When it comes to hospital disputes with Medicare’s recovery audit contractors – or RACs – this one is a doozy.

Gretchen Case, Cedars-Sinai Medical Center’s director of compliance and revenue integrity experience in Los Angeles, recounts the case of one patient who underwent treatment for cancer and received eight cycles of chemotherapy at the 865-bed academic medical center. The hospital’s RAC audited each of the eight claims. It approved four claims and denied four claims – all for the same service and patient.

“Nothing changed in the clinical course of care,” Case said. “Why were four of the claims rejected? We don’t know the expertise of the individual who made the denials, but what I find so disturbing is that they are denying claims because they are counting on hospitals either not defending themselves or not being able to defend themselves.”  

The hospital is contesting the denied claims in this case, and has spent more than $3,000 to defend the four denials. RACs are paid a commission of between 9 to 12.5% for each Medicare claim they deny. As Case, observed, the more claims they deny, the more they profit.

“We understand the need to be audited,” Case said. “But take away the contingency fee. Remove the vested interest in denying claims and let’s create an infrastructure that is fair and respectful of both parties.”

Cedars-Sinai’s experience with the RAC program is one of several case examples included in a recently released AHA report, “The Real Cost of the Inefficient Medicare RAC Program: Results from the AHA’s RAC Administrative Burden Survey.”

The report, along with an infographic, highlights the cost to hospitals of managing and responding to RAC audits. Hospitals report spending hundreds of thousands – in some cases millions – of dollars each year to manage RAC audits, denials and appeals. They say money spent managing the RAC auditing process could otherwise be spent on improving patient care.

Hospitals also object to a disparity in the program’s rules that prevents them from rebilling denied inpatient claims for outpatient payment if the claim is more than a year old, while RACs can audit medical records up to three years old. Hospitals report that most claims audited by RACs fall outside the one-year rebilling window and thus cannot be rebilled.

Appealing a denied RAC claim can involve up to five levels. More than 70% of appealed hospital Medicare Part A denials are fully overturned at the third level of appeal, when the case is heard not by a contractor, but by an administrative law judge. But it can take years to settle disputed claims.

“RACs cause a great deal of uncertainty not just for hospitals, but also for patients,” noted Cedar-Sinai’s Case. “Our patients are either angry or confused when they learn these audits have caused an increase in their out-of-pocket payments or prevented them from qualifying for additional care following their stay in the hospital. We have beneficiaries calling us asking how they can help us fight back.”

The AHA report on RACs coincided with the introduction by Reps. Sam Graves, R-Mo., and Adam Schiff, D-Calif., of legislation that would make significant changes to the RAC program.

The Medicare Audit Improvement Act, H.R. 2156, would direct the Centers for Medicare & Medicaid Services (CMS) to replace the RAC contingency fee structure with a flat fee to reduce the financial incentive for overzealous auditing practices; rationalize payments to RACs by lowering payments for poor RAC performance; fix CMS’s rebilling rules to allow hospitals to rebill claims when appropriate; and require RACs to base their inpatient claims decisions on only the information the physician had when treating the patient.

“Physicians do what is best for their patients and make medical decisions based on the care needs of their patients,” said AHA Executive Vice President Rick Pollack in a May 1 statement of support for the legislation. “But recovery audit contractors second guess medical decisions and divert resources from patient care. This legislation makes long-overdue repairs to the broken RAC program.”

The financial impact of the RAC audit system can hit hospitals hard – especially smaller hospitals, like 56-bed Illinois Valley Community Hospital in Peru, Ill. CEO Tommy Hobbs said the cost of managing RAC audits equates to a 1 to 2 percentage point reduction in the hospital’s margin. The hospital’s experience with RAC audits is another case example in the AHA report.

“We’ve hired consultants to help us with medical necessity decisions to the tune of $150,000 a year,” Hobbs said. “We added staff for case management for another $20,000 a year. It takes financial resources away from accomplishing strategic initiatives around quality improvement.”

He added: “There’s too much subjectivity in the audit process. If there ever was a program crying out for reform, this is it.”