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Andrew Wachler Esq.

In today’s audit landscape, hospitals’ inpatient short-stay claims are receiving increased attention from the Centers for Medicare & Medicaid Services (CMS). On Nov. 15, 2011, CMS announced the launch of two demonstration programs that directly impact hospitals, specifically as it pertains to these claims. The first such program, called the Part A-to-Part B Rebilling Demonstration Program, is voluntary. The second program, the Recovery Auditor Pre-Payment Review Demonstration Program, however, is mandatory for providers in 11 states.[2] Whether included in either of these programs or not, hospitals must be aware of the most current audit developments affecting them and effective strategies to employ during the audit appeals process.

AB Rebilling Demonstration Program

The Part A-to-Part B Rebilling Demonstration Program reflects CMS’s stated goal to reduce improper payments from the Medicare program, and it will involve the participation of up to 380 hospitals.[3] The program’s participants, determined through a first-come, first-serve application process, will consist of 80 large hospitals (300 or more beds), 120 moderate-sized hospitals (100-299 beds) and 180 small hospitals (99 or fewer beds).[4] The program will run for three years, from Jan. 1, 2012 to Dec. 31, 2014. Enrollment for the program opened at 2 p.m. EST on Dec. 12, 2011.

The AB Rebilling Demonstration Program only will involve the rebilling of certain claims for Part B reimbursement. Specifically, it will center on short-stay inpatient claims (denied on or after Jan. 1, 2012) that are denied by a Medicare Administrative Contractor, a Zone Program Integrity Contractor, a Recovery Auditor or Comprehensive Error Rate Testing (CERT) when services are determined to have been provided in an incorrect setting. Under the program, these claims can be resubmitted as new claims for outpatient services provided. In addition, short-stay inpatient claims self-identified by a provider as being rendered in the incorrect setting after services were provided and billed may be resubmitted as new claims for outpatient services.[5]

Under the program, once a hospital rebills a claim for Part B reimbursement it will receive 90 percent of the total Part B payment (not including observation services), but still will be required to refund the difference of the beneficiary’s co-pay and deductible due under Part A and Part B.[6] CMS expressed its rationale for the 90 percent provision during its Nov. 30, 2011 Special Open Door Forum. The agency noted that it did not want to provide 100 percent of Part B reimbursement because it did not want to incentivize inaccurate billing, fearing that full payment would encourage hospitals to “game” the system.

One of the most concerning aspects of the AB Rebilling Demonstration Program is the requirement that participants waive their right to appeal all inpatient short-stay claims denied for lack of medical necessity when services are determined to have been provided in an inappropriate setting.[7] This highlights the inequity of a system in which a provider must choose between either appealing the denial of an inpatient claim and being unable to rebill the claim for outpatient reimbursement or rebilling the claim for 90 percent reimbursement of the Part B outpatient portion, yet waiving all due process rights.

Recovery Audit Pre-Payment Review Demonstration Program

Again, unlike the AB Rebilling Demonstration Program, the Pre-Payment Review Demonstration Program is mandatory and will have a dramatic effect on providers in the 11 participating states because it allows Recovery Auditors (RACs) to conduct pre-payment reviews on providers’ Medicare claims.

In states outside of the demonstration program, RACs only may conduct post-payment reviews of providers’ Medicare claims. However, on Dec. 30, 2011 CMS announced that the implementation of the Recovery Audit Pre-Payment Review Demonstration Program was being delayed until further notice. There has been no indication that this delay will be indefinite, therefore it is still important for providers to understand the basics of the program.

The Recovery Audit Pre-Payment Review Demonstration Program will allow RACs to review claims before they are paid to ensure that providers are complying with all Medicare payment rules.[8] The 11 states CMS selected for the demonstration program included Florida, California, Michigan, Texas, New York, Louisiana, Illinois, Pennsylvania, Ohio, North Carolina and Missouri. Under the current plan CMS will roll out the demonstration program with a focus on inpatient short-stay claims, focusing on MS-DRG 312 Syncope & Collapse as the only claim initially subject to review. However as the program progresses, CMS will initiate pre-payment review of seven more DRGs. CMS likely will add even more claims, including physician claims, as the demonstration program proceeds. Furthermore, the program is being introduced in addition to, and not in replacement of, the current RAC Program. The limit on the number of medical records eligible to be reviewed by the contractors is the same as that which exists under the post-payment RAC program; therefore, the limits may be doubled for hospitals in the demonstration states.

Despite CMS’s focus on the positives of the Recovery Audit Pre-Payment Review Demonstration Program, there are very serious implications for providers subject to its provisions.

Specifically, the program highlights the difficulty in balancing Medicare program integrity with the detrimental effects a pre-payment review has on Medicare providers. Pre-payment review is an aggressive and effective method for contractors to audit providers and prevent improper payments.  This method threatens providers, however, because it significantly impacts cash flow, and there are no substantive criteria or procedures in place to determine placement on (or removal from) pre-payment review lists. For hospitals in the demonstration program, they will have no choice but to experience pre-payment review and the possible devastating impacts it may have on their finances.


The looming implementation of CMS’s Recovery Audit Pre-Payment Review Demonstration Program indicates a pronounced shift in contractors’ focus on pre-payment reviews. From a Medicare program integrity perspective, a “prevent and detect” approach is an effective way to avoid improper payments, but pre-payment reviews can be unjustly devastating to providers. Specifically with regard to hospitals, pre-payment reviews may involve providers being forced to absorb the costs of expensive procedures and admissions while a contractor reviews (and potentially denies) a claim. In fact, if a hospital appeals a denied claim 30 days after each level of appeal, it could take at least a year before the claim reaches the ALJ level of appeal.[1]

One possible result of the Recovery Audit Pre-Payment Review Demonstration Program will be hospitals choosing to bill services they consider inpatient as outpatient services instead. Although hospitals should determine how to bill services based upon clinical decisions, this review demonstration program places them in a difficult position because of the uncertainty of payment for inpatient short-stay claims.

The Rest of Us

Even providers not participating in the recently announced CMS demonstration programs will be affected by the demonstration programs’ implications on obtaining orders for Part B reimbursement for Part A denials for lack of medical necessity.

Specifically, the demonstration programs reinforce the importance that hospitals appeal Part A denials – and in the event that those claims continue to be denied, seek Part B reimbursement. In addition, the Recovery Audit Pre-Payment Review Demonstration Program highlights the importance that providers receive Part B reimbursement early in the process and do not have to wait until they reach the ALJ stage of appeal. At this juncture there is not an effective mechanism for providers not taking part in the Part A-to-Part B Rebilling Demonstration program to achieve Part B reimbursement in this context despite the fact that they are entitled to it by law.

Since the reimbursement mechanism is not in place, it is essential that hospitals continue to appeal Part A claims denied due to medical necessity when services allegedly are provided in the wrong setting – and, in the alternative, to seek Part B reimbursement. A consistent effort by the healthcare industry will help to encourage CMS to implement a mechanism for Part B reimbursement that not only reaches beyond the rebilling demonstration program, but also maintains hospitals’ due-process rights to appeal Part A inpatient denials.

The demonstration programs announced late last year reflect the current state of the Medicare program and the federal government’s extensive efforts to curb improper payments to providers.  However, they also reflect the need for hospitals to individually and collectively seek Part B reimbursement in the context of Part A claims denied for medical necessity.

About the Authors

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.

Jessica Lange is an associate at Wachler & Associates, P.C.  Ms. Lange dedicates a considerable portion of her practice to defending healthcare providers and suppliers in the defense of RAC, Medicare, Medicaid and third party payer audits.  Her practice also includes the representation of clients in Stark, anti-kickback, and fraud and abuse matters.

Contact the Authors




[1] Interestingly, hospitals subject to the pre-payment review demonstration program that also are enrolled in the Part A-to-Part B Rebilling Demonstration Program will not be able to appeal pre-payment review denials of inpatient short-stay claims, but only will be able to rebill them through the Part A-to-Part B Rebilling Demonstration Program.

[2] The Recovery Audit Pre-Payment Review Demonstration Program’s implementation was delayed on Dec.30, 2011.

[3] Part A to Part B Rebilling Demonstration Program, Provider Outreach and Education PowerPoint presentation, Nov. 28, 2011, available at: https://www.cms.gov/CERT/downloads/Rebilling_Demo_Outreach_1129.pdf (Last visited: Dec. 9, 2011).

[4] Id.

[5] Supra, Note 13. During the Special Open Door Forums, CMS clearly stated that conditional Code 44 still applies, wherein a hospital is precluded from changing the service from inpatient to outpatient once the patient has been discharged but when services have not yet been billed. This places hospitals in the demonstration program in a difficult position, because in order to rebill the short-stay inpatient services as outpatient they first must submit a bill for the inpatient services.

[6] Supra, Note 9.

[7] Supra, Note 13.

[8] Centers for Medicare & Medicaid Services, Fact Sheet for the Recovery Audit Pre-Payment Review Demonstration Program, Nov. 15, 2011, available at: https://www.cms.gov/apps/media/press/factsheet.asp?Counter=4170 (Last visited: Dec. 11, 2011).


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