Level of Concern Rises as RACs are Back

Concerns are related to observation claims.

By now just about everyone has surely heard about Centers for Medicare & Medicaid Services (CMS) Administrator Seema Verma’s blog post on May 2, 2019. In the post, Verma asserted that CMS would require Recovery Audit Contractors (RACs) to “maintain a 95 percent accuracy score” and “an overturn rate of less than 10 percent.”

While that sounds good, especially compared to the historical overturn rate of 75 percent, Verma defined neither the accuracy score nor the overturn rate. Similarly, she didn’t define a time frame for either parameter. Also, buried in Verma’s post was the statement that RACs “must audit proportionately to the types of claims a provider submits.”

Verma’s statements have been widely construed as a warning that the RACs are about to be “unleashed” on providers again. Despite Verma’s assurances of additional protections, most providers remain skeptical that the RACs (or other contractors) will be adequately supervised and held accountable, to prevent the RAC debacle that flooded the appeals system with capricious denials awaiting overturn.

At this point, the RACs have been performing minimal, small-volume reviews. The RACs might be expected to be yearning for additional business and revenue streams. Assuming that’s true, and that the RACs will begin aggressive reviews and denials, providers must begin assessing risk areas and planning mitigation and appeals strategies.

According to Verma, RAC additional documentation requests (ADRs) will be guided by the volume of claims a provider submits based on an undefined “type” of claim. Furthermore, as mentioned, the RACs must maintain specified accuracy and overturn rates.

For most providers, this means there is a legitimate concern that observation claims could be reviewed simply based on the volume of claims. Verma’s guidance should also make providers suspicious that RACs will review claims that are subject to denial on the basis of objective findings in the medical record. More specifically, providers should expect that the days of denials being based on the soft “decision-making” by RAC “medical professionals” are over. If Verma is to be believed, these historical disparities of medical opinion that the RACs used to deny claims must be over.

In this article, we shall first consider the largest volume risk area, observation claims. There are two types of potential observation denials. The first is denials based on failure to document the essential elements of observation services. The second is based on observation claims that should have been inpatient. Let’s look at each of these.

CMS defines observation services as “a well-defined set of specific, clinically appropriate services, which

include ongoing short-term treatment, assessment, and reassessment before a decision can be made regarding whether patients will require further treatment as hospital inpatients, or if they are able to be discharged from the hospital.” This deceptively simple definition is surprisingly hard to meet in practice. In preparation for possible review, several questions must be asked of each observation claim:

  • Does the documentation indicate what is being treated, assessed, and reassessed?
  • Are there documentation of ongoing treatment, assessment, and reassessment, or is the patient being seen once a day?
  • Does the documentation indicate what parameters might trigger admission “for further treatment,” or if the patient might be discharged from the hospital?

Implicit in observation services, for the purpose of reimbursement, is a decision related to admission or discharge. If the record does not delineate CMS’s criteria, then observation reimbursement might be jeopardized. In such cases, providers might be left with outpatient services or Part B “ancillaries.”

The second type of observation denial is crueler, and it arises from observation stays exceeding two midnights. In this case, a contractor might legitimately deny an observation claim, because, under the two-midnight rule, it should have been an inpatient claim. It’s not clear if such a denial would count as an underpayment or an overpayment, for the purpose of calculating the RAC contingency fee.

A small number of such denials have been reported. They would be extremely difficult to defend since none of the records are likely to document “rare and exceptional (circumstances that) reasonable and necessary outpatient observation services span more than 48 hours.” Unlike inpatient Part A denials, there is no clear opportunity to rebill Part B claims as Part A. Further, a rebilling as Part A would probably be prohibited since the claim would have no valid inpatient order.

To summarize the reasons for concerns related to observation claims:

  • They probably meet the volume requirements for every provider.
  • They are unlikely to be sufficiently documented to justify the observation charges.
  • They are very hard to successfully appeal.

In the next segment, we’ll discuss other claims potentially at risk, based on Verma’s recent guidance.

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John K. Hall, MD, JD, MBA, FCLM, FRCPC

John K. Hall, MD, JD, MBA, FCLM, FRCPC is a licensed physician in several jurisdictions and is admitted to the California bar. He is also the founder of The Aegis Firm, a healthcare consulting firm providing consultative and litigation support on a wide variety of criminal and civil matters related to healthcare. He lectures frequently on black-letter health law, mediation, medical staff relations, and medical ethics, as well as patient and physician rights. Dr. Hall hopes to help explain complex problems at the intersection of medicine and law and prepare providers to manage those problems.

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