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Hospital Officials Complain To Senate Panel About Medicare Efforts On Observation Care

Overly aggressive practices of contractors charged with recovering inappropriate Medicare payments are causing headaches for hospitals and patients, hospital executives told the Senate Finance Committee Tuesday.

Photo by Karl Eisenhower/KHN

Recovery Audit Contractors – or RACs – uncover and collect improper payments  made to hospitals, physicians, clinics and other providers. In 2011 the audits resulted in the return of nearly a half a billion dollars to the Medicare Trust Fund. “We need to build on this success, but we can’t overburden legitimate providers who play by the rules,” Finance Committee Chairman Max Baucus, D-Mont., said Tuesday.  “We need balance.”

If Medicare or the contractors determine that a patient who was admitted instead should have been in observation care, the hospital can lose the Medicare inpatient payment and Medicare may refuse to pay for the observation services.

RAC practices are not only costing hospitals large amounts of money and staff time to deal with appeals, but also have caused more physicians to put a patient into “observation” status “out of fear of an inpatient denial,” said Jennifer J. Carmody, director of reimbursement services for the Billings Clinic, a health care organization in Billings, Mont., that includes a 285-bed hospital and 90-bed skilled nursing and assisted living facility.

“RAC denials eliminate payment for medically necessary services rendered to patients simply because of a disagreement about the admission status,” Carmody said in her testimony. She noted the case of a 74-year-old woman who came to the emergency room when she had difficulty breathing. Two weeks earlier, she had open heart surgery following a heart attack.

Her oxygen levels were well below normal, Carmody noted, and the patient was diagnosed with a blood clot in her lung and was started on intravenous blood thinners.  While the woman met Medicare’s criteria for an inpatient admission, the RAC reviewer denied the claim saying it was not medically necessary for her to be an inpatient “because in reviewing the whole record her length of stay was only two days due to appropriate and expeditious treatment,”  Carmody said.

While such RAC determinations cause hospitals to receive less payment from Medicare, they also affect patients, requiring them to pay more.  Patients in observation care are not admitted to the hospital, so they face higher copayments, sometimes much higher out-of-pocket drug costs than admitted patients and do not qualify for nursing home coverage. Medicare will cover a doctor-ordered nursing home stay only after a beneficiary has been in the hospital for three days as an admitted patient.

“These changes are confusing and upsetting to patients who don’t understand why they were in a hospital bed but still considered an outpatient,” Carmody said.

Carmody said Billings estimates that it spends roughly 8,600 work hours and approximately $240,000 per year for internal staff to manage RAC audits and appeals. That’s in addition to the more than  $500,000 per year that Billings pays an outside contractor to help with medical necessity reviews. Billings has been successful on appeal 84 percent of the time, winning 308 cases while losing 57, she said.

Suzie Draper, vice president of business ethics and compliance at Intermountain Healthcare in Salt Lake City, Utah,  said in testimony that her company has added 22 full-time employees just to deal with the RAC program.

“Intermountain has had many hearings and received denials based on the outcome of a patient’s treatment, not on the original intent of the physician at the time of the admission. … If a patient’s condition indicates to a physician that an inpatient admission is called for, but the patient subsequently improves more quickly than the original expected length of stay, the RAC will in hindsight determine that the physician’s original assessment was incorrect,” she said. “Providers who have worked diligently to improve patient outcomes so that patients improve rapidly are essentially penalized for their efforts to improve patient care and shorten length of stay.”

Of the approximately $120 million in claims RAC auditors examined, just over $16,000 was returned to Medicare. “The RAC program is not helping reduce health care costs and the program diverts resources that might otherwise be applied to quality improvement and patient care,” Draper said.

Robert Rolf, vice president of CGI Federal Inc.,  a RAC based in Fairfax, Va., said that the contractors bear all of the risk associated with investing in the systems and personnel necessary to conduct the program and are paid on a commission basis only for underpayments and overpayments actually recovered. Fees earned on recoveries that are reversed on appeal must be returned to the government.

“Contrary to some assertions, the contingency approach does not encourage the pursuit of questionable recoveries or discourage the pursuit of underpayments,” he said.

Medicare in May announced new rules to help delineate the difference between inpatient and observation care and last year began a pilot program to test relaxing the rules.

Sen. Orrin Hatch, R-Utah, the Finance panel’s ranking Republican, noted that the Centers for Medicare & Medicaid Services, which oversees the RAC program, is reviewing RACs’ bids for new contracts in the coming years.

As CMS reviews the bids, Hatch urged the agency to consider “the balance between program integrity and administrative burden.”

“There is a lot of unrecovered money still out there and RACs are an important component in the effort to get some of that money back where it belongs,” he said. “But we need to make sure they are going about it the right way.”

This article was produced by Kaiser Health News with support from The SCAN Foundation.