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The RACs are focusing on improper payments, and the reasons these occur can include the following:


  • Medically unnecessary services and potentially inappropriate settings;
  • Incorrect coding; and
  • A combination of the above.


To reduce the risk of improper payments occurring due to the above root causes, there is an urgent need for hospital leaders to re-evaluate their facilities’ internal auditing and monitoring programs. Although they may have worked in the past, it’s essential that they be adjusted to meet the RAC demands of the future. What’s necessary from this point on is a self-auditing program that can analyze resource consumption and coding. To yield sustainable results as healthcare reform unfolds in an environment of value-based purchasing, financial managers must understand causes of improper payment, plan for corrective action, and measure and report results. The best defense against RACs is an effective auditing and monitoring program.


The Centers of Medicare & Medicaid Services, or CMS, implemented a RAC demonstration project that evaluated the effectiveness of the compliance programs of hospitals of varying sizes. Many were identified as ineffective in terms of reducing risk. Reasons for ineffective programs included fragmented structure, lack of accountability, lack of specificity, lack of comparative data, and auditing and monitoring efforts being put on hold to tend to daily operational issues. Based on U.S sentencing guidelines, hospitals found to have committed fraud and/or abuse may receive reduced sentences if their governing boards support the compliance program and review the audit findings.


Language appearing in the “Corporate Responsibility and Corporate Compliance: Resources for Healthcare Board of Directors,” published by the Office of Inspector General (OIG) and the American Health Lawyers Association (AHLA), emphasizes an obligation of governing boards to ensure compliance plan oversight for their hospitals.


Using CERT Data to Your Advantage

The CMS Comprehensive Error Rate Testing (CERT) reports, published in May 2008, identify the 184 Diagnosis-Related Groups (DRGs) with the highest numbers of identified improper payments.  Combining these DRGs with other MS-DRGs results in a total of 384 high-risk MS-DRGs. (To view the CERT report, go to http://www.cms.hhs.gov/CERT/CR/itemdetail.asp?filterType=none&filterByDID=-99&sortByDID=1&sortOrder=descending&itemID=CMS1221863&intNumPerPage=10.)


You will need to review the entire database of MS-DRGs that CERT has identified as being “at risk” for improper payments, then customize your internal monitoring and audit strategy appropriately. Focus on cases with high volume, high relative weight, high improper payment risk, and one-day length of stays. The ultimate goal is to perform data analysis on these “at-risk” MS-DRGs and customize an internal monitoring and auditing plan to identify, resolve and prevent future improper payment risk.


Next Steps

To understand how to do this, you’ll need to be familiar with a few key definitions and guidelines.


Your facility’s improper payment rate is determined by the Paid Claims Error Rate (PCER), which is the percentage produced by dividing the number of total improper payments by total dollars paid. The percentages of improper payment for the 185 DRGs reported in the CERT report range from 0.1 percent to 47.7 percent. CMS has established an overall provider PCER goal of 3.7 percent. Currently, the provider community is reported at 4.5 percent. The CERT report also shows paid claims error rates by state, and you may use this as a benchmark for comparison.


Furthermore, the CERT data reports improper payment by the following cause criteria: 1) no documentation (2.6 percent), 2) insufficient documentation (percent not applicable), 3) medically unnecessary service (62.1 percent), 4) incorrect coding (29.3 percent) and 5) other (6 percent).


For example, cardiac defibrillator with implant, without cardiac catheterization, is the MS-DRG with the highest improper payment value ($184,283,328), and it comes with a PCER of 10.2 percent. Improper payment due to medically unnecessary service accounts for 90.2 percent of the total number of improper payment dollars ($166,223,562), and incorrect coding makes up 5.9 percent of the total ($10,872,716).


The CERT report also released percentages and improper payment dollar amounts related to specific reasons for a select number or MS-DRGs. To fill the gaps, MedLearn coding and case management experts created percentage brackets for medical necessity and coding (0 percent/90 percent, 15 percent/75 percent, and 45 percent) in order to project improper payments due to each reason.

The table below contains data from the May 2008 CERT report. The top 20 improper payment MS-DRGs are listed in order of the projected collected dollar amounts.


Top 20 Medically Unnecessary/Potentially Inappropriate Inpatient Setting MS-DRGs and Incorrect Coding MS-DRGs


MS-DRG Descriptor


Renal failure w/CC


Heart failure & shock w/CC


Perm cardiac pacemaker impl w/MCC


Perm cardiac pacemaker impl w/CC


Perc cv proc w/ drug elut stent w/o MCC


Ext OR proc unrelated to PDX w/CC


ECMO or trach w/ MV96+ hrs or PDX ex face, mouth & neck w/ maj OR


Circ disor except ami w/ car cath w/MCC


Cardia arrhyth & conduc dis w/CC


Chronic obstr Pulm dz w/oCC/MCC


Kidney & UTI w/oMCC


Maj jnt replace/reattach lo ext w/oMCC


Bronchitis & asthma w/oCC/MCC


Simple pneum & pleur w/CC


Circ disor except ami w/ car cath w/oMCC


Transient ischemia


Syncope and collapse


Other circ system OR proc


Non ex OR proc unrelated to PDX w/CC


Oth kidney & UTI Proc w/CC


Remember, although these MS-DRGs may be the top 20 nationally, they may not be your facility’s top 20.

About the Author

Carol Spencer, BA, RHIA, CCS, CHDA, brings more than 20 years of experience in Health Information Management, coding, teaching, data quality and operations. She is an accomplished teacher, author, and speaker covering subjects/topics such as CPT and ICD-9-CM coding, Physician Office Coding/Billing, Medical Terminology, and financial and compliance impacts of the MS-DRG rule change and compliance strategies. She is a thought-leader on data analytics with extensive CDIP and RACs experience. Ms. Spencer is the MedLearn project lead on MedLearn’s RAC Inpatient Data Analytics.

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