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Analysis of the recently published RACTrac, a research project of the American Hospital Association (AHA), reveals that providers spent a total of $242,776,250 in managing their RAC response programs during the fourth quarter of 2012. 

The survey showed that 63 percent of all responding hospitals reported spending more than $10,000 on those programs during the fourth quarter. Forty-three percent spent more than $25,000, while 13 percent spent more than $100,000.

Do the Math

“Let’s factor some math into this,” said Frank Cohen, senior healthcare analyst for the Frank Cohen Group, in a written statement to RACmonitor. “According to the AHA, there are 5,815 registered hospitals in the U.S. Starting at the bottom, 63 percent of hospitals (3,663) spent more than $10,000, but 43 percent (2,500, at the next level) spent more than $25,000.” 

To arrive at the nearly quarter of a billion dollars spent by providers in managing their RAC programs, Cohen provided the following analysis:

“First, we subtract the next level (43 percent) from the first level (63 percent) and we see that 20 percent of hospitals spent between $10,000 and $25,000, which gives a midpoint of $17,500, Cohen wrote. “Multiply the 20 percent of hospitals in this category (1,163) (by) the $17,500 and you get a total expenditure of $20,352,500.”

Cohen continued: “The next level is 30 percent spending between $25,000 and $100,000. We did this math the same way: by subtracting the top 13 percent from the 43 percent. The midpoint between the $25,000 and $100,000 would be $62,500. Multiply this (by) the 30 percent of hospitals in this category (1,745), and you get an expenditure of $109,031,250.” 

Cohen explained that he took the top 13 percent (756) that reported spending more than $100,000 and selected an estimated expenditure, then multiplied by the number of hospitals in this category.

“Here, the response was ‘more than $100,000,’ which could be pretty much any amount, so I selected what I consider to be a very conservative $150,000, which gets you an expenditure of $113,392,500,” Cohen concluded.

A Quarter Billion Dollars

To summarize, then, 20 percent of hospitals account for $20,352,500 in expenditures, 30 percent of hospitals account for $109,031,250 in expenditures and 13 percent of hospitals account for $113,392,500 in expenditures for a grand total of $242,776,250. 

“Another way to say this is nearly a quarter of a billion dollars,” Cohen said. “Try that and see how easily it slips off your tongue!”

Cohen asserted that the money wasn’t going to be paid back to the Medicare trust fund, but rather funds that likely would be interpreted as “administrative waste.” 

“It is funding that, in fact, likely otherwise would have been used to maintain or improve the quality of care delivered to patients,” Cohen said. “Imagine how far a quarter of a billion dollars would go towards improving the overall quality of care in this country.” 

Denials: $1.3 Billion 

“During this period, $1.3 billion in denials were reported,” Cohen said. “The most commonly cited reason for a complex denial was ‘short stay, medically unnecessary,’ and 70 percent of hospitals responding to the RACTrac survey indicated that these were the most costly of their complex denials.” 

The RACTrac reported that nearly 70 percent were denied because care was provided in the wrong setting, not because the care was not medically necessary. 

“As I tell my grandchildren, words mean things, and if the reason for the denial had nothing to do with medical necessity, I would think that (to a reasonable person) it should have a different label,” Cohen explained. “Why is that important? Because the hospitals spent a lot of time and resources looking at medical necessity, which is contained within a clinical prevue, only to find that they were barking up the wrong tree.”

Medical Necessity: Inpatient vs. Outpatient 

Medically unnecessary one-day stays continue to top the list of reasons for denial after complex review,” Steven J. Meyerson, a physician with Accretive Physician Advisory Services, told RACmonitor. “This category includes outpatient surgery and procedures performed as an inpatient – and the admission of medical patients for whom the RAC auditor has determined that outpatient care would have been appropriate.”

Meyerson explained that for the first group, it’s important to use Medicare’s inpatient only list (Addendum E) and to review the documentation for any procedure not on the list that is going to be billed as inpatient in order to be sure there is adequate documentation of either a physician’s risk assessment and admission order prior to the procedure (or an admission for a serious complication or acute event such as bleeding, stroke, or an MI occurring afterwards). 

“To prevent denial of medical admissions, it’s important for hospitals to follow standard screening procedures, using InterQual or Milliman criteria, followed by secondary review by a physician advisor trained in the application of Medicare regulations for those cases that fail to meet first-level criteria for admission,” Meyerson said. “Once again, physician documentation of the severity of illness, the risk of an adverse outcome, and the need for services that are best provided in an inpatient setting will help prevent denials and support appeals.”

Cohen added that this situation is, in his words, “even more disturbing because, since medical necessity falls within the clinical arena, this essentially is saying that the expert clinical decisions made by educated and qualified physicians were wrong 61 percent of the time – and that is simply not credible or believable.”


Fear Not One Day Stays 

“Hospitals should not be afraid of billing for one-day stays as long as the patient was admitted for appropriate reasons, whether it be an inpatient-only procedure or physician judgment that inpatient care is required,” Meyerson said. “The medical record, of course, must support the physician’s decision and the medical necessity for inpatient care, because the physician’s order alone will not win an appeal.”

Of $1.3 billion in denials, hospitals appealed more than 40 percent of that sum, yielding a 72 percent success rate. “Let me repeat that,” Cohen said, “because it should become a mantra: of the $1.3 billion in denials, hospitals appealed more than 40 percent of them, yielding a 72 percent success rate.” 

Of similar significance, Cohen added, more than one-third of respondents reported having a RAC denial reversed through utilization of the discussion period.

According to the Centers for Medicare & Medicaid Services (CMS), the discussion period clock starts ticking when a hospital receives either a demand letter or a review results letter, and it keeps ticking through the point at which recoupment occurs. 


“I equate this to a front-end edit, through which a claim may be rejected at the front end of the claims process (often by an EDI company) for lacking certain basic information, such as patient demographics,” Cohen said. “Of those providers appealing denial findings, nearly three-fourths (sounds a lot bigger than 72 percent) achieved reversals. Remember that 40 percent of the $242 million hospitals generally spend to manage the RAC process is around $96.8 million, and of that, 72 percent (or around $70 million) apparently could be classified as total waste.

Cohen said a significant number of other denials were reversed during the discussion period, prior to a formal appeal.

“Now, some may say that’s a good thing; the practice didn’t have to go through the hassle of the appeal process,” said Cohen. “But I see it as a bad thing; the RACs are making garbage calls and getting nailed on what are very obvious mistakes made in the front end (like forgetting to put a patient’s name on a claim form).”

“When a hospital wins an appeal at whatever level, it means the RAC erred in denying payment,” Meyerson said. “Considering the reported appeal (rate) of 40 percent of denials with a 72 percent success rate, the error rate can be calculated at 29 percent: a very high rate, and one that calls into question the validity of the RAC review process.”

Meyerson noted that CMS reported $2.4 billion in RAC corrections during the 2012 fiscal year, with 93 percent recoveries and only 7 percent underpayments in the fourth quarter. 

“So a 29 percent error rate could mean $647 million incorrectly collected from hospitals,” Meyerson concluded. “Some of this will be recovered through the appeal process, but only after a delay that could be two years or more, and after considerable work and expense.”

Junkyard Parts

Cohen believes that the entire claims process is too complex, and that there are too many interdependencies and too many moving parts. 

“Mixing in old policies that seem to survive the new ones yields what is beginning to look (metaphorically) like a junkyard,” he said. “If you work hard enough, you can find enough parts to build a working car eventually, but is that really the most efficient use of time? What we need is an overhaul, not of the healthcare system (although that may be true), but rather of the administrative rules and processes currently in place.”

Agreeing with the government that the U.S. is losing hundreds of millions, if not billions, of dollars through waste, Cohen pointed out that it is not always the kind of waste such as the fraud and abuse commonly reported in the media.

“I am talking about the kind of waste that is inherent within any complex system out of control: administrative waste,” he said. “I would hypothesize that what I see as fraud and abuse by the RAC auditors have contributed to a reduction in efficiency and quality of care through diversion of funding and resources that would have been much better left to the discretion of our healthcare providers.”

Where the Money Is

“It sounds like a cliché by now, but with appeal success rates so obviously benefitting providers, I am at a loss why only 40 percent of providers are appealing RAC determinations,” said J. Paul Spencer, compliance officer for Fi-Med Management. “I view RACs like I do liquor store robbers in bad neighborhoods. They will keep hitting easy targets until those providers show that they want to defend themselves.”

About the Author

Chuck Buck is publisher of RACmonitor

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Exploring the Impact of the RAC Program on Hospitals Nationwide


Chuck Buck

Chuck Buck is the publisher of RACmonitor and is the program host and executive producer of Monitor Monday.

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