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achandler100By Andrew Wachler, Esq. and Alicia Chandler



As the RACs continue to focus on medical necessity issues in inpatient hospital admissions, hospitals are left with few good options to address these issues effectively.


The Medicare definitions of the terms “inpatient” and “outpatient” are circuitous and do not offer hospitals much guidance, if any, as to when patients should be kept in outpatient observation as opposed to being admitted as inpatients. If these admissions subsequently are audited, a RAC’s ruling that services were medically necessary but should have been performed in a different setting does not result in a payment reduction from a higher Part A inpatient amount to a lower Part B outpatient amount.  It results in the hospital receiving virtually no payment for medically necessary services that a RAC claims merely were performed in the wrong setting.


CMS published FAQ 9462 in November 2008 (and updated it only last month), taking the position that a hospital receiving a demand letter stating that services should have been performed in an outpatient setting can re-bill only at the outpatient level for ancillary services, and only if all the claim processing rules and timeliness rules are met. There are no exceptions to these rules, even though those exceptions existed during the demonstration program. Therefore, in most cases hospitals are left with no choice but to appeal the RAC’s decision in order to receive any level of payment for medically necessary observation and underlying services, including but not limited to emergency department care, surgical procedures, recovery room services and anesthesia.


While there are no statistics we are aware of published on the rates of overturning medical necessity decisions in short-stay cases, both from our experiences and anecdotally it seems that hospitals are experiencing significant success in this arena. On appeal to the ALJs, hospitals frequently have sought to prove that services were medically necessary and properly performed on an inpatient basis. However, as alternative relief in the event that the ALJ does not agree, hospitals have requested that the ALJ order CMS to pay for the services at the outpatient rate. In all the cases we are aware of, either ALJs or the Medicare Appeals Council has agreed to pay at the outpatient rate upon the determination of an appropriate setting for a medically necessary service.(1) However, aside from appealing the RAC’s decision to the ALJ (or the council), hospitals have no method to receive full payment for the services provided.


This landscape has forced hospitals to appeal RAC decisions even in cases in which the hospital otherwise just would agree to accept payment at the outpatient rate, as CMS has created no process for the hospitals to re-bill at the outpatient rate. While the reasons behind this policy are unclear, there are no legal impediments to a policy change that would eliminate the need for hospitals to appeal virtually every RAC inpatient medical necessity denial in order to secure some meaningful level of payment for medically necessary services.


On March 29, Andrew Wachler along with the American Hospital Association, the Greater New York Hospital Association, representatives from three major healthcare systems and Don Romano met with representatives from CMS to discuss the issues of medical necessity denials in short-stay cases. These hospital representatives advocated for reinstituting a method for resubmitting adjusted bills, something that existed during the RAC demonstration, to allow hospitals to resubmit claims when necessary services were provided in the wrong setting. CMS appeared sensitive to the hospitals’ concerns on this issue, and it continues to explore whether the concept could be incorporated into the RAC permanent program.


The current system is neither equitable nor efficient. Even the statement of work for the Recovery Audit Contractor Program published by CMS states that the mission of the program “is to reduce Medicare improper payments through the efficient detection and collection of overpayments, the identification of underpayments and the implementation of actions that will prevent future improper payments.” But even though proper payment is the stated goal, hospitals have been given no way to receive payment for services that even the RACs agree were medically necessary (albeit in a different setting). This failing creates inefficiencies by forcing hospitals to incur the costs of appeals, thus increasing the caseload for ALJs unnecessarily. While some short-stay cases clearly still will be appealed even if hospitals are permitted to submit an adjustment bill, in a number of cases hospitals would choose to avoid the costs of appeal and simply accept payment at the outpatient rate. Additionally, any concerns about the possibility of beneficiaries’ received bills for larger Part B co-payments arising years after a procedure could be addressed through an understanding between CMS and hospitals that such collection efforts would be unreasonable – in light of both the passage of time and the failure to notify beneficiaries in advance of the possibility that the services later would be re-billed under Part B.



(1) For example, UMDNJ – University Hospital v. Riverbend GBA (March 14, 2005) and O’Connor Hospital v. National Government Services (February 1, 2010).




In summary, it is time for CMS to fix this inequity of the RAC program and allow the submission of an adjustment bill when a RAC finds that services provided in an inpatient setting were medically necessary but provided in the improper setting. Fixing this would be both equitable, in that it would pay hospitals for medically necessary services provided, and efficient, as it would eliminate the need for hospitals to appeal virtually every short-stay case. We will continue to update the RACmonitor.com community about developments as they occur.


About the Author



Andrew B. Wachler is the principal of Wachler & Associates, P.C.  He graduated Cum Laude from the University of Michigan in 1974 and was the recipient of the William J. Branstom Award. He graduated Cum Laude from Wayne State University Law School in 1978. Mr. Wachler has been practicing healthcare and business law for over 25 years and has been defending Medicare and other third party payor audits since 1980.  Mr. Wachler counsels healthcare providers and organizations nationwide in a variety of legal matters.  He writes and speaks nationally to professional organizations and other entities on a variety of healthcare legal topics.

Alicia Chandler is an attorney at Wachler & Associates, P.C.  Ms. Chandler graduated cum laude from Harvard Law School.   She also has a Bachelor in Business Administration from the University of Michigan Business School where she graduated with high distinction. Ms. Chandler’s health care practice focuses on Stark, fraud and abuse, and Medical Staff Privileges issues.


Contact the Authors



Andrew Wachler awachler@wachler.com


Alicia Chandler achandler@wachler.com


To comment on this article please go to editor@racmonitor.com


Ensuring Medical Necessity: Lessons from the Top




Andrew Wachler Esq.

Andrew B. Wachler, Esq. is a partner with Wachler & Associates, P.C. Mr. Wachler has been practicing healthcare law for over 30 years. He counsels healthcare providers, suppliers and organizations nationwide in a variety of healthcare legal matters. In addition, he writes and speaks nationally to professional organizations and other entities on healthcare law topics such as Medicare and 3rd party payor appeals, Stark law and Fraud and Abuse, regulatory compliance, enrollment and revocation, and other topics. He often co-speaks with Medicare and other government officials. Mr. Wachler has met with the Centers for Medicare & Medicaid Services (CMS) policy makers on numerous occasions to effectuate changes to Medicare policy and obtain fair and equitable reimbursement for health systems.

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