Medicare Payment and Reimbursement

HFMA Comments on Medicare Part B Inpatient Hospital Billing and the RAC Program

May 20, 2013 10:27 am

May 17, 2013

Marilyn Tavenner
Centers for Medicare & Medicaid Services
Department of Health and Human Services
Hubert H. Humphrey Building
200 Independence Avenue, SW, Room 310G
Washington, DC 20201

Re: CMS-1455-P: Medicare Program; Part B Inpatient Billing in Hospitals – Federal Register Vol. 78, No. 52 March 18, 2013

Dear Ms. Tavenner:

The Healthcare Financial Management Association (HFMA) would like to thank the Centers for Medicare & Medicaid Services (CMS) for the opportunity to comment on issues related to Medicare Part B inpatient hospital billing and the Recovery Audit Contractor (RAC) program.

HFMA is a professional organization of more than 40,000 individuals involved in various aspects of healthcare financial management. HFMA is committed to helping its members improve the management of healthcare delivery systems, comply with the numerous rules and regulations that govern the industry, and further the principles of administrative simplification.

In 2008, HFMA convened a group of healthcare stakeholders representing payers, providers, employers, and patients to define the key principles that a reformed payment system must achieve. The group came to consensus around five key principles, which are discussed briefly below:1  

  • Quality: Payments should encourage and reward high-quality care and discourage medical errors and ineffective care. Wherever possible, payments should reward positive outcomes, rather than adherence to processes. In the absence of outcome measures, payment systems should reward the use of accepted practice and evidence-based processes and protocols that meet or exceed standards of quality and safety to promote optimal outcomes. Payers should not be responsible for payment to cover costs directly related to serious preventable medical errors.
  • Alignment: Payments should align incentives among all stakeholders to maximize the efficiency and coordination of health services based on accepted practice and evidence-based delivery models and protocols. Payment systems should stimulate and reward healthful behavioral choices and selection of value-based services by consumers related to prevention, primary care, acute care, and chronic disease management. Care decisions should be made through a shared decision-making process in which patients’ values and preferences are identified and respected.
  • Fairness/Sustainability: Payment systems should balance the needs and concerns of all stakeholders. Payments should recognize appropriate total costs for the efficient delivery of healthcare services that are necessary and consistent with evidence-based care, high-quality/low-cost provider benchmarks, and the advancement of medical science. Payment systems should accommodate payers’ and purchasers’ needs to allocate funds in a predictable, manageable fashion. In addition, consumers should have financial incentive to select high-quality, efficient care without being discouraged from seeking necessary and appropriate services. Finally, the payment system should be sustainable, providing a stable funding stream in the face of competing claims on public and private capital.
  • Simplification: Payment processes should be simplified, standard, and transparent. All parties should use payment methodologies, standardized at the national level, to reduce complexity. The payment methodologies should be transparent to those affected by them, and comply with privacy, security, and antitrust laws and regulations.
  • Societal Benefit: The resources needed to support broad societal benefits (i.e. medical education and research, indigent care) should be paid for explicitly. Similarly, payment systems should reward innovators who develop technologies, services, processes, and procedures that enhance safe, high-quality, and efficient care.

HFMA appreciates CMS’s attempt to provide hospitals an avenue to rebill some medically necessary services subsequent to the denial of an inpatient stay resulting from a Recovery Audit Contractor (RAC) or other retrospective payment review. While HFMA strongly supports efforts by CMS to identify improper payments within CMS administered programs, we believe the RAC program is counterproductive to the principles of a reformed payment system. The program violates the following principles of a reformed payment system:

Quality: As stated above, in the absence of an outcome measure, payment systems should reward the use of widely accepted practices. In the cases that fall under the purview of this rule, physicians are prescribing inpatient services that they think are necessary based on their professional judgment. However, CMS systematically thinks these cases should not merit a higher level of reimbursement for the Part A DRG. As a result, CMS’s payment system is not rewarding accepted practice and is pushing more patients into observation status.

Fairness/Sustainability: The RAC program denies payment for services that are medically necessary. Instead, it encourages the use of observation services, which are significantly under-reimbursed and have the potential to cause patients significant financial harm if they are to be used in the manner CMS is encouraging through the RAC program and this proposed rule.

Simplification: The RAC program places an unnecessary administrative burden on overstretched hospitals. Further, the administrative complexity of the program consumes both financial and human resources that could otherwise be allocated to quality improvement activities.

If the RAC program is to continue, CMS needs to address the fundamentally flawed incentives in the program’s design. It costs RAC auditors little to request and review medical records from providers and to subsequently deny legitimate claims in hopes of receiving a commission payment. Indicative of the problem, almost 66 percent of medical record requests did not contain an overpayment and, when a RAC denies payment, providers prevail in 72 percent of appeals.2 

Given these incentives, it’s not surprising that three-fourths of all appealed claims are still in the appeals process,3  contributing to the claims backlog that CMS seeks to resolve with CMS-1455-R and CMS 1455-P. Unfortunately, we do not believe the proposed rule will have its desired effect as it does not address the misaligned incentives that create the problem. Very simply: paying RACs on a contingency basis with no penalty for being wrong gives them the incentive to deny claims liberally, leading to an ever-increasing volume of appeals by hospitals. The cost burden of questionable denials that is the hallmark of the RAC program will continue to be borne by providers (and as a result, ultimately all purchasers of health care).

Beyond the badly misaligned economic incentives, our members attribute their high success rate on appeals to the RACs’ inconsistent use of standard industry criteria (e.g., InterQual or Milliman) to audit admission decisions. Their failure to apply these widely accepted industry standards consistently when denying medically necessary, site-of-service-appropriate benefits to Medicare beneficiaries is a significant factor in creating the backlog that CMS seeks to resolve through this proposed rule.

HFMA strongly recommends that CMS hold RAC contractors accountable for the cost of questionable denials. For any denial that is subsequently overturned, RAC contractors should reimburse the provider for all costs related to the appeal. HFMA would be happy to work with CMS to develop a standard appeal cost.

Further, HFMA strongly recommends that CMS require RACs use accepted industry standards in a consistent manner as part of their reviews. We believe that CMS could both ensure hospitals are appropriately reimbursed for medically necessary services and be far more effective in resolving the appeals backlog that this proposed rule seeks to resolve by taking the two steps we have suggested.

Specific to the proposed rule, HFMA believes that it is insufficient in that it does not allow providers to rebill all medically necessary services and provides an insufficient timeframe for rebilling of those services it does allow.

Rebilling for All Medically Necessary Services
The proposed rule confirms that CMS will not allow rebilling for medically necessary services such as diabetes self-management training, physical therapy, speech-language pathology, occupational therapy, emergency department visits, and observation services that were part of an inpatient Part A claim denied by a RAC or other retrospective payment review. CMS supports this decision by stating that these services specifically require outpatient status in order to be billed and that the claim cannot be switched to outpatient status after the patient has been discharged.

HFMA finds this argument troublesome for several reasons. First, it willfully (and in contradiction of CMS’s own program manuals) overlooks the fact that the excluded services were medically necessary services provided to eligible Medicare beneficiaries. In these cases, hospitals have provided a medically necessary service for which they incurred a cost and should be appropriately reimbursed. CMS’s own manuals support this principle. CMS has stated in the Benefits Policy Manual in Chapter 1, § 10 and Chapter 6, § 10, that Part B payment will be made for hospital services provided if Part A payment is denied. Further, the Financial Management Manual in Chapter 3, § 170.1 directs contractors to “ascertain whether the beneficiary is entitled to any Part B payment for services in question when the contractor determines that a Part A overpayment has been made.”4 By ignoring its own administrative pronouncements and refusing to pay for medically necessary services, CMS is further shifting the cost of caring for eligible beneficiaries onto other purchasers of health care.

Second, as CMS is well aware, the administrative distinction (upon which its decision rests) between an inpatient stay and an observation stay (during which many of these services are received) is not supported clinically. In almost all instances, observation patients are admitted to a bed on an inpatient unit and receive care from the same clinical staff as would an inpatient. This administrative distinction between inpatient services and observation was created at a time when it was inconceivable that three years after an admission, a Medicare contractor who has never seen the patient in question and who lacks the prerequisite education and credentialing to make an admission decision could subsequently deny a claim.

When a retrospective audit denies the inpatient admission but recognizes the medical necessity of other services, the auditor is in essence stating that observation services were appropriate. Yet even in these instances where the place of care, not necessity of the care, is in question, CMS refuses to infer from the admission order that the physician would have ordered observation services had the option for inpatient admission been foreclosed. Again, CMS’s policy directly contradicts its own manual. Chapter 29, § 280.3 of the Claims Processing Manual recognizes that providers are entitled to correct payment for services that are not “covered as billed.”5 

Based on the CMS manuals cited above, Medicare Appeals Council (MAC) decisions have ordered CMS contractors to review services provided during the inpatient admission for coverage and payment under Part B. Subsequently, Administrative Law Judges (ALJs) have routinely remanded cases for determination of the amount that should be paid when they deny appeals for inpatient admissions. In most cases the instructions have ordered the payment of observation services when in fact they were not billed on the original claim.

Given that there is significant regulatory support in the CMS manuals as confirmed by the findings of both the MAC and ALJs, HFMA strongly recommends that CMS revise its existing policies to allow hospitals to adjust claims denied by the RAC, rebill all medically necessary services that are part of a Part A inpatient claim that is denied by the RAC or other retrospective audit, and receive payment for all medically necessary services – including observation.

Rebilling Timeframe
The proposed rule limits providers’ ability to rebill medically necessary inpatient Part B services that were included on Part A claims denied by the RACs to the one year timely claims filing limit. The proposed rule contends that these claims are new claims and not merely adjusted claims. HFMA has multiple concerns about regarding this aspect of the proposed rule.

First, this position is arbitrary, as CMS has not provided any statutory explanation to suggest why the agency must treat medically necessary services on a claim denied by a retrospective auditor as a “new claim.”

Second, CMS is also well aware that few if any providers receive retrospective denials of Part A claims within one year of service as RACs and other retrospective audits have up to three years to review a claim. In its proposed rule, CMS states it believes that providers could avail themselves of the ability to rebill medically necessary services under Part B 25 percent of the time. Our members believe CMS’s estimate that providers could rebill claims related to inappropriate site of service 25 percent of the time is overstated. Of greater concern than the estimate itself is what it implies – that CMS believes it is appropriate to not pay providers for medically necessary services provided to eligible Medicare beneficiaries in 75 percent of these cases. This is unacceptable.

Operationally, even if the provider did receive a denial within the year, complying with the rebilling timeframe would require providers to waive their due rights to an appeal. Further, CMS states that the articulation of a new Part B rebilling policy stems from CMS’s concern that observation services provided to patients are increasing. We believe the limited timeframe afforded a provider to rebill allowable Part B services will have significant unintended consequences from the beneficiary perspective. The unrealistic rebilling timeframe resulting from CMS’s arbitrary stance that these adjusted claims would be “new claims” will likely increase the use of observation services as providers attempt to receive some compensation for medically necessary services provided to eligible beneficiaries.

Based on the arguments articulated above, HFMA strongly disagrees with CMS’s assertion that medically necessary Part B inpatient claims rebilled subsequent to the denial of a Part A inpatient claim by a RAC or other retrospective audit are new claims. At a minimum, HFMA strongly recommends following the timeframe developed in CMS-1455-R, which allows a provider 180 days from the date of receipt of the final or binding appeal decision or 180 days from the date of receipt of the Part A initial determination or revised determination if there is no appeal pending to adjust claims. The ruling already demonstrates that CMS has the authority to grant exemptions to timely filing limits. Ending the exemption as proposed is arbitrary at best.

However, HFMA’s preferred approach would define claims in these instances as a rebill (and therefore exempt from filing limits if the original claim was received in a timely manner) instead of a “new claim” as CMS has proposed. The administrative infrastructure for this already exists. There are universal billing codes that indicate billing delays related to denied services. HFMA is happy to provide technical assistance to CMS if it elects to pursue this option.

HFMA encourages CMS to incorporate our recommendations related to rebilling for medically necessary services and rebilling time limits into the final rule. Otherwise we are concerned that not only will beneficiaries be harmed by a continued increase in observation services, but all non-Medicare purchasers of healthcare will also inappropriately bear the costs resulting from CMS’s non-payment of medically necessary care provided to Medicare beneficiaries.

We are at your service to help CMS gain a balanced perspective on this complex issue. If you have additional questions, you may reach me or Richard Gundling, Vice President of HFMA’s Washington, DC, office, at (202) 296-2920. The Association and I look forward to working with you.


Joseph J. Fifer, FHFMA, CPA
President and Chief Executive Officer
Healthcare Financial Management Association 

1. Healthcare Financial Management Association, Healthcare Payment Reform — From Principles to Action, September 2008.
2. American Hospital Association, Exploring the Impact of the RAC Program on Hospitals Nationwide, March 8, 2013.
3. American Hospital Association, Exploring the Impact of the RAC Program on Hospitals Nationwide, March 8, 2013.
4. Financial Management Manual (FMM) (CMS Pub. 100-06), ch. 3, § 170.1 (internally referring to the Part B payment policy in BPM (CMS Pub. 100-02), Chapter 6, § 10).
5. Claims Processing Manual (CMS Pub. 100-04), ch. 29, § 280.3 (“Claims Where There is Evidence That Items or Services Were Not Furnished or Were Not Furnished as Billed”).

About HFMA
The Healthcare Financial Management Association (HFMA) provides the resources healthcare organizations need to achieve sound fiscal health in order to provide excellent patient care. With more than 40,000 members, HFMA is the nation’s leading membership organization of healthcare finance executives and leaders. HFMA helps its members achieve results by providing education, analysis, and guidance, and creating practical tools and solutions that optimize financial management. The organization is a respected and innovative thought leader on top trends and challenges facing the healthcare finance industry. From addressing capital access to improved patient care to technology advancement, HFMA is the indispensable resource for healthcare finance.



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