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Medicare: 'we want our money back!'.

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The Recovery Audit Contractor programs are recovering millions from hospitals when auditors disagree with physicians' decisions.

"We want our money back!"

This is a frequent statement that many hospital finance departments are hearing from Medicare. With the rise of the government's efforts to combat health care fraud and to control excessive health care billing, Recovery Audit Contractor (RAC) programs were started through the Medicare Modernization Act of 2003.

As a demonstration project between 2005 and 2008 they had reclaimed $895 million from just six states. This number has reached $ 3.6 billion since the national program started in 2010.

What exactly is a RAC and how does it affect the hospital and its physicians? Let's examine two examples to understand the function of RACs. (1-2.)

Patient A arrived at the emergency room with generalized seizures that started one hour before arrival. He has a known history of seizures but forgot to take his Dilantin for the past five days.

He was given two doses of intravenous Ativan in the emergency room, and the hospitalist was called to admit him. He was admitted in the intensive care unit, underwent a CT scan of the head, loaded with IV Dilantin and was evaluated by a neurologist.

The patient was at baseline status the next day and was discharged. The hospital billed Medicare Part A $9,000 and was reimbursed accordingly.

Patient B presented to the emergency room with three episodes of generalized seizures that started one hour before arrival. He was still seizing in the emergency room and was given four doses of IV Ativan and then sedated for a long time.

The hospitalist admitted him to the intensive care unit and ordered a CT scan of the head. He was evaluated by the neurologist who ordered an EEG, MRI of the brain and initiated a new intravenous antiepileptic medication.

Patient was monitored every four hours and improved the next day when he was discharged on oral antiepileptic medication. The hospital billed and was subsequently reimbursed $12,soo from Medicare Part A.

Audits begin

Both of these cases seem to be relatively simple seizure hospitalizations and from the hospital standpoint, both required an admitting hospitalist, a neurologist, intensive care unit monitoring and similar imaging studies. The hospital was justified in its charges and was reimbursed appropriately and promptly by Medicare.

Three years later, the hospital was hit by an audit on these two cases. The RAC auditor deemed that patient A did not qualify for an inpatient and could have been safely monitored in an observation status.

The auditor wrote that the patient with the known seizure disorder with subtherapeutic drug levels, not requiring a change in seizure medication or those and with no post ictal or neurological findings could be managed in the outpatient setting under observation status.

In the case of Patient B, even though the auditors deemed an appropriate inpatient status, the hospital did not submit the entire record as requested, and the discharge summary and consultant note were not included in the submitted package.

Due to this error, Medicare Part A payment was requested back. When such a determination happens, Medicare takes back the entire Part A payment, and since this inpatient claim paid under Medicare Part A is denied, the hospital cannot receive Medicare Part B payment except for a few ancillary services.

The hospital ended up receiving little if any reimbursement for reasonable and medically necessary items and services provided. The RAC programs however work on a different modelthey keep a contingency percentage of 9 percent to 12.5 percent of the entire Part A payment. (3-4)

These overpayment determinations are very common in one- or two-day inpatient admissions that the RACs deem medically unnecessary. As a result hospitals have been required to give back hundreds of millions of dollars per year due to RAC determinations that services should have been provided in an outpatient rather than inpatient setting.

What can the hospitals do in the future to prevent such audits and paybacks?

It is important that the patient be described appropriately in the medical record to support the status. In our scenarios it was assumed that since the patient was going to the intensive care unit, inpatient care was appropriate.

However physicians need to document the possibility and probability of adverse clinical outcomes and follow evidence-based guidelines for treatment. Medicare expects that records reflect the severity of signs and symptoms, comorbid and complicating conditions, and the justification of inpatient management or the practicality of outpatient management.

Lawsuit filed

The American Hospital Association and three hospitals have sued Medicare due to the RAC pro-gram.3 They state that these contractors are paid based on the amount of Medicare reimbursement they can "claw back" from hospitals.

Though they operate with nothing but a cold paper record, they now regularly overrule physicians' expert medical judgments long after the fact, determining that particular Medicare patients--patients whom they have never even seen--should not have been admitted to the hospital to receive inpatient care. The hospitals argue that RACs are quite frequently wrong in their assertions about what a physician, confronted with a patient in need of medical treatment, should have done months or years earlier.

They also state that they have to pursue appeals through the administrative appeals process, which is an expensive and burdensome exercise. Whatever the result of this lawsuit, one thing is clear: The RAC program is a financial success for Medicare, and it seems it is one of the ways the government is altering the billing systems of the hospitals and controlling health care costs.

On Oct. 1, 2013, CMS finalized the two-midnight rule (CMS 1599). Under this rule, CMS instructs that hospital inpatient admissions that involve a least two consecutive midnights will qualify for appropriate payment under Medicare Part A.

It also means that if the hospital stay is under two midnights, it will be inappropriate for payment under Medicare Part A. The admitting physician has to certify their recommendation that the patient will need medical care spanning at least two midnights with supporting notes in their admission orders.

The message sent from CMS is that length of treatment in the hospital will determine whether patients will be inpatient or observation.


(1.) Recovery Audit Program from Centers for Medicare and Medicaid services from accessed on 4/4/2013 http://

(2.) Cost reports HCR I S data from Centers for Medicare and Medicaid services from accessed on 4/4/2013 http://

(3.) American Hospital Association website accessed on 4/4/2013 Case 1:12.-cv-01770 Document I Filed 11/01/12. THE AMERICAN HOSPITAL ASSOCIATION, MISSOURI BAPTIST SULLIVAN HOSPITAL, MUNSON MEDICAL CENTER, LANCASTER GENERAL HOSPITAL, and TRINITY HEALTH CORPORATION, Plaintiffs, v.KATHLEEN SEBELIUS, in her official capacity as Secretary of Health and Human Services, Defendant.

(4.) Medicaid Program; Recovery Audit Contractors; Final Rules Federal Register / Vol. 76, No. I8o / Friday, September 16, 2011 / Rules and Regulation.s

By Deepak Pahuja, MD, FACP

Deepak Pahuja, MD, FACP, is chief medical officer of Aerolib Healthcare Solutions ( and serves as physician advisor for RAC reviews, retrospective and concurrent case reviews.
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Author:Pahuja, Deepak
Publication:Physician Executive
Geographic Code:1USA
Date:Jan 1, 2014
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