The prospect of returning money to Medicare at $20,000 a pop isn't the only negative consequence of the Recovery Audit Contractor program's focus on short-stay necessity in hospitals. The behavior of clinicians and hospital leadership in response to findings of overpayment, or the threat of it, can raise eyebrows across the board, from dunned patients to the Health & Human Services' inspector general.

One tactic is to decide not to confront RACs when past short stays are challenged as improper, which ultimately could open hospitals up to further liability by attracting scrutiny from other federal audit and investigation entities, says Karen Bowden, senior vice president of consulting at Craneware InSight. "If they have a lot of denials that either they elect not to defend, or not to appeal, essentially that means they couldn't defend how they billed it," she says.

Another option is to avoid short-stay billing complications by playing it safe and going with observation as "the path of least resistance" from Medicare, says Larry Hegland, medical director of audit services at Ministry Health Care, a hospital system in central Wisconsin. "The problem is that observation status puts a lot more cost on the patient."

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The billing impact of observation status — an outpatient setting under Medicare Part B — is that patients may not understand the greater payment liability they have even though it involves being in the hospital and in a bed for a day or more, Hegland says. Inpatient coverage under Medicare Part A carries a deductible that typically is met on the first day of a hospital stay, after which virtually all charges are covered. By contrast, "Part B has, in addition to a deductible, a 20 percent co-pay, and many drugs are not covered. As a result, patients who enter the hospital in observation status often have much higher out-of-pocket expenses than had the same stay qualified for inpatient status."

When a physician makes the decision to choose inpatient or observation status, he or she is looking not only at the patient at the time of admission but making a complex medical judgment about the patient's potential for disease progression and risk for developing complications. The criteria that most hospitals use to support physicians in making the inpatient-or-observation choice are focused on a checklist of factors at the moment of decision, rather than also looking forward at the potential for complications and other risks.

Case managers, who work with physicians in status determinations, are bound by rules to consider that moment rather than what they think might happen that would worsen the situation, Hegland explains. Decisions based only on those criteria often are very conservative and tend to push patients into observation status, even though using judgment above and beyond the criteria can make a case for an inpatient stay.

One of the reasons for the high overturn rate on appeal is that "only at the level of the administrative law judge can you bring in that physician judgment piece, because judges can take into consideration the physician's medical judgment at that level," Hegland says.

Contesting denials carries risk as well. The cost of fighting them, or the breadth of the gray area involved, lead some hospitals to let the decisions stand; or they may lose after a long appeals process. But either of those actions may raise additional red flags, Bowden says. "Do you not have the resources to [appeal], or can you not defend it? And if you cannot defend it, there are rules in Medicare that require you to investigate why you can't defend it and to repay." That means not just the incidences turned up in a RAC audit but any and all other claims made under the same indefensible circumstances, she says.

Say, for example, that all audited claims for one-day stays due to chest pain are denied and not appealed. A hospital gives up the payments for those audited records, but the RAC audits represent only a portion of all such cases billed to Medicare, and they may signal a broader pattern of problems, Bowden says. Unless a hospital examines the years during which all those claims occurred, self-reports the errors and repays the improper amounts, it could be accused by the government of "willful neglect" and risk an investigation by the Office of Inspector General for false claims. That's starting to happen: Bowden says her firm is working with a few clients "under significant scrutiny by OIG for a pattern of RAC denials."

The threat of cascading investigations is another justification for a dedicated department that encompasses all federal activity, Hegland says. "You have to be able to do something more than manage audits. The OIG expects that you should be fixing problems." If, in the course of these audits, a billing error rate isn't getting better, the inspector general's office can go on-site and do validation audits to see whether it can make the case that the hospital is acting fraudulently, he says.

Health care leaders and their audit specialists contend, however, that the government should shoulder a share of the blame for the scope of RAC denials over medical necessity, especially pertaining to short-stay decisions. "If the regulation was clear-cut, then we wouldn't have all the problems, and we wouldn't really have to go to a judge to figure it out," says Carol Conley, director of audit and compliance with CoxHealth, a health care system in Springfield, Mo. "A lot of it is based on a physician's medical decision-making and all the complexities of the patient case, and taking into consideration all the patient's history and current condition," she notes.

Even when objective criteria point otherwise, Medicare regulations require physicians to make the determination. If doctors are asked whether they expect the patient to stay 24 hours, says Conley, the likely reply is, "OK, that works for us."

The American Hospital Association has been arguing for clear and consistent direction to CMS, says Rochelle Archuleta, AHA senior associate director for policy. "We do agree that there is a need for greater clarification in what distinguishes an inpatient admission from an observation stay. We made preliminary recommendations to CMS on that point; it's a complicated issue, but it deserves attention. Hospitals need greater specificity in those guidelines."

The American Hospital Association offers guidance on preparing for a RAC review and encourages hospitals to participate in its RACTrac survey, which assesses the program's impact on hospitals.

For more on the RAC program, read our March cover story, Understanding and Managing RAC.

John Morrissey is a writer in Mount Prospect, Ill.