Robert Jacobs
Bonnie Scott
Elizabeth Flood
Ellen Scott

An analysis of a set of Medicare RAC appeal decisions rendered by administrative law judges is instructive as to how CMS might improve the process.

At a Glance   

  • Review by an administrative law judge (ALJ) constitutes the third level of appeal for healthcare providers seeking to overturn reverse recovery audit contractor (RAC) findings of overpayment of Medicare claims.
  • An analysis of the results of RAC appeals submitted by 30 New York hospitals during the demonstration project has disclosed two deficiencies in the ALJ review process: inconsistent ALJ decision making and a lack of an appropriate feedback mechanism to correct erroneous overpayment determinations.
  • The Centers for Medicare & Medicaid Services should take advantage of feedback from such studies as an impetus to reevaluate and streamline the RAC appeals process.    

When recovery audit contractors (RACs) recouped nearly $993 million in Medicare overpayments during the demonstration period, ending March 27, 2008, the Department of Health and Human Services (HHS) and the Centers for Medicare & Medicaid Services (CMS) reported programmatic success. Meanwhile, healthcare providers expressed frustration over the RAC program-and with good reason. Although RAC recoupments of Medicare improper payments are an important measure of the program's overall success, and provided evidence to justify moving forward with the permanent RAC program, they offer little insight into the effectiveness of each element of the program. Behind the scenes, the RAC program has displayed many areas of internal inconsistency and inefficiency, driving up program costs for both CMS and the provider community. One particular area of concern is the RAC appeals process, including the administrative law judge (ALJ) level of review.

ALJ Review: Concerns and Considerations

ALJ hearings serve as the third level of appeal for both Medicare and RAC claims. In accordance with the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA), these hearings are conducted by the Office of Medicare Hearings and Appeals (OMHA), an entity that is "organizationally and functionally separate" from CMS and its contractors (MMA, P.L. No. 108-173, §931). The ALJ level serves as a critical safeguard for Medicare members and providers because it offers these parties the opportunity to have their claims evaluated by impartial decision-makers in fresh, de novo reviews. However, the protections afforded by this independent hearing venue come at a significant cost, both to OMHA and to providers.

ALJ review of RAC claims imposes a substantial financial burden on OMHA. The first level of expense lies in the escalation of OMHA's caseload. In its "2011 Budget in Brief," HHS notes that during FY09, OMHA received almost 216,000 claims of all types (Medicare Parts A, B, C, D, and RAC claims), and that with the inception of the nationwide RAC program, OMHA predicts that the caseload will reach 297,000 claims in FY10 and 336,000 claims in FY11 ( .Further, based on the acceleration of the RAC program thus far, these seem to be low-end estimates.

Still, the increasing volume of RAC claims is not the only concern, as RAC claims have also proven to be expensive to adjudicate. Although many other types of claims that reach the ALJ level involve relatively simple and straightforward issues, RAC claims frequently involve medical issues that are highly complex. Consider the contrast between an "easy" claim in which, for example, the ALJ must decide whether a certain medication is covered by Medicare, and a complicated RAC claim in which the ALJ must decide the medical necessity of a two-day inpatient stay for a 90-year-old diabetic. Increased complexity translates to increased cost.

Complicated RAC claims burden ALJ teams (which consist of an ALJ, an attorney, a paralegal, and a hearing clerk) and require a substantial expenditure of team time and resources. First, hearing requests for RAC claims strain OMHA support staff with administrative tasks such as record retrieval, typing, filing, and scheduling. Second, they tax the attorneys and paralegals who are responsible for reviewing case files, researching, preparing briefs, assisting ALJs, and drafting written decisions (which can be six to 12 pages). Third, complex RAC claims increase the workload for the ALJs themselves, who must spend added time reviewing medical records, researching statute, and hearing cases.

The costs associated with conducting ALJ hearings represent another expense. When ALJs review "easy" or straightforward claims, they can make their decisions "on the record" (based solely on their review of the relevant documents), without the need for a hearing. However, due to the complexity of RAC claims, they often require hearings, especially given that only favorable decisions can be made on-the-record, and unfavorable decisions cannot be rendered without a hearing. Although hearings are generally conducted via telephone, OMHA regulations allow for some hearings to be held via teleconference or in-person (which could entail additional costs). Further, consulting fees may also come into play as ALJs are permitted to request that outside medical and/or technical experts (such as DRG-credentialed coders) provide testimony during hearings.

According to OMHA, the average cost to adjudicate an ALJ claim for FY09 was $300 (HHS, "FY 2011 Online Performance Index"). Nonetheless, the costs of adjudicating a complex RAC claim, as described above, are undoubtedly much higher. Moreover, with the FY10 rollout of the nationwide RAC program, OMHA can expect to receive an increasing number of complex claims. From a budgetary standpoint, OMHA does not appear to be prepared. Even if OMHA's estimated cost per claim adjudicated were to hold steady for FY10, OMHA's operational costs-based on OMHA's estimate for FY10 of 297,000 claims-will exceed $89 million, overstretching its current FY10 budget of $71 million (HHS, "2011 Budget in Brief

Just as the administration of the ALJ level of appeal places a financial burden on the federal government, the utilization of the ALJ level of appeal places a substantial financial burden on Medicare providers. According to the American Hospital Association (AHA), it costs providers about $2,000 to see a claim through the first three levels of the appeal process (AHA, Limiting Access to Inpatient Medical Rehabilitation, This figure may include the cost of hiring extra staff to handle claims or outsourcing these claims to consultants or legal counsel. Providers may also choose to purchase tracking software to monitor their RAC claims and identify those claim types that are repeatedly being flagged as overpaid.

With important provider rights and significant financial consequences at stake, RAC claims at every level of appeal, especially the ALJ level, should be handled as accurately and efficiently as possible. However, a recent review of RAC appeals data generated during the demonstration period disclosed inconsistency and inefficiency within the appeals process.

Potential Areas for Improvement

The review encompassed RAC appeals submitted by 30 hospitals in the state of New York during the demonstration. The analysis looked at data from about 400 ALJ hearing requests, 62 percent of appealed denials ultimately required hearings (all conducted via telephone). This retrospective review of the ALJ decisions disclosed areas where there is a need for improved efficiency both at the ALJ level and in the RAC appeals process as a whole.

Inconsistent ALJ decision making. The first target area for improvement is an inconsistency in ALJ decision making. ALJs are uniformly charged with reviewing cases and applying relevant laws and Medicare regulations. In making their decisions, ALJs are required to give "substantial deference" to CMS program guidance (i.e., memoranda and manual instructions) when it is applicable to the case at hand (42 CFR § 405.1062). ALJs are not bound by CMS guidance, but the review of nearly 400 written ALJ decisions exposed significant differences in the way ALJs have interpreted and applied CMS program guidance.

Analytical differences among ALJs became especially apparent in cases in which the ALJs were asked to determine whether beneficiaries' inpatient admission services met Medicare coverage criteria (medical necessity admission denials). The CMS Medicare Benefit Policy Manual advises that the physician or other practitioner responsible for the patient's care is responsible for deciding whether the patient should be admitted to the hospital as an inpatient (Chapter 1, § 10). It states that physicians can make this decision only after considering several factors, including the patient's medical history and current medical needs, the severity of the patient's signs and symptoms, and the medical predictability of something adverse happening to the patient. Practitioners also are advised not to order admission for a patient unless they expect that the patient will need hospital care for 24 hours or more (outpatient treatment is suitable for those who are not expected to need at least 24 hours of care). The CMS Program Integrity Manual adds that the patient must show "signs and/or symptoms severe enough to warrant the need for medical care and must receive services of such intensity that they can be furnished safely and effectively only on an inpatient basis" (Chapter 6, Section 6.5.2.).

These guidelines suggest that the treating physician, who is most familiar with the patient's condition, is in the best position to render a medical necessity determination ("treating physician rule"). Although some ALJs adhered closely to this rule, others relied heavily on independent medical experts to make their decisions. Some ALJs even tried to make their own treatment assessments and medical necessity determinations. The problem with after-the-fact medical necessity determinations is that a retrospective look at a patient's hospital stay is not equivalent to the treating physician's assessment of the patient at the time the patient presented to the hospital. This is especially true when the after-the-fact determination is made by a medical expert who is not a member of the same specialized practice area as the treating physician (i.e., an internist making a medical necessity determination about a cardiologist's treatment decision).

Significant variations in the appeal success rate among 25 different ALJs, as is shown in the exhibit below, also pointed to inconsistency in the process, as analytical differences resulted in inconsistent hearing outcomes. Inconsistent outcomes are problematic because they can lead to the clouding of Medicare coverage issues as well as provider confusion about future Medicare claims decisions.

Exhibit 1


Exhibit 2


Lack of appropriate feedback regarding incorrect overpayment determinations. The next area targeted for improved efficiency is the lack of experiential feedback from the ALJ level to both RACs and lower-level appeals contractors. During the RAC demonstration, RACs that made incorrect overpayment determinations received neither informational feedback nor financial repercussions; they retained contingency fees even if their determinations were overturned on appeal.

Although this issue has been changed (now when a RAC determination is overturned at any level of appeal, the RAC must return the contingency fee), there is still no feedback loop to foster learning and accuracy. Furthermore, there is no mechanism in place to prevent RACs (and lower-level contractors) from making the same types of incorrect determinations, which have been repeatedly overturned at the ALJ level.

For example, during the demonstration, RAC overpayment determinations involving excisional debridements were repeatedly overturned on appeal. In fact, the data indicated an 83 percent success rate for excisional debridement claims at the ALJ level, indicating a surprising level of inefficiency.

At some point, CMS should intervene and educate lower-level RAC entities regarding these claims and their appeals. To clarify the excisional debridement issue, perhaps CMS could establish a general rule, stating, for instance, that the use of a sharp instrument on a large lesion should automatically classify the debridement as excisional. In any event, a formalized feedback process could help improve consistency and reduce waste (by eliminating the provider costs of pursuing higher-level appeals and the administrative costs of adjudication). Still, HHS would need to be careful not to compromise the autonomy of ALJs in its effort to relay data and knowledge from the ALJ level back to the RACs and other CMS contractors.

There is an inherent tug-of-war between maintaining a completely independent hearing venue for third-level RAC claims and administering a consistent and efficient process. However, the study hospitals' 85 percent overall success rate for RAC appeals at the ALJ level (for claims denied at lower-level appeals) clearly shows the need for a more streamlined appeals process.

It is time for CMS to reevaluate the RAC appeals process and take advantage of feedback from providers and consultants who have experience at the ground level. Providers and CMS alike can learn from past decisions. Providers can learn by identifying areas that are prone to overpayments, and CMS can learn by identifying areas where RACs have made overpayment determinations, but failed to sustain on appeal. In turn, providers can avoid submitting noncompliant claims, and CMS can decrease its error rate. An open communication channel among all parties will promote the exchange of information and ultimately allow the RAC program to fulfill its stated mission: to correct past improper payments so that CMS and its contractors can prevent such payments in the future.

Robert Jacobs is president, Health Resources Optimization, Inc. (Health/ROI), Lake Success, N.Y., and a member of HFMA's Metropolitan New York Chapter.

Bonnie Scott is a JD-MPH candidate, Emory University, Atlanta. She was a legal healthcare intern, Health/ROI, Lake Success, N.Y., during the summer 2010.

Elizabeth Flood, RN, is clinical director, PARR denial management program, Health/ROI, Lake Success, N.Y.

Ellen Scott, RN, is clinical director, PARR denial management program, Health/ROI, Lake Success, N.Y., and a member of HFMA's Metropolitan New York Chapter ( .

Publication Date: Tuesday, March 01, 2011

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