliance exposure, improve patient data management and identify hospital resource, quality and utilization issues.

What is remarkable to us is not the similarity of the industry responses to these programs, but the common threads that are documentation, coding, billing and care management – all core business practices that impact OPPS and MS-DRG payments and serve as the basis for all RAC audit and recovery activities.

Survey of Provider Efforts Show Room for Growth in 2010

HCPro’s Revenue Cycle Institute recently revealed on its Web site that it conducted a survey of 700 hospitals, asking healthcare officials about their efforts to prepare for the permanent RAC program. The institute found that while 71 percent of responding hospitals said they have a formal RAC preparedness program in place, the majority of those programs were still in the early stages of development, focusing on initial attempts to complete risk assessments.

Slightly less than half of responding hospitals had designated a RAC coordinator. Most responding facilities also have or are building RAC teams, and the majority of those teams include a physician advisor acting in some capacity. This finding is consistent with what we have been hearing during the past year from hospitals we work with.

More importantly, though, nearly 30 percent of hospitals that responded to the survey did not have a formal RAC preparedness program in place. While this does not necessarily mean that these hospitals are not doing anything to deal with RAC initiatives, it does suggest several things to us. For one, the hospitals without a formal RAC program likely have chosen a “watchful waiting” strategy, through which they will wait to see what the true impact of the RAC program will be on their bottom line.

Treating Symptoms, Not Causes

We have had several recent conversations with clients who said that their strategy is to set aside a pre-determined cash reserve for potential paybacks and deal with the program on a case-by-case basis. The rationale is that it is easier to fix very specific claim, billing, and documentation issues one at a time rather than to completely revise existing business practices. On the surface, this approach may seem prudent in a tough economy, but it may turn out to be very shortsighted, because you essentially are constantly treating symptoms instead of the underlying causes of errors.

The other notion that this lack of a formal RAC preparedness program suggests is that some hospitals honestly do not have the time, talent and/or money resources to successfully develop a plan to respond to RAC initiatives. Resource shortages are not to be taken lightly, but thrifty approaches can be taken to solve this problem. For example, some of our clients have pooled limited resources so they can conduct risk assessments on similar DRGs. Typically, certain types of coding and/or documentation errors create the same risks, regardless of location. Once these common errors are identified, a common solution can be created and shared among different providers.

What Should Providers Look for in 2010?

While it often has been said that the RAC program is another administrative burden for providers, we would like to suggest that it also does create a unique opportunity for providers to re-examine their core business practices and place more emphasis on documentation, coding, billing and care management. So what should providers look for in 2010 as they develop and refine their RAC control processes?

By combining data mining and an audit/recovery function under one roof, Medicare has sent a very clear message to providers: “These are the rules of the game. Follow the rules and no one gets hurt.” We think that providers should take a serious look at this model and see how it might be replicated to their advantage. Many hospitals continue to operate as if each component of the patient encounter is separate and distinct. The result is a continued disconnect of data collection, data analysis and data reporting. The result: $10.8 billion in Medicare payments that do not comply with Medicare coverage, coding or billing rules. In 2010, hospitals dealing with the RAC program may wish to:

1)   Look for ways to make their entire data collection, documentation, coding and billing process as transparent as possible. This may mean combining all functions under one roof and developing a “daily management brief” that summarizes and tracks key metrics.

2)   Develop or acquire analytic tools that will mine data in ways that allow them to quickly identify sources of medical necessity denial, so they can initiate corrective action immediately.

3)   Promote a culture of complete accountability and a “no excuses” attitude among staff responsible for documenting, coding and billing medical services.

4)   Look for the potential to “share and compare” effective care management strategies, both internally and externally.

5)   Actively monitor your risk for improper payments through the use of data mining tools.

The nationwide rollout of the permanent RAC program is currently underway, and will accelerate in 2010. Providers of all types will deal with this program in their own unique ways. But one thing is certain: our best chance for continued success is to insist on organizational mastery of the core business practices of documentation, coding, billing and care management.


About the Authors

Randy Wiitala, BS, MT (ASCP) conducts CPT coding and chargemaster assessments, reviews provider operations for regulatory agency compliance, evaluates administrative policies and procedures and assists in the development of quality-assurance programs. He’s also a frequent seminar presenter, speaking to hospitals, corporations, clinics, state hospital associations and professional organizations. These educational programs cover a variety of areas, such as coding, regulatory compliance and reimbursement for laboratories; chargemaster system management; and APCs. Randy contributes to a number of MedLearn books, as well as the Laboratory Compliance Manager newsletter. He is the project lead on MedLearn’s RAC Outpatient Data Analytics. He is a member of the American Society of Clinical Pathologists, the National Certification Agency and Healthcare Financial Management.



Barb Vandergrift, RN, BSN, MA, Barbara Vandergrift is a Nursing Case Management leader and educator with over twenty years of clinical nursing experience Ms. Vandegrift has extensive experience in guiding the provision of Case Management Services in short term acute hospital settings.

She has worked with health care systems and individuals to provide staff management, development, and skill building in the areas of Quality Management, Utilization Management, Cost Avoidance and Revenue Enhancement. As a member of the MedLearn consulting team her primary focus is on RAC’s medical necessity application.



Carol Spencer, BA, RHIA, CCS, CHDA, is a thought-leader on data analytics with extensive CDIP and RACs experience. She is the MedLearn project lead on MedLearn’s RAC Inpatient Data Analytics. She brings more than 20 years of experience in Health Information Management, coding, teaching, data quality and operations. Carol holds a BA in Health Information Management and an RHIA. She is an accomplished teacher, author, and speaker covering subjects/topics such as: CPT and ICD-9-CM coding, Physician Office Coding/Billing, Medical Terminology, and financial and compliance impacts of the MS-DRG rule change and compliance strategies.


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