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A RAC appeals case originating in 2004 has reached the Medicare Appeals Council. The next step in the appeals process would be Federal Court. (1)


At issue are four claims judged by the RAC to be unjustified for inpatient admission and associated services. The RAC demanded return of the inpatient payments as overpayments. The Administrative Law Judge (ALJ), which is the appeals step just before the Medicare Appeals Council, ruled that three of the claims actually were justified and medically necessary. The fourth claim was judged as being medically unnecessary for inpatient admission, BUT the services provided would have met requirements for observation services.


Note: this appeal involves the very sensitive and broadly based issue of short-stay inpatient admissions that should have been classified as observation. The Medicare program has never adopted formal standards for inpatient admissions; thus any short-stay inpatient admission can be questioned and there is no definitive way for auditors to know that an admission is proper.


The CMS stance on this type of situation is that the hospital is to lose all  reimbursement. If a hospital determines after the fact or an auditor determines for them, the only billing is a Type of Bill 110 for a no-pay claim. In theory, there might be some incidental services that would not be part of the inpatient claim, but basically all reimbursement is lost. (2)


The ALJ ruled that the observation services should be paid in lieu of denying payment for the inpatient services. CMS appealed, stating that there was an error in law.


In its referral memorandum to the Council, CMS asserts that the ALJ erred as a matter of law by ordering Medicare payment for ‘the observation and underlying care’ provided to the beneficiary because those services are not separately billable under Part A.”


From the Ruling


“The Council does not agree that the case contains an error in law. The position advanced by CMS in its memorandum is inconsistent with the guidance set forth in the CMS Manuals.


CMS has expressly stated that Part B payment may be made if Part A payment is denied.”


The ruling goes on to discuss various Medicare rules and regulations supporting that CMS should make payment for the observation services that will offset some portion of the inpatient overpayment.


In this case, the provider submitted a timely claim for services which was paid under Part A. When 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.


Consistent with the CMS manual provisions discussed above, 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 contractor shall issue a new initial determination upon effectuation.”  (Emphasis added.)


The ruling clearly indicates that when the RAC reopens  a determination, everything starts over. Thus, if there should have been some other payment, the claim should have been adjusted and the proper payment credited against the overpayment.


Understandably, CMS is very concerned about this type of interpretation. If it  holds up, assuming CMS does not take this to court, there are significant issues of reduced overpayments and complicated processing issues. Let us consider an example.


Case Study 1 – Sam, a retired rancher, has been brought to the Apex Medical Center’s ED one afternoon. He is complaining of chest pains and a severe headache. An extensive workup is provided at the ED including laboratory testing, cardiology testing and extensive radiology tests, inclusive of a CAT scan.  Sam’s attending physician decides to admit him as an inpatient due to a likely cardiac event.


The next morning, Sam is feeling much better. Virtually all of his symptoms are abated. Additional testing indicates no problems and Sam is discharged just before lunch.


(1) See “The Medicare Recovery Audit Contractor Program” authored by Dr. Abbey.  CRC Press, ISBN: 1-4398-2100-8.

(2) For instance, see “Hospital Guidelines for Outpatient Observation Services”, AdminaStar Federal, Inc., December 2002 Medical Director’s Corner.


Because this was an inpatient admission, all the diagnostic testing and services provided in the ED are included on the inpatient claim, (3) at least as charges although there would be no CPT coding reported. If a RAC determined that this whole episode should have been an outpatient observation case, we would have  needed to go back and determine what payment should have been made on the outpatient side.  This would require rebilling and recoding the case with all the CPT codes for the various ED and diagnostic services along with the observation.


Once the rebilling is accomplished, the amount that should have been paid for the ED services and the observation can be determined. Just the process of rebilling the case with proper codes is significant. Quite likely, a significant portion of the inpatient overpayment will be offset by the outpatient payment.


Let us take the concept of using what should have been paid and apply it against the overpayment by extrapolating with other types of situations.


Case Study 2 – The Apex Medical Center has just received a RAC determination that an incorrect CPT code was used on a claim that paid $400 (that is, the code used was not justified by the documentation). The RAC is demanding repayment of the $400. Apex checks and discovers that a different code that would have paid $320 should have been used. Unfortunately, this claim is identified outside the time period during which it can be re-filed.


If we apply the ALJ ruling, which is being upheld by the Medicare Appeals Council, the overpayment amount is actually $80 – because the RAC reopened the case, the $320 payment can be used to offset the $400 overpayment. But how will the proper code and corrected claim be developed and recognized?


The concept illustrated in the ruling also can be applied to current types of situations. Take Case Study 1 and modify the facts by having Utilization Review (UR) intervene just before Sam is discharged from the hospital. Presume that UR, with the physician’s concurrence, by using Condition Code 44 changes the case to observation.  Recent pronouncements from CSM (4) have indidcated  that the observation services only can be billed from the time the doctor orders the observation. The ALJ ruling appears to imply that the observation should be considered back to the beginning of the episode of care occasioning the inpatient admission.


Bottom Line:


Whether CMS will appeal this ruling to Federal Court is not known. If it is appealed, this issue could be tied up in the courts for years. There are two potentially major issues:


i.             There are tens of millions of dollars in recouped overpayment that may need reconsideration.
ii.            The process for reconsideration is quite complex and would take significant effort on the part of providers and Medicare contractors.


Be certain to follow any further developments in the O’Connor Hospital case. Whatever the outcome, it should be interesting!


This ruling can be downloaded from: http://www.gao.gov/new.items/d10143.pdf.


About the Author


Duane C. Abbey, Ph.D., CFP, is an educator, author and management consultant working in the healthcare field. He is president of Abbey & Abbey Consultants, Inc., which specializes in healthcare consulting and related areas. His firm is based in Ames, Iowa. Dr. Abbey earned his graduate degrees from the University of Notre Dame and Iowa State University.

Contact the Author




The above article was extracted from the Medical Reimbursement Newsletter, April 2010 issue, pages 19-20.  The Medical Reimbursement Newsletter is published by Abbey & Abbey, Consultants, Inc., ISSN: 1061-0936.


(3) See the DRG Pre-Admission Window process, whereby all diagnostic services and related therapeutic services must be bundled into the inpatient claim.

(4) See CMS Q&A #9973.


Duane C. Abbey, PhD, CFP

Duane C. Abbey, PhD, CFP, is an educator, author, and management consultant working in the healthcare field. He is president of Abbey & Abbey Consultants, Inc., which specializes in healthcare consulting and related areas. His firm is based in Ames, Iowa. Dr. Abbey earned his graduate degrees at the University of Notre Dame and Iowa State University. Dr. Abbey is a member of the RACmonitor editorial board and is a frequent guest on Monitor Mondays.

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