Hospitals subject to Medicare payment policy know it's a lot like being condemned to an eternity of rolling a boulder uphill. Just when you think you've made some progress, things can start to go downhill. When hospitals became more efficient and adopted proven patient treatment protocols that got patients home sooner, they expected some recognition and reward — at least a pat on the back.

Instead, the Centers for Medicare & Medicaid Services instituted duplicative audit programs of short hospital stays in which private contractors are rewarded for second-guessing the medical judgment of hospitals' admitting physicians.

We're all for audits — they are a necessary and important form of oversight. But private contractors, particularly the recovery audit contractors, have created a torrent of problems that harm both hospitals and patients.

RACs have no incentive to reward hospital efficiency and every reason to deny it. Why? Because RACs are paid 9 to 12.5 percent of every dollar they claw back from hospitals. Because short hospital inpatient stays offer the most lucrative target for RACs, that's where they spend most of their energy.


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First wave. The first wave in the torrent of RAC denials unearthed a CMS policy that denied hospitals the right to rebill Medicare for care RACs claimed should have been provided in an outpatient setting rather than as an inpatient in the hospital. Since Medicare pays more for hospital inpatient stays, RACs had a considerable financial incentive to second-guess the admitting physician. And the CMS nonpayment policy left hospitals no choice but to appeal the denial; otherwise they were paid virtually nothing for care they delivered. 

As RAC denials mounted, so did the appeals. Even though hospitals won most of their appeals, the RACs were undaunted.

The American Hospital Association and four hospitals went to court to challenge the CMS policy. Once the lawsuit hit the courthouse steps, CMS reversed its policy and allowed rebilling. But CMS limited rebilling to care provided in the prior 12 months. They also made it prospective — claims that predated the policy reversal weren't eligible. Both limitations were unfair, particularly the 12-month limitation. RACs can and regularly do review claims that are much older than that. So, the AHA updated its lawsuit to force CMS to pay for claims that predated its policy reversal. In a separate lawsuit, we challenged the 12-month limitation. The court has not yet ruled on either matter.

Second wave. The second wave created a problematic growth in observation stays. Predictably, RAC rejection of so many short-stay inpatient claims created confusion for hospitals and physicians that resulted in a disproportionate number of patients being assigned to observation care. Observation care is considered an outpatient service, even though patients may stay as long as several days. It can include short-term treatment and tests to help physicians decide whether the patient should be admitted as an inpatient.

Patients pay a price for being assigned to observation care. Unlike inpatient care, patients have co-payments for physicians' fees and hospital services, and there is no coverage for follow-up care in a skilled nursing facility.

CMS attempted to bring clarity to this confusing situation with its "two-midnight" rule, which took effect in October 2013. The rule requires physicians to certify that a patient's condition is serious enough to warrant at least two overnight stays before Medicare will cover the patient's care as an inpatient. Hospitals object to the arbitrary time period and to the crystal ball burden it places on physicians.

Furthermore, under the mistaken assumption that the rule would increase payments to hospitals, the agency imposed a 0.2 percent Medicare payment cut. Fortunately, hospitals got some temporary relief when first CMS and then Congress (at the AHA's behest) agreed to suspend RAC audits through March 31, 2015.

The suspension doesn't upend the rule, so the AHA and several state hospital associations were joined by four hospital systems in a lawsuit challenging the rule and the payment cut. The rule flies in the face of common sense and good medical care, and the payment cut is indefensible. 

Third wave. Meanwhile, the proliferation of RAC denials created a serious backlog in the appeals system, as hospitals were forced to appeal them over and over again. RACs aren't bound by precedent, so even though denials were overturned on appeal with great regularity, RACs could, and did, deny the very same type of claim again and again. 

Predictably, the huge number of inappropriate RAC denials and subsequent appeals created such a massive backlog in cases before administrative law judges that Health & Human Services has imposed a two-year moratorium on assigning new appeals. That meant that hospitals could wait as long as five years to have an appeal decided, delaying billions of dollars in Medicare reimbursements to hospitals, many of which are not in good financial health. Some 800,000 appeals awaited assignment to an ALJ as of July 2014.

In May 2014, the AHA and three hospitals filed a lawsuit in response to the two-year moratorium on assigning new appeals. This suit would compel HHS to meet the statutory deadline of 90 days for timely review of Medicare claims denials.

Legislative remedies. We're rolling the boulder uphill again by pressing for changes not just before the courts, but also with HHS and Congress, where we support legislation to address this untenable situation.

The Two-Midnight Rule Coordination and Improvement Act of 2014 (S. 2082) would require HHS to develop "appropriate criteria" for payment of short inpatient stays — those expected to last fewer than two midnights — in consultation with hospitals and other stakeholders. Using the criteria that emerge from this consultation, HHS would develop a payment methodology for short inpatient stays.

The Medicare Audit Improvement Act of 2013 (S. 1012/H.R. 1250) would improve auditor performance, penalize RACs that fail to comply with the program, make performance evaluations of auditors public and permit hospitals to rebill denied claims without unreasonable restrictions. 

Our legal, regulatory and legislative advocacy is focused on making certain that RACs and other Medicare auditing programs are fair and rational and respect the realities hospitals face every day. Let's work together to get CMS to reward efficient high-quality medical care and roll the boulder to the top of the hill and keep it there.  

Rich Umbdenstock is president and CEO of the American Hospital Association.