Medicare RACs to conduct prepayment reviews for doctors, hospitals

The Obama administration aims to prevent improper payments, but physician and hospital organizations are concerned that the audits will create more administrative work.

By — Posted Nov. 28, 2011

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Medicare contractors will begin prepayment reviews of certain Medicare claims starting in January 2012 in an effort to reduce the estimated billions in improper federal health care payments made each year.

Physician and hospital organizations reacted warily to the announcement. Although they said doctors and hospitals understand the need to limit errors and fraud in health care claims, the reviews could add yet another administrative burden.

The pilot programs stem from a series of executive orders by President Obama that began in November 2009. The first order directed agencies to reduce improper federal payments by $50 billion and to cut the Medicare payment error rate in half. The Dept. of Health and Human Services has made progress toward achieving Obama's goal to reduce bad payments, said Jack Lew, director of the White House Office of Management and Budget, during a Nov. 15 conference call with reporters.

The federal government reduced total erroneous payments by $17.6 billion in fiscal 2011, a 0.6 percentage point decrease to 4.7%. The bad payment rate for Medicare fee-for-service declined to 8.6% in 2011, a decrease of 0.5 percentage points, for savings of nearly $1 billion.

"The progress made this year is a good step, but it's not the end," Lew said. Medicare fee-for-service still paid more than $28.8 billion in improper claims in fiscal 2011, according to OMB estimates. "The actions we're announcing today reflect what we think is good stewardship," Lew said.

The first of the three-year demonstration programs -- all beginning in January 2012 -- will allow Medicare recovery audit contractors to conduct prepayment reviews of certain claims in 11 states. RACs currently examine claims after they have been paid. Auditors will begin the pilot program by focusing on inpatient hospital claims, especially those for short stays, and conduct the reviews before payment is authorized, said Deborah Taylor, director of the Office of Financial Management at the Centers for Medicare & Medicaid Services.

The second demonstration program will require prior authorization for powered mobility devices in seven states. It will begin with prepayment reviews for every claim, then transition to prior authorization within a year.

The third demonstration program will provide hospitals a new avenue to recover inpatient Medicare claims that were denied because the wrong site of service was listed. Hospitals will be allowed to resubmit these inpatient bills as outpatient claims at a slightly reduced rate and avoid the existing appeals process that CMS said can be costly and time-consuming.

The OMB error rates are based on an extrapolation of known payment errors, said Danny Werfel, MPP, the head of OMB's Office of Federal Financial Management. Roughly one-third of these estimated bad payments are recoverable, he said, but the administration is pursuing efforts to increase that percentage.

Hindsight is 20/20

Reviewing Medicare claims before payment makes some sense, but it's unclear to what extent physicians will be targeted by the claims prepayment demonstration programs, said Glen Stream, MD, president of the American Academy of Family Physicians. Recovery audit contractors typically have focused on hospital claims.

Dr. Stream said his 175-physician multispecialty practice in Spokane, Wash., has been audited by RACs several times. He said he hasn't heard many reports of RACs auditing other physician practices. Still, these audits can be difficult to comply with for smaller practices that rely on paper records.

The auditors examine claims for Medicare underpayments as well as overpayments. In fiscal 2011, RACs found about $800 million in overpayments and just over $140 million in underpayments.

The advantage of using RACs to conduct prepayment reviews instead of Medicare Administrative Contractors -- the organizations that process Medicare claims -- was not immediately clear, said Don May, MPA, the American Hospital Assn's vice president for policy.

The AHA still has general concerns about RACs, which are paid based on the amount of improper payments to physicians, hospitals and others that they find. RACs have been rejecting a significant number of Medicare hospital claims because they find them not to be medically necessary, May said. But sometimes physicians must provide treatment based on the potential seriousness of patients' conditions -- such as chest pain -- and not on what seems like appropriate care in hindsight, May said.

May said RACs are better suited to correct technical problems in claims, such as coding errors. They may not be as qualified to audit claims based on medical necessity, he added.

May said simply allowing a RAC denial to stand is sometimes hospitals' least costly option. AHA members report that appealing those decisions in front of an administrative judge costs at least $2,500 per case.

The National Assn. of Public Hospitals has concerns about RACs similar to those of the AHA. However, none of the 140 member public hospitals has reported undergoing an audit yet, said Beth Feldpush, DrPH, the NAPH vice president for policy and advocacy.

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Taking another look at Medicare claims

Federal officials have announced a trio of three-year pilot projects to cut improper Medicare payments and let hospitals resubmit denied claims:

  • Medicare recovery audit contractors will start reviewing certain claims before they are paid. The RACs will review claim types associated with high rates of improper payments, such as short inpatient hospital stays, in 11 states: California, Florida, Illinois, Louisiana, Michigan, Missouri, New York, North Carolina, Ohio, Pennsylvania and Texas.
  • Prior authorization review will be required for powered mobility devices. The pilot will operate in seven states: California, Florida, Illinois, Michigan, New York, North Carolina and Texas.
  • Hospitals will be allowed to bill for 90% of the outpatient rate for certain inpatient claims denied by Medicare contractors. Hospitals would receive the outpatient claims if the contractors find the patients would have qualified for outpatient care but were improperly admitted as inpatients. The pilot program will begin with up to 380 hospitals nationwide.

Source: Centers for Medicare & Medicaid Services, November

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