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With each new day the regulatory landscape for hospitals is becoming more stringent and complex as it relates to compliance with the rules and regulations promulgated by the Centers for Medicare & Medicaid Services (CMS). Most hospitals utilize multiple forms of compliance auditing, including the work performed by utilization review (UR) committees. The UR committee is charged with ensuring that each case is in compliance, being comprised of physicians, nurses, case management and administrative staff who are well versed in the ever-changing medical necessity compliance regulations.

One important tool used by these UR committees is the Program for Evaluating Payment Patterns Electronic Report (PEPPER). The PEPPER is intended to support a hospital’s own auditing and monitoring activities, and it is utilized not only by the UR committee but also by case management, medical coding and billing, compliance, finance, and leadership teams.

Created in 2003, PEPPER in its current form includes an expanded list of areas at risk for improper Medicare payments. These targets reflect the latest denial data from Recovery Audit Contractor (RAC), Comprehensive Error Rate Testing (CERT) and Medicare Administrative Contractor (MAC) audits. The PEPPER is updated annually, and this year alone 18 new “targets” have been added, changing both the quantity and format of PEPPER data. All of these changes need to be understood fully in order to maximize their value.

The PEPPER currently is distributed to short-term acute-care hospitals on a quarterly basis, being distributed annually to long-term acute-care hospitals, critical access hospitals and inpatient psychiatric hospitals. Later this year, the reports will be available to inpatient rehabilitation hospitals for the first time. It is crucial that these institutions all learn to analyze and utilize the PEPPER report data to support their ongoing compliance efforts.

To learn how to analyze this data, one first must understand what the report is indicating. The PEPPER report provides a rolling three-year analysis of paid Medicare inpatient claims. The statistics are formatted in a ranking system based on state information, MAC/FI jurisdiction and national claim patterns. This quarterly data allows for an analysis of trends and is available within four to six months following claim submission. Starting this year the PEPPER data reflects 17 MAC/FI jurisdictions, but further consolidation is expected as the MAC program is finalized.

UR committees should not use PEPPER as their sole data analysis tool since it does not monitor outpatient services such as observation care or outpatient procedures (with the exception of one target that includes both inpatient and outpatient cardiac stents). It also does not include Medicare Advantage (HMO) claims or information from other payers. While the comparison data provided by the PEPPER is helpful, it currently does not compare hospitals by size, demographics or types of services. Thus, large inner-city hospitals are being compared to small community hospitals and everything in between.

The PEPPER compares Diagnosis-Related Groups (DRGs), sometimes referred to as MS-DRGs, developed for Medicare to classify hospital cases by similar clinical groups (that in turn use similar levels of hospital resources to treat cases in order to find outliers in comparison to other hospitals). If a hospital is significantly above or below the average within these groups, it is considered an outlier and can be at higher risk for audit. These designations can help identify potential areas of compliance weakness and should be prioritized and targeted by hospitals for ongoing internal compliance assessment.

Medicare and Medicaid Program Integrity Contractors – including RACs, MACs, Zone Program Integrity Contractors (ZPICs), Program Safeguard Contractors (PSCs) and many others – review these outliers for possible areas to audit.

Outliers are discovered by using a simple DRG validation ratio. MS-DRG coding is tested in the PEPPER by examining ratios of higher-severity MSDRGs compared to the universe of related MS-DRGs. The example below shows the ratio for simple pneumonia.






The result will appear in the “percent” column of the hospital’s PEPPER and will be color-coded if it is considered to be an outlier. Outliers appear in red if they are above the 80th percentile, appearing in green if they are below the 20th percentile. Once the outliers are calculated, high outliers must be evaluated by the hospital to ensure correct status and adequate documentation, both clinically and during utilization review. These outliers reflect admissions that may lack clear documentation of inpatient medical necessity regardless of length of stay. These numbers also may imply that further education is necessary for all parties in the UR committee, as well as attending physicians, if documentation is an issue.


As knowledge and acceptance of PEPPER grows, more hospitals are discovering the value of these reports and using them to their advantage in adhering to the standards identified in the Conditions of Participation. To obtain your PEPPER data files, go online to www.qualitynet.org. Training and other information is available at www.pepperresources.org.

About the Author

Ralph Wuebker, MD, currently serves as Vice President of Executive Health Resources’ (EHR) ACE (Audit, Compliance and Education) Team. This group of physicians conducts audits and regular visits to EHR’s client hospitals to provide ongoing education on a variety of topics including Medicare and Medicaid compliance and regulations, medical necessity, Recovery Audit Contractors, utilization review, denials management and length of stay.

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Understanding and Managing the Posted RAC Issues


Ralph Wuebker, MD, MBA

Dr. Ralph Wuebker serves as Chief Medical Officer of Executive Health Resources. In this role, Dr. Wuebker provides clinical leadership within the company and works closely with hospital leaders to ensure strong utilization review and compliance programs. Additionally, Dr. Wuebker oversees Executive Health Resources’ Client Services teams, who provide onsite education for physicians, case managers, and hospital administrative personnel and help hospitals identify potential compliance vulnerabilities through ongoing internal audit. An expert in CMS regulations, medical necessity compliance, utilization review, denials management, and program integrity efforts, Dr. Wuebker also serves as an industry thought leader and editorial advisor to the media, as well as a highly respected and distinguished industry speaker.

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