Nearly three years after the nationwide rollout of a controversial federal demonstration program that incentivizes private contractors to audit hospital billings on a contingency fee basis, the data are in. Many hospitals are fighting back and regaining ground, while others are losing millions of dollars.

But even hospitals that have successfully challenged the Recovery Audit Contractors program agree it is flawed, unfair and costly.

In 2010, the Centers for Medicare & Medicaid Services expanded the RAC program from the three states where it was piloted. The auditors are charged with recovering Medicare reimbursements improperly paid due to error. Many hospitals were caught off guard. The four RACs, which were awarded contracts in different regions of the United States, collected $75 million that first year, a figure that rose to $141 million in 2011 and has exceeded $2 billion in each subsequent year.

All that money didn't go back into federal coffers.

Of the $2.33 billion that RACs collected in overpayments and underpayments in fiscal year 2013 through June 30, more than $200 million went to the auditors thanks to the contingency fees they charge, which range from 9.5 to 12 percent.

Hospitals complain that the growing financial and administrative burdens from auditors seeking medical records to deny payments for services already delivered is causing them hardships and siphoning resources that should be devoted to patient care.

According to the American Hospital Association, two-thirds of the medical records reviewed by RACs contain no errors. The AHA's RACTrac survey also found that 40 percent of hospital claims denials are appealed and that hospitals prevail in those appeals 72 percent of the time. Hospitals contend that RACs are second-guessing physicians' medical judgments sometimes years after patients were treated and released.

Among the charges against the program is that RACs challenge claims for legitimate services rendered, assuming many hospitals won't appeal the findings. While auditors can challenge billings dating to three years earlier, hospitals only can appeal cases within one year. Hospital coding experts and consultants also say the auditors do not interpret the standards clearly and are too quick to punish hospitals that don't return documentation or appeals on time. They say RACs are slow to uncover underpayments to hospitals and too quick to find overpayments.

"For a long time, the RAC program operated under the radar of hospital executives," says Larry Hegland, M.D., system medical director for recovery audit and appeal services for the 15-hospital Ministry Health Care. "It wasn't until after it was launched nationally in 2010 and it hit full stride that hospital leaders realized the volume of dollars flowing to the government and recognized the threat."

"This program," Hegland says, "has devastated many financially challenged hospitals."

Success at a Steep Price

Ministry submitted 318,986 pages of medical records and supportive documentation through 10 audit cycles and faced more than 1,960 complex audits affecting $23 million in reimbursement. "We win nearly 90 percent of the time, but we have to invest considerable resources to keep the money we've earned to provide patient services," Hegland says.

Steven Hanks, M.D., executive vice president and chief medical officer for the Hospital of Central Connecticut in Hartford, says the RAC program is broken and needs to be fixed. His hospital has appealed 96 percent of RAC denials with a 94 percent success rate.

"Even though we've successfully contested nearly all the cases we believe were correctly billed, we still receive the maximum number of records requests allowable: 400 every 45 days," Hanks says. "Essentially, the RACs are casting a wide fishing net. Our performance shows how insane the system is."

Though neither the AHA nor CMS could provide an average cost to comply with a RAC claim denial, the AHA's RACTrac found that 63 percent of the 1,200 hospitals responding to its most recent survey reported spending at least $40,000 in 2012 in RAC-related costs, while 46 percent spent more than $100,000, 28 percent more than $200,000 and 10 percent paid $400,000.

Many hospitals have developed effective RAC response programs, although recent AHA surveys revealed an increased volume of RAC medical records requests and complex audit denials.

Abby Pendleton, a health care attorney with Health Law Partners of New York and Michigan, says that while hospitals are reimbursed for copying costs, assembling RAC response teams can be expensive. Some hospitals hire nurses, case managers, physicians and billing specialists. But even if they're hiring outside companies to assist with RAC audits, they need internal resources.

"It takes a significant amount of resources just to retain the money for services they've already provided, money that they should be able to keep, particularly when hospital appeals are more than 70 percent successful," Pendleton says. "But that's if you can afford to appeal and many hospitals can't; they lack the resources."

Pendleton says the high appeal success rate tells her that RACs are not applying the standards correctly.

While every arm of the federal auditing bodies is supposed to be communicating to reduce overlap and duplication, she says her firm has found instances of multiple auditors reviewing the same claims.

"They're over-denying and getting their 9 to 12.5 percent contingency fees just for saying, ‘No,' " she says. "They're applying the wrong standards, looking at whatever ways they can to deny claims. It's costing everyone money."

Is a Fix on the Way?

The hospital pleas are being heard.

Two versions of a bill have been introduced in the U.S. House and Senate to restrain the auditors, attracting 162 co-sponsors in the House, as well as eight influential senators. The bipartisan Medicare Audit Improvement Act of 2013 (S. 1012), sponsored by Sens. Mark Pryor (D-Ark.) and Roy Blunt (R-
Mo.), imposes greater oversight on audit contractors and what the AHA calls "a leveling of the playing field between hospitals and auditor contractors."

Robyn Bash, the AHA's senior associate director of federal relations, says the legislation would ease the administrative burden for hospitals facing audits by limiting the number of medical records RACs can request. It also imposes financial penalties on RACs when hospitals prevail on appealed payment denials, compelling the auditors to foot the cost of successful hospital appeals.

"There are large numbers of inaccuracies in the audit process and we would like to see the RACs held more accountable," Bash says.

The bill also would allow hospitals to rebill for claims denied because of setting. "This [issue] is the most contentious and problematic, because the services provided were medically necessary," Bash explains. "But in hindsight, RACs decided services should have been provided in outpatient rather than inpatient settings. This legislation would allow rebilling opportunities without timely billing deadlines."

Rochelle Archuleta, an AHA senior associate director of policy development, says hospitals understand the need for audits as a regulatory check and balance. "But we see some fundamental flaws in the system," she adds, particularly the lengthy, costly appeals process that can last up to three years.

Many hospitals are seeking professional advice in the growing RAC response industry from specialists like Scott Mertie, president of Kraft Healthcare Consulting, based in Nashville, Tenn. He says for-profit hospitals are more proactive in engaging third parties to prepare for audits from government agencies and private contractors.

But Mertie says even his clients are noting an increase in audit activity. "We see government budgets tightening and know that the Affordable Care Act provisions are supposed to be paid for by finding overpayments," he says. "To a certain degree hospitals feel picked on with this unfair burden."

The View from CMS

While CMS concedes that contractors do not always find errors on the claims they request, the agency says the auditors are returning money that Medicare sorely needs. CMS says more than half of the claims that RACs challenge are upheld as valid. The AHA surveys indicate that RACs find no errors in more than 60 percent of billings.

Nonetheless, many hospitals have created RAC response teams. But even those who successfully appeal 90 percent of the claims against them continue to be audited.

CMS contends the agency is responding to hospital complaints. "CMS implements system edits, engages in provider education and has developed innovative payment demonstrations for certain items and services to prevent improper payments based on RAC findings," a CMS source told Hospitals & Health Networks magazine in an email.

CMS says that to improve transparency, all RACs participate in the Electronic Submission of Medical Documentation System and have increased the use of their provider portals to include demand letter information and review rationales for their improper payment determinations.

Some RACs deliver messages to provider communities about specific audits and discuss instructions and other information helpful to providers responding to requests for more documentation. Providers also can discuss determinations with RACs prior to filing an appeal.

In December 2012, CMS predicted an error rate of 36.1 percent on DRG length of stay of one day, translating to $3.43 billion. It also estimated overpayments totaling $1.56 billion and $2.03 billion in inpatient DRG lengths of stay of 2.2 days and 3.3 days, respectively. Most of those overpayments were attributable to medical necessity, but also due to insufficient documentation.

Small Hospitals Challenged

Small, independent and rural hospitals face unique resource challenges from RACs, says Brock Slabach, senior vice president of member services, National Rural Health Association. He says his 1,000 hospital members are aware of RAC, but confront many other, more pressing issues. "Sometimes it's easy for issues like RACs to be pushed to a lower level of importance," he says.
Jodi Schmidt, CEO of Parsons, Kan.-based Labette Health, agrees. But Schmidt says her independent 125-bed county hospital has taken the RAC threat seriously.

"We've achieved a 90 percent success level in challenging denials," Schmidt notes. "That has come with a huge effort from across our system. We face the same challenges large hospitals do, but with fewer resources. We can't afford to lose those dollars."

She estimated that Labette spends $275,000 annually on RAC-related issues to retain those reimbursements. Labette has 330 claims tied up in RAC reviews valued at $1.75 million.

"It's a cash flow issue for us," she says. "At the same time, we're paying added costs just to keep those dollars. That means case management and utilization review staff are focusing on protecting us from RAC activity, time that could be spent with patients."

Ministry's Hegland says that because of his system's disciplined and coordinated response, "We have yet to lose one single dollar because we missed a deadline," adding that RACs collect less than 3 percent of the claims dollars that Ministry contests.

An Inefficient Process

"But the cost to the health care system has exceeded the returns to the government," Hegland says. "This is not a very efficient process to recover money."

Attorney Jessica Gustafson, who also practices at Health Law Partners, says there should be limits on auditors' powers. But she doesn't foresee RACs disappearing soon.

"They're too popular with the government and are collecting so much money," she says. "More providers need to hold regulators' feet to the fire on getting RACs to apply the correct standards."

Mark Taylor is a freelance writer in Munster, Ind.

Aggressive Tactics, Fuzzy Guidelines

Gene Diamond, chief executive officer of the Franciscan Alliance's five-hospital Northern Indiana Region, says hospitals are seeing increased activity from Recovery Audit Contractors and other auditors. "We're experiencing a rising tide of demands for records and it is taxing us and necessitating that we spend more time and money not only finding those records, but also handling the requests for explanations," he says.

Moreover, when hospitals receive denials, they must appeal with justifications. "We've had to add staff and considerable resources to address these issues," he says.

His system is not alone. In the most recent American Hospital Association RACTrac survey of hospitals, 47 percent of the 1,273 responding hospitals reported increased medical records requests since the fourth quarter of 2012, and the number of complex audit denials increased by 58 percent in that same period.

Alex Stemer, M.D., president of Franciscan Medical Specialists and regional vice president of strategic planning for the Alliance's Northern Indiana Region, says physicians also are subject to data requests from multiple agencies. The most common come from CMS' Comprehensive Error Rate Testing program.

"If you treat a lot of diabetics or complex patients, they send you threatening letters," Stemer says. "Often physicians in private practice will look at those and change their practices and diminish their coding intensity. And while the change in coding behavior may save payers hundreds of thousands of dollars per year, that doctor's whole pension fund or savings could be wiped out by this threat."

Most independent physicians are not equipped to battle Medicare auditors, he says, so to avoid the trouble, they decrease their coding intensity or try to see more patients. "How does this help patients?" Stemer asks.

Defining medical necessity is the most important part of documenting appropriately and CMS uses "at best subjective criteria," Stemer says, adding that the issue of "observation days" continues to plague hospitals. It's not unusual for a hospital to have 100 claims pending on patients who really needed to be admitted to the hospital, he says.

Pat Wesley, the Alliance's northern regional director of revenue management, says her office monitors the organization's audits, ensuring that the system, its hospitals and physicians are coding appropriately for the care they provide. Since the first record request in 2010, her department has spent a lot of time learning the RAC response process and the best way to prepare and respond.

The Alliance strategy is to appeal unless it believes the system erred. "We appeal 95 percent of cases that our RAC tells us we've been overpaid for," she says. "We currently have 700 cases under appeal, with an average payment value of probably $6,000 per case. Right now, we have about $4.5 million worth of claims in dispute."

While the Alliance has an 87 percent success rate appealing the denials, it comes at a cost. Her office now employs three full-time staff and interacts daily with other departments like medical records, case management and finance.

Wesley advises hospital leaders to regularly check the CMS and RAC websites to learn more about their targeted activities and priorities. She also recommends monitoring subjects of interest to the Health & Human Services' Office of Inspector General, which advises providers on areas of investigation.

With private audit contractors and state and federal investigative agencies, hospitals need a coordinated approach to audit response. "Increasingly, it seems as though it's coming from every direction," Wesley says. "So you have to be as proactive as you can be."

Billing guidelines remain fuzzy, leaving plenty of room for interpretation and RAC denials, she adds. "Clearer guidance would be easier to follow with less subjectivity," she says. "I don't know how long hospitals can continue to do this and remain solvent. ... I wish CMS would give us the tools to do this right in the first place so we don't have to continue to come back and keep fighting these costly battles." — M.T.

RAC Facts

Hospital interactions with recovery audit contractors has been contentious at best. Here are a few interesting facts and statistics about how things are going to date:

Activity is up: 92% of all hospitals surveyed through the second quarter of 2013's RACTrac reported RAC activity up from 91% in the first quarter of 2013.

And it's been costly: 63% of all hospitals reported spending more than $10,000 managing the RAC process during the first quarter of 2013, 45% spent more than $25,000 and 11% spent over $100,000. The average dollar value of an automated denial was $576. The average dollar value of a complex denial was $5,704.

Medical record requests: The average dollar value of a medical record requested by a RAC during a complex review varied in the second quarter of 2013, from a high of $10,114 in hospitals in Region A to the lowest figure of $7,981 in Region C hospitals. The average value of those requested records in Regions B and D were around $8,500. And 47% of the 1,273 hospitals responding in the most recent AHA RACTrac survey reported increased medical records requests since the end of 2012.

Complex audits: 58% reported increased complex audit denials in that same period.

Costly medical necessity denials: 67% reported that the medical necessity denials were the most costly of the complex denials.

Short-stay denials: 62% of short-stay denials for medical necessity were because the care was provided in the wrong setting, not because the RAC considered the care medically unnecessary.

Timely filing window: More than 65% of hospitals reported that two-thirds of their claims were requested by RACs after the timely filing window had elapsed.

Appeals: Surveyed hospitals reported appealing 40% of all RAC denials with a 70% success rate. And three-fourths of all appealed claims remain in the appeals process.

Source: "Exploring the Impact of the RAC Program on Hospitals Nationwide, Results of AHA RACTrac Survey, 2nd quarter 2013," Aug. 27, 2013