A bipartisan bill titled the Medicare Audit Improvement Act of 2012 was introduced into the U.S. House of Representatives this month, carrying with it the potential to implement sweeping reforms to many of the Medicare audit contractor programs.

The proposed legislation primarily would serve two critical functions. First, it would improve Medicare contractor transparency and compliance, particularly with respect to the Recovery Audit Contractors (RACs). Second, the act would enhance healthcare providers’ rights during the Medicare audit process, allowing hospitals to receive accurate outpatient reimbursement for inpatient hospital claims denied for medical necessity and reinstating appeal rights for participants in the AB Rebilling Demonstration Program.

Medicare Contractor Transparency and Compliance

Again, the proposed Medicare Audit Improvement Act of 2012 calls for the implementation of measures that would enhance the transparency of Medicare contractors, but it also would impose penalties on Medicare contractors for compliance failures. With regard to transparency, the proposed act would require the U.S. Secretary of Health and Human Services to publish specific information about the RACs on the Centers for Medicare & Medicaid Services website. This information would include the aggregate total of audits performed by each RAC during a contract year;[1] claim denials issued by each RAC; denial rates for each RAC for Part A, Part B and DME claims during a contract year; the aggregate total of appeals filed by providers with respect to each type of audit performed by a RAC during a contract year; aggregate appeal rates during a contract year; and appeal outcomes at each of the five stages of appeal. Furthermore, the proposed act would require that the secretary make performance evaluations for all RACs publicly available, plus annual error rates of RAC reviews for each audit type. 

As it pertains to compliance, the proposed legislation would implement wide-ranging changes; for example, it would require the secretary to establish a process to ensure that additional documentation requests of a hospital annually made by Medicare contractors were restricted to a) two percent of all claims for each year and/or b) 500 additional documentation requests during any 45-day period.[2] This limitation, covering all Medicare contactors, is notable because Centers for Medicare & Medicaid Services (CMS) representatives previously had expressed some doubt about the ability of the various contractors to reconcile their individual additional documentation requests (a topic that arose in the recent CMS Open Door Forum addressing the RAC Prepayment Demonstration).

The compliance measures outlined in the bill also would require that RACs continue to (or in some cases, begin to) follow the requirements set forth in the RAC Statement of Work. Specifically, if a RAC does not render audit denial decisions within the required time frames or does not furnish audit demand letters in a timely fashion, then the RAC is to be subject to financial penalties. This type of accountability on the part of the RACs is greatly needed, particularly when audited hospitals are held to such stringent response time frames by the contractors (as the system currently stands, the RACs are not incentivized to meet their own time frames as set forth in the program requirements). Presently, hospitals are left waiting for a response without any way to intervene or ensure compliance with these requirements. 

The bill also proposes to require a RAC to pay a fee to the prevailing party whenever a claim denial is overturned on appeal (the fee amount would be determined by a fee schedule established by the secretary). This provision is particularly significant being as the RACs are incentivized by the contingency fee arrangement to audit and deny claims, with a substantial number of those denials later overturned on appeal.

Ideally, a financial penalty for claims overturned on appeal might reign in the overaggressive nature of RAC audit denials and protect provider rights by limiting the number of claims appealed through the Medicare appeals process. Providers undertake both administrative and legal costs in order to file such appeals, and are subject to recoupment of Medicare payments when claims are audited on a post-payment basis. Healthcare providers also often are forced to wait extremely long periods of time before a final appeal decision is reached. In circumstances in which the claim denial ultimately is overturned, many resources, both from the government and healthcare providers alike, are wasted. As such, this proposal could save resources for both entities.

Proposed Changes to the AB Rebilling Demonstration Program and Rebilling Claims

In addition to matters involving Medicare contractor compliance and transparency, the proposed bill includes provisions that would improve the Part A-to-Part B Rebilling Demonstration Program and also enhance a hospital’s ability to receive full and accurate Part B reimbursement when a claim for a hospital inpatient admission is denied by a RAC due to lack of medical necessity. With regard to the Part A-to-Part B Rebilling Demonstration Program, which began in January 2012, in order to participate in the program and re-bill for Part B reimbursement when a short-stay inpatient admission was denied by a RAC, hospitals were required to waive their right to appeal short-stay inpatient admission denials. The proposed act states that it would “restore due process” under the demonstration program and prohibit the secretary from denying a hospital the right to appeal a claim of any kind, with respect to hospital inpatient admissions. 

Finally, the bill also proposes that hospitals should have the right to re-bill under Part B any inpatient claim denied because a RAC alleges that services should not have been provided in an inpatient setting – as long as the services are found to have been medically necessary if provided at the outpatient level. Wachler & Associates, P.C., along with other industry stakeholders, has been at the forefront of this issue and other efforts to effectuate full Part B reimbursement for hospitals in situations in which an inpatient admission is denied due to lack of medical necessity.


Although recent developments like the July 13 CMS memorandum seem to have improved hospitals’ abilities to effectuate this alternative Part B payment following an administrative law judge’s decision, the language in the proposed legislation would solidify more clearly a hospital’s right to receive Part B reimbursement under the aforementioned denial scenario. The proposed bill, however, does not state the specific parameters of Part B reimbursement that Medicare contractors would be required to provide when a hospital resubmits a claim for outpatient payment. Although the language of the proposed bill alludes to the submission of an adjusted outpatient claim, the level of reimbursement (for example whether reimbursement for underlying care and emergency department services would be included) is unclear.  

The proposed bill’s focus on contractor transparency, compliance and accurate payment for providers is an encouraging step in the right direction. If passed, the legislation would help protect healthcare providers’ rights during the audit and audit appeals process – but it will not solve all of the issues healthcare providers face when an audit occurs. It is still essential that providers proactively prepare for Medicare audits and diligently defend against audit claim denials through the appeals process. 

About the Authors

Andrew B. Wachler is the principal of Wachler & Associates, P.C.  He graduated Cum Laude from the University of Michigan in 1974 and was the recipient of the William J. Branstom Award. He graduated Cum Laude from Wayne State University Law School in 1978. Mr. Wachler has been practicing healthcare and business law for over 25 years and has been defending Medicare and other third party payor audits since 1980.  Mr. Wachler counsels healthcare providers and organizations nationwide in a variety of legal matters.  He writes and speaks nationally to professional organizations and other entities on a variety of healthcare legal topics.

Jennifer Colagiovanni is an attorney at Wachler & Associates, P.C.  Ms. Colagiovanni graduated with Distinction from the University of Michigan and Cum Laude from Wayne State University Law School.  Upon graduation, Ms. Colagiovanni was nominated to the Order of the Coif. Ms. Colagiovanni devotes a substantial portion of her practice to defending Medicare and other third party payer audits on behalf of providers and suppliers.  She is a member of the State Bar of Michigan Health Care Law Section.

Jessica Forster is an associate at Wachler & Associates, P.C.  Ms. Lange dedicates a considerable portion of her practice to defending healthcare providers and suppliers in the defense of RAC, Medicare, Medicaid and third party payer audits.  Her practice also includes the representation of clients in Stark, anti-kickback, and fraud and abuse matters.

Contact the Authors




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[1] The types of audits included in this information would be automated, complex, medical necessity review, Part A claims, Part B claims, durable medical equipment claims and Part A medical necessity.

[2] A Medicare contractor, as defined by the act, includes Medicare Administrative Contractors, Recovery Audit Contractors, Zone Program Integrity Contractors, Program Safeguard or Integrity Contractors and Comprehensive Error Rate Testing program contractors.

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