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RAC Audit Update: Renewed Focus on the Two-Midnight Rule

In RAC news, on June 1, 2021, Cotiviti acquired HMS RAC region 4. Don’t be surprised if you see Cotiviti’s logo on RAC audits where you would have seen HMS. This change will have no impact in the day-to-day contract administration and audit timelines under CMS’ guidance. You will continue to follow the guidance in the alleged, improper payment notification letter for submission of medical documentation and discussion period request. In March 2021, CMS awarded Performant an 8.5 year contract to serve as the Region 1 RAC. 

There really cannot be any deviations regardless the name of the RAC Auditor because this area is so regulated. Providers always have appeal rights regardless Medicare/caid RAC audits. Or any other type of audit. Medicaid RAC provider appeals are found in 42 CFR 455.512. Whereas Medicare provider redeterminations and the 5 levels of appeal are found in 42 CFR Subpart I. The reason that RAC audits are spoken about so often is that the Code of Federal Regulations applies different rules for RAC audits versus MAC, TPE, UPIC, or other audits. The biggest difference is that RAC auditors are limited to a 3 year look back period according to 42 CFR 455.508. Other auditors do not have that same limitation and can look back for longer periods of time. Of course, whenever “credible allegations of fraud” is involved, the lookback period can be for 10 years.

The federal regulations also allow States to request exceptions from the Medicaid RAC program. CMS mandates every State to participate in the RAC program. But there is a federal reg §455.516 that allows exceptions. To my knowledge, no State has requested exceptions out of the RAC Audit program.

RAC auditors have announced a renewed focus on the two-midnight rule for hospitals. Again. This may seem like a rerun and it is. You recall around 2012, RACs began noticing high rates of error with respect to patient status in certain short-stay Medicare claims submitted for inpatient hospital services. CMS and the RACs indicated the inpatient care setting was medically unnecessary, and the claims should have been billed as outpatient instead. Remember, for stays under 2 midnights, inpatient status may be used in rare and unusual exceptions and may be payable under Medicare Part A on a case-by-case basis.

Proposed Federal Legislation Will Provide Relief to Hospitals and Medicare Patients in Need of Post-Acute Care

The Center for Medicare and Medicaid (CMS) announced that the new RAC contracts in North Carolina should be ready by the end of the year.  This means that, next year, RAC audits on hospitals and other providers will significantly increase in number. Get prepared, providers!!

However, there is proposed federal legislation that could protect hospitals and Medicare patients if passed.

Hypothetical: You present yourself to a hospital. The hospital keeps you in observation for 1 day. You are then formally admitted to the hospital as an inpatient for 2 more days. Under Medicare rules, will Medicare now cover your post-acute care in a skilled nursing facility (SNF)?

Answer: No. Observation days in hospitals do not count toward the Medicare 3-day requirement.

On November 19, 2014, Congressman Kevin Brady introduced draft legislation that would allow hospital observation stays to count toward establishing Medicare eligibility for post-acute services, as well as improve and supervise the RAC program.

You are probably wondering…Why would a hospital keep me in observation for a full day without admitting me as an inpatient when hospitals are reimbursed at a significantly higher rate for inpatient versus outpatient?

Answer: To avoid RAC recoupments.

In recent years, recovery audit contractors (RACs) have been exceedingly aggressive in post payment review audits in challenging hospital claims for short, inpatient stays. The RACs are motivated by money, and all of the RACs are compensated on a contingency basis, which leads to overzealous, sometimes, inaccurate audits. Here in North Carolina, Public Consulting Group (PCG) retains 11.5% of collected audits, and Health Management Systems (HMS) retains 9.75%.  See my blog: “NC Medicaid Extrapolation Audits: How Does $100 Become $100,000? Check for Clusters!”

Why have RACs targeted short-stay admissions in hospitals? As mentioned, one-day inpatient stays are paid significantly more than similar outpatient stays. Because of the financial incentives, RACs often focus audits on whether the short-stay is appropriate because this focus will yield a larger overpayment. As a result, hospitals become hesitant to admit patients as an “inpatient” status and, instead, keep the patient in outpatient observation for longer periods of time.

Keeping a person in observation status rather than admitting the person could impact the person’s health and well-being, but it will also impact whether a Medicare patient can receive post-acute care in a SNF (or, rather, whether Medicare will pay for it).

In order for a Medicare patient to receive covered, skilled nursing care after a hospital stay, Medicare requires a 3-day inpatient stay.  With the onslaught of RAC audits, hospitals become leery to admit a person as an inpatient.  When hospitals are tentative about admitting people, it can adversely affect a person’s post-acute care services.

To give you an idea of how overzealous these RACs are when it comes to auditing Medicare providers, there are over 800,000 pending Medicare appeals. That means that, across the country, RACs and other auditing companies have determined that over 800,000 providers and hospitals that accept Medicare were improperly overpaid for services rendered due to billing errors, etc. Over 800,000 providers and hospitals disagree with the audit results and are appealing. Now, obviously, all 800,000 appeals are hospitals appealing audits findings short-stay admissions not meeting criteria, but enough of them exist to warrant Congressman Brady’s proposed bill.

The proposed bill will significantly impact RAC audits of short-stay admissions in hospitals.  But the proposed bill will also extend the current short moratorium on RAC audits on short-stay admissions in hospitals.  Basically, the RACs became so overzealous and the Medicare appeals backlog became so large that Congress placed a short moratorium on RACs auditing short-stay admissions under the two-midnight rule through the end of March 2015.   The proposed bill will lengthen the moratorium just in time for NC’s new RACs to begin additional hospital audits.

The moral of the story is…you get too greedy, you get nothing…

Remember “The Goose That Laid the Golden Eggs?”

A man and his wife owned a very special goose. Every day the goose would lay a golden egg, which made the couple very rich.  “Just think,” said the man’s wife, “If we could have all the golden eggs that are inside the goose, we could be richer much faster.”  “You’re right,” said her husband, “We wouldn’t have to wait for the goose to lay her egg every day.”  So, the couple killed the goose and cut her open, only to find that she was just like every other goose. She had no golden eggs inside of her at all, and they had no more golden eggs.

Too much greed results in nothing.

Similar to the husband and wife who killed the goose who laid the golden eggs, overzealous and inaccurate audits cause Congress to propose a temporary moratorium on RACs conducting audits on short-term hospital stays until the reimbursement rates are implemented within the same proposed bill (which, in essence will lengthen the moratorium until the rates within the bill are implemented, which also includes additional methods to settle RAC disputes).

The proposed bill, entitled, “The Hospitals Improvements for Payment Act of 2014,” (HIP) would revamp the way in which short hospital stays are reimbursed and how observation days are counted toward Medicare’s 3-day rule for post-acute care; thereby alleviating these painful hospital audits for short inpatient stays. Remember my blog: “Medicare Appeals to OMHA Reaches 15,000 Per Week, Yet Decisions Take Years; Hospital Association Sues Over Medicare Backlog.”

HIP would create a new payment model called the Hospital Prospective Payment System (HPPS) that would apply to short-term hospital stays.

What is a “short stay?” According to the proposed bill, a short stay is a: (1) stay that is less than 3 days; (2) stay that has a national average length of stay less than 3 days; or (3) stay that is “among the most highly ranked discharges that have been denied for reasons of medical necessity.”

Proposed HIP would also require the Department of Health and Human Services (HHS) to establish a new base rate of payment, which will be calculated by blending the base operating rate for short stays and an equivalent base operating rate for overnight hospital outpatient services.

The draft bill would also repeal the 0.2 percent ($200 million per year) reduction that CMS implemented with the two-midnight rule, which is the standard that presumes hospital stays are reasonable if the stay covers two midnights.

The proposed bill also mandates more government supervision as to the RACs.

This proposed bill comes on the cusp of an increased amount of RAC audits in NC on hospitals. As previously discussed, our new RAC contracts will be awarded before the end of this year. So our new RACs will come in with the new year…

The moral of the story?

Expect hospital RAC audits to increase dramatically in the next year, unless this bill is passed.