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The basic facts of the case are all too familiar to RAC-audited hospitals.  A California bay area hospital experienced RAC audit recoupments during the demonstration project for accounts whose service dates were in 2004.


The RAC had recouped the entire payment for short stay cases that it had determined were not reasonable and necessary as inpatient services.  The hospital had appealed a number of these cases, and had some success in recovering recoupments after successfully making the argument that the cases were in fact appropriate for inpatient services.


The Medicare Appeal Council’s crucial opinion involved a case where the hospital was unsuccessful in establishing a convincing case for inpatient status.  In this case, at the third level of appeal, the ALJ found that “the observation and underlying care are warranted” and as a result the ALJ determined that CMS was liable for any difference between the covered and non-covered services.


CMS appealed to the Medicare Appeal Council at the 4th level of appeal claiming that the ALJ had “erred as a matter of law by ordering Medicare payment for the observation and underlying care provided to the beneficiary…”


Judge Krzywicki disagreed; strongly and succinctly.  Citing numerous inconsistencies in CMS interpretation of its own regulations, Judge Krzywicki reasoned that “(w)hen the RAC reopened the determination on the initial claim at issue here, it had the same plenary authority to process and adjust the claim as it did when that claim was first presented and paid. The RAC’s revised initial determination states that the beneficiary met the criteria for outpatient observation status… The QIC also found that outpatient observation status would have been an appropriate course of treatment… The ALJ agreed that outpatient observation status was reasonable and necessary.”  And therefore Judge Krzywicki ordered “the contractor shall work with the provider to take whatever actions are necessary to arrange for billing under Part B, and thus, offset any Part A overpayment.”


The arguments and regulatory language cited in this case would seem to apply to any medical necessity recoupment or denial where review organizations dispute the setting of care while not disputing the care that was provided.


Notably, CMS officials have no comment on the O’Connor Hospital decision.


About the Author


Dennis Jones is the director compliance services for CBIZ KA Consulting. While Dennis is recognized as a leading RAC issues expert, his expertise covers a wide variety of topics including Managed Care, Uncompensated Care, Medicare and Medicaid Compliance, HIPAA, and Process Improvement. As a result he has spoken previously for NJHA, World Research Group, and various state chapters of HFMA, AAHAM, and AHIMA. Dennis is a past-president of the New Jersey Chapter of AAHAM and has held senior management positions in provider, IT vendor and reimbursement consultant arenas.


He is a graduate of the Pennsylvania State University with a degree in Health Planning and Administration and hopes to be able to afford season football tickets some day.


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