To become a RAC-ready organization, start by reviewing the policies, procedures and protocols of the case management department, and be sure they are aligned with the Medicare manuals.

The hospital conditions of participation require all hospitals to have a utilization review plan. A hospital must ensure that all the Utilization Management (UM) requirements of 42 CFR 482.30 are fulfilled.

For example, a RAC-ready organization will have a support structure, consisting of the following, to help case management staff adhere to regulatory compliance standards:

  • A UM committee consisting of two or more practitioners to carry out assigned tasks.
  • A UM plan that provides for review of Medicare patients with respect to the medical necessity of:
    • Admissions to the institution;
    • Duration of stays; and
    • Professional services furnished.

The Department of Health and Human Services’ Office of Inspector General’s (OIG) Supplemental Compliance Program Guidance for Hospitals states the following: ( ]

“Often, the status of patients at the time of admission or discharge significantly influences the amount and method of reimbursement hospitals receive. Therefore, hospitals have a duty to ensure that admission and discharge policies are updated and reflect current CMS rules.”

RAC Ready Case Management

A case management structure that is RAC-ready will have processes to monitor risk areas and a UM program to report potential exposure to recoupment.  Performance-improvement activities within this department will assist in the development of programs to address areas not meeting regulatory compliance.

If your hospital is not RAC-ready, it’s time to get ready, starting with the development of a utilization management plan. Consider a further drill-down on your internal utilization practices to determine what care setting needs attention.

Whether the patient enters the facility through the emergency department (ED), endoscopy, cardiac cath lab, surgery, or as a direct admission, it’s important to know how a determination is made for outpatient or inpatient status and whether medical necessity is a consideration. Also, be sure the following questions can be answered:


  • What protocol is used for outpatient observation?

  • Have medical staff received any education to ensure that they are current with regulatory and compliance issues as they pertain to medical necessity?

  • Does the ED physician understand admission criteria?

  • When was the last time the case management staff received training on admission criteria?

  • What monitoring is occurring to assure the application and appropriateness of screening criteria?

If your hospital has fallen short, it is not too late to focus on a few key areas where medical necessity is a target in a RAC audit. These are provided below along with brief guidelines for implementation.


Short-Stay Admissions

All short-stay cases should be reviewed to identify whether they were medically appropriate for inpatient admission. In the physician’s documentation, look for clinical signs and symptoms that indicate the patient’s condition and response to treatment. The clinical history is very important in telling the story of failed outpatient intervention and the need for acute-care treatment.


When the patient recovers faster than anticipated and is discharged within a one-day stay, has the policy for condition code 44 been followed? Specifically, when a Medicare patient’s status is changed from inpatient to outpatient, the following conditions must be met:


  • The change in patient status from inpatient to outpatient must be made prior to discharge or release, while the individual is still a patient of the hospital;
  • The hospital must not have submitted a claim to Medicare for the inpatient admission;
  • A physician must concur with the utilization review committee’s decision; and,
  • The physician’s concurrence must be documented in the patient’s medical record.

Inappropriate Use of Outpatient Observation

If the term “23-hour observation” is used in your facility, examine the protocol and the medical staff’s understanding of the use of this outpatient level of service.  Observation no longer is limited to 23 hours and may extend longer when used to determine the possible need for inpatient admission.

This additional time is necessary to evaluate the patient’s condition and/or whether the physician believes the patient will respond to treatment rapidly. The documentation should clearly reflect the level of care needed-that is, outpatient observation versus inpatient admission.

Admissions for Socioeconomic Reasons or SNF Placements

Medicare pays for up to 100 days of skilled nursing or rehabilitation if it follows a three-day, acute-care hospital stay. Medical necessity will need to be met on all three days to qualify for this benefit. Monitor and audit all three-day hospital stays with a Skilled Nursing Facility (SNF) admission, evaluate the need for an acute-care admission and determine whether each day of the stay was medically necessary.

Medically Unnecessary Admissions

In order for admissions to be considered medically necessary under the Medicare program, the patient must have a condition requiring treatment that can be provided only in an inpatient setting. If the patient safely can receive treatment in a less intensive setting, such as outpatient observation, the patient should not be admitted.

A RAC-ready hospital has a process and system in place for taking care of patients who do not require acute-care hospitalization – every day of the week, 24 hours per day.

Using the above guidelines, pressure-test your hospital system and assess whether its structure will withstand an upcoming RAC review – or whether it will melt under the heat of the spotlight that is medical necessity.

About the Author

Barbara Vandegrift is a senior healthcare consultant with Medical Learning, Inc. (MedLearn), St. Paul, MN. MedLearn is a nationally recognized expert in healthcare compliance and reimbursement. Founded in 1991, MedLearn delivers actionable answers that will equip healthcare organizations with their coding, chargemaster, reimbursement management and RAC solutions.

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