Medicare Payment and Reimbursement

HFMA Comments on the Medicare Recovery Audit Contractor Program

October 18, 2013 4:35 pm

October 11, 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

Mr. Daniel R. Levinson
Inspector General
U.S. Department of Health and Human Services
Washington, DC 20201

Re: Medicare Recovery Audit Contractor Program

Dear Ms. Tavenner and Mr. Levinson:

The Healthcare Financial Management Association (HFMA) would like to thank the Centers for Medicare & Medicaid Services (CMS) for the opportunity to proactively comment on issues related to the Medicare 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:  

  • 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 worked with its members to provide comments (link included below) to CMS’s proposed rule Medicare Program; Part B Inpatient Billing in Hospitals (CMS-1455-P). Through that process we identified a number of issues related to the RAC program that violate the payment reform principles discussed above, which CMS needs to address. Further, we would like to take this opportunity to comment on decisions articulated in CMS’s 2014 IPPS final rule related CMS-1455-P:


  1. CMS needs to modernize its payment policy for short stays to ensure the Medicare program’s fundamental fairness for all stakeholders. This will obviously take time, but in the interim CMS needs to take steps to prevent costs from being inappropriately shifted to beneficiaries.
  2. The one-sided nature of the application of interest penalties raises a fairness issue that must be corrected.
  3. There are timing issues due to the RAC audit and related appeals processes that discriminate against providers. Given that DRG weights for subsequent fiscal years are calculated using claims data from a period still under review, the process could lead to the under-pricing of DRGs commonly targeted by the program.
  4. The timeliness of the data in the recently released OIG study, Medicare Recovery Contractors and CMS’s Actions to Address Improper Payments, Referrals of Potential Fraud, and Performance is concerning. Specifically, we believe that due to timing issues, the data related to the volume of claims appealed and subsequently overturned is higher than reported by the OIG.

Societal Benefit:
Both the Disproportionate Share (DSH) payments to hospitals that serve high volumes of indigent patients and Graduate Medical Education (GME) payments to teaching hospitals are impacted by inpatient census. As Medicare, Medicaid, and commercial inpatient stays are denied retrospectively, hospitals need an opportunity to update cost report filings. If not, safety net and teaching hospitals will be under-reimbursed for the valuable services they provide society.

If CMS insists on continuing retroactive audits, it needs to develop a secure portal system that will serve as a single repository for all communication related to all ongoing retrospective audits (including but not limited to RACs, CERTs, and ZPICS) to reduce the administrative burden and eliminate the incidence of overlapping audit programs simultaneously challenging the same claim.

The inherent nature of population-based reimbursement eliminates the likelihood of inadvertent, inappropriate utilization. The current system of retrospective audits needlessly consumes resources that could be used by providers to improve quality and reduce cost.

The timing of the RAC audit and appeals process could lead to cases that are ultimately deemed by the RAC to be inappropriate admissions being included in the calculation of the readmissions penalty.  


1) HFMA believes that CMS needs to modernize its payment system to better reflect the realities of clinical care for short stay cases. From a clinical care, resource use, and most importantly, the beneficiary’s perspective, there is no difference between a “short stay” inpatient admission and an observation case. There are examples of payers that have eliminated observation payments in favor of a flat case rate for hospital services related to short stay cases (Exhibit I). HFMA is willing to work with CMS to develop a reimbursement model for short stay cases that is more equitable for patients, providers, and the Medicare program.

In the interim, HFMA believes CMS must take the following steps to shield patients from the unintended consequences of its various retrospective audit programs:

Cap patient liability for I/P Part B services billed subsequent to the denial of an inpatient stay for inappropriate site of service at the inpatient amount. Given beneficiaries’ inability to influence the site of medically necessary care under the circumstances in which they are admitted, we believe it is patently unjust that they are financially harmed by programs that generate savings for Medicare.

As discussed in the 2014 IPPS Final Rule, we appreciate that capping patient liability at the Part A deductible amount requires congressional action and will take time. In the interim, HFMA requests that CMS work with the OIG to develop a safe harbor from Civil Monetary Penalties (CMPs) for providers who waive or reduce the beneficiary’s Part B liability if it exceeds the Part A deductible for Part B rebilling of services associated with a RAC denial for inappropriate site of service.

Without a sufficient safe harbor from CMP, hospitals that attempt to waive all or part of the cost sharing associated with retrospective site of service denials expose themselves to significant compliance risk.

Simplify the process necessary to bill self-administered drugs to Part D for patients and those whose inpatient stays have been denied due to allegedly inappropriate site of service by a RAC. Many beneficiaries are covered by Medicare Part D. We appreciate CMS’s efforts to educate them on the appropriate steps necessary to bill Part D for self-administered drugs1. However, these efforts are insufficient as we frequently hear of the challenges patients face trying to bill these drugs.

We would encourage CMS to require Part D plans to standardize and simplify the requirements they place on beneficiaries when the beneficiary directly submits a claim. This will allow hospitals to create a standard package of documentation, given to beneficiaries at discharge, which will satisfy the documentation requirements imposed on beneficiaries when they bill Part D plans. In addition, CMS needs to provide beneficiaries more guidance and support beyond the relatively basic four page document that is currently available to them. Further, HFMA would strongly encourage a blanket exception that allows coverage for any drug provided to a beneficiary during a RAC-affected stay that is not on the Part D plan’s formulary.

Beyond simplifying the process for direct beneficiary billing of Part D claims, for instances where a beneficiary’s inpatient stay has been denied due to allegedly inappropriate site of service, self-administered drugs should be covered by Part B. This step would reduce the urgency for Part D providers to simplify their direct billing systems. More importantly this step would also provide protection for beneficiaries who do not have Part D.

Requiring Part B to cover self-administered drugs will likely also require congressional action. We would strongly recommend that waiving charges related to self-administered drugs be included as part of the safe harbor from CMPs that CMS and the OIG create for hospitals for instances where an inpatient stay is retroactively denied due to allegedly inappropriate site of service.

Count days related to inpatient stays retroactively denied as inappropriate site of services towards those necessary for SNF and post-acute services. We believe this would provide significant protection for the most vulnerable Medicare beneficiaries.

CMS’s final 2014 IPPS rule clarified that inpatient stays of three or more days denied by the RAC for inappropriate site of service do qualify a beneficiary for coverage of SNF services. However, it’s not clear that the MACs understand this position. The HFMA requests that CMS issue sub-regulatory guidance to the MACs reaffirming this policy clearly. It would be helpful if in this guidance, CMS would provide examples of three day stays that were denied for allegedly inappropriate site of service that would qualify the beneficiary for coverage of SNF service and examples of stays that “represent a substantial departure from normal medical practice”2 and would make the beneficiary not eligible for coverage of subsequent SNF services.

2) Under the program, providers have 30 days to refund amounts related to claims contested as a result of retrospective audits. If a provider incurs the interest penalty due to delayed repayment, this penalty is not refunded when the provider prevails on appeal. Further, when providers prevail on appeal (which they do 75 percent of the time), they are not paid interest on funds that were inappropriately recouped. Our members report that the average estimated time for a claim to work through the appeals process is now 228 days.

It is unacceptable that: 1) CMS does not refund interest charged to providers on claims where the provider has prevailed on appeal and 2) CMS does not pay interest on funds improperly recouped from providers by RACs—the concept of time value of money applies to providers as much as it does to CMS. This asymmetry is fundamentally unfair. HFMA strongly believes CMS should refund interest payments made by providers for cases where providers prevail on appeal. Further, in instances where providers refund payments related to disputed claims and subsequently prevail on appeal, CMS should pay providers the related accumulated interest. Not only should CMS adopt this policy moving forward but also apply it retrospectively.

3) RAC contractors have a three year window to retroactively review and deny inpatient claims. HFMA is concerned that given this lag, claims are included in the MedPAR file used to determine MS-DRG weights for a given federal fiscal year that are subsequently deemed inappropriate inpatient stays by RAC auditors. Cases that are deemed inappropriate stays are typically shorter in duration and lower in resource use. Including these cases, given their lower resource use, inappropriately pulls down the average cost and weights for these MS-DRGs. As a result, providers are under-reimbursed for MS-DRGs that are frequently targeted by RAC contractors.

HFMA appreciates CMS’s comments on this issue in the 2014 final IPPS rule. However, CMS was unable to bring data to bear on the proposed rule to justify its position. HFMA believes that CMS needs to study this issue to determine the impact on DRG weights of including cases deemed inappropriate stays in MEDPAR files used for weight development. For DRGs and years where providers are under-reimbursed as a result of the inappropriate inclusion of inpatient cases denied by the RAC, CMS should develop a methodology to retroactively pay hospitals appropriately. There is considerable precedence for this. CMS has for several years reduced payments to providers as a result of alleged upcoding in prior years related to the implementation of MS-DRGs. Additionally, CMS needs to develop a prospective methodology to prevent cases denied by the RAC from inappropriately underweighting DRG weights for targeted DRGs.

4) HFMA appreciates and strongly supports the Department of Health and Human Services Office of the Inspector General’s efforts to ascertain the performance of RACs visa vie their stated mission. However, based on the experiences of our members, we believe that the current volume of appeals and the success rate is higher than reported. It appears that the OIG analysis compares the number of improper payments identified and the number of appeals filed during 2010 and 2011. The data was pulled in June of 2012.

HFMA believes that pulling the data in June of 2012 allowed insufficient time for appealed claims to work their way through the process. Based on our members experience, during that timeframe it took approximately one year for a claim to receive a decision from the Administrative Law Judge. We also understand from our members that in 2011 RAC activity related to medical necessity increased significantly. Due to the dollar value of these claims (compared to previous RAC focus), appeals activity in 2011 increased significantly as well. The timing of the data collection appears to have excluded many claims identified in 2011 from its analysis. However, there’s no accounting for appeals that were undecided at the time of the study so in essence the findings are comparing apples to oranges.

HFMA strongly recommends that the OIG correct its methodology to address this issue both in this report and in future analyses. Otherwise, instead of providing transparency that moves the industry forward future efforts will sow confusion.  

Societal Benefit

The retrospective denial of Medicare claims also has the potential to negatively impact DSH payments made to hospitals that serve high volumes of indigent patients and GME payments made to teaching hospitals.

A hospital’s DSH percentage (which is used to determine the DSH add-on payment) is the sum of the SSI fraction (SSI days/total Medicare days) plus the Medicaid fraction (Medicaid days/total inpatient days). In order to ensure that hospitals receive accurate DSH payments, Medicare must take two steps. First, it needs to ensure that any inpatient Medicare days subsequently denied for inappropriate setting by the RACs or other retrospective audits need to be removed from the denominator of the SSI fraction. Hospitals must be provided with sufficient detail to ensure that this has occurred.

Second, CMS must instruct the Medicare Administrative Contractors (MACs) to allow providers to remove any inpatient days subsequently denied by retrospective audit (including Medicare, Medicaid, and commercial days) for inappropriate site of service from column 8 of Worksheet S-3 Part 1 of the Medicare cost report. Otherwise, including these days inappropriately reduces DSH payments, resulting in inadequate reimbursement for services provided to indigent patients by DSH hospitals.

Medicare GME payments are similarly at risk if providers aren’t allowed to adjust the statistical information provided in column 8 of Worksheet S-3 Part 1. Medicare direct GME payments are calculated by multiplying an established per resident amount (PRA) times the weighted number of full-time equivalent (FTE) residents working in all areas of the hospital (and non-hospital sites, when applicable) and the hospital’s Medicare share of total inpatient days. As recommended above in the discussion of the DSH Medicaid fraction, CMS must instruct the MACs to allow providers to remove any days denied by RAC or other retrospective audits prior to issuing a final notice of program reimbursement (NPR). Otherwise, teaching hospitals will be under-reimbursed for the valuable service they provide to society.

HFMA appreciates CMS’s statement in the 2014 IPPS final rule that “total patient days from Worksheet S-3, Part I, column 8 are derived from the hospital’s census and therefore include inpatient days denied under Part A and rebilled under Part B.” We interpret this statement to preclude days associated with Medicare cases that were denied under Part A and not rebilled under Part B and Medicaid and commercial inpatient cases denied by retrospective auditors for inappropriate site of service from inclusion in column 8 of Worksheet S-3, Part I. We request that CMS affirm this interpretation.

However, HFMA strongly disagrees with CMS’s decision in the 2014 IPPS final rule to include paid Part B days in the denominators of the SSI fraction and Medicaid fraction. We find it troubling and logically inconsistent that CMS insists on counting days as inpatient when its contractors find the site of service medically unnecessary and refuses to pay for clinically necessary care. This interpretation serves to further reduce payments to hospitals for services that benefit society like indigent care and physician training.  


CMS’s current requirements related to beneficiary cost sharing under the RAC program have the potential to cause significant confusion for beneficiaries and drive unnecessary administrative expense for providers. In instances where the inpatient stay was denied but some Part B inpatient charges were paid, the provider must first refund the beneficiary’s inpatient deductible and then bill the patient for the outpatient coinsurance(s) and charges related to self-administered drugs.

In the 2014 IPPS final rule, CMS signals its intent to issue sub-regulatory guidance related to patient refunds in this instance. HFMA strongly encourages CMS to allow providers to net Part B liabilities, including charges for self-administered drugs, from refunds made to the beneficiary for the Part A deductible. Should CMS collaborate with the OIG to develop a mechanism allowing providers to voluntarily cap beneficiary liability, in instances where the Part B co-insurance and charges for self-administered drugs exceed the Part A liability, we would recommend that providers be required to send patients a zero-balance statement that provides transaction detail for the patient’s record. We believe this approach will significantly reduce beneficiary confusion and reduce provider administrative costs.

Another step that would simplify administration of the RAC program, significantly reduce beneficiary confusion, and the burden on both providers and CMS’s appeals process relates to the use of industry standard care guidelines. Almost all providers use either InterQual or Milliman evidence-based care guidelines to review and support a physician’s decision to admit a patient. Despite the use of these guidelines (by both providers and RACs), RACs still attempt to deny admissions as medically unnecessary. HFMA strongly believes CMS should adopt a policy stating that a patient’s admission is a medically necessary inpatient stay if it is supported by either InterQual or Milliman criteria. Not only would this reduce the administrative burden on providers, but it would also significantly reduce the backlog of claims stuck in the appeals process—appeals where hospitals prevail the overwhelming majority of the time. Further, it would allow providers to communicate to patients their status (inpatient vs. observation) in a timely manner.

If CMS insists on the current regime of retrospective audits, it needs to develop a portal that will facilitate coordination across the various retrospective auditors (e.g. RACs, CERTs, ZPICs, etc.) and provide a single point for all communication. There is a significant time lapse between CMS updates of the file provided to the various contractors defining the universe of claims they can pursue. As a result, we continue to hear feedback from our members that it is not uncommon for a case that has been denied and recouped by one auditor to be subsequently denied and recouped by a second auditor. Please see exhibit II for an example of this. When this occurs, it requires significant administrative effort to rectify the double recoupment and refund providers the over-recoupment. HFMA believes that if CMS requires all auditors to log their activity in a portal in real time, it will prevent the issue of a “double denial” from occurring. 

Hospitals are required to provide RACs with a single point of contact to which all communications related to audits are directed. Despite this, correspondence—particularly correspondence related to appeals—is frequently sent to multiple individuals within a hospital. Not only does this increase the already significant administrative cost providers incur as a result of the program, but it also delays response times, increasing the likelihood of an inappropriate denial. HFMA believes that the portal should serve as a conduit for all communications—including appeals correspondence—and medical records requests, ensuring that all communication is routed to the appropriate contact at the hospital.

HFMA believes CMS has another opportunity to reduce the administrative burden of the program by requiring all audit contractors to make use of the HIPAA 275—medical attachment. This would allow providers with this capability to further take advantage of the administrative efficiencies HIPAA allows and further encourage providers that don’t have this capability to develop it. Taking this step would also have the added benefit of signaling CMS’s commitment to fully deploying the HIPAAA transaction set and using it to improve the efficiency of administrative functions.  


All hospitals judiciously admit patients to the inpatient setting based on a physician’s professional expertise, supported by evidence-based clinical care guidelines (as discussed above). The Medicare Shared Savings Program (MSSP), Pioneer ACO program, Physician Group Practice Transitions Demonstration (PGPTD), and other similar programs shift the economic incentives for providers from rewarding individual incidents of care to managing population health. Hospitals participating in these programs are rewarded if they can reduce Medicare spending per beneficiary below a target benchmark while improving quality on a range of measures. Therefore, inappropriate admissions would actually cause organizations participating in these programs financial harm. This gives participants absolutely no incentive to admit a Medicare beneficiary to the hospital when it is medically unnecessary. 

The administrative and clinical resources spent managing RAC audits do nothing to improve quality for any patient. This is especially true at organizations pursuing population health models. As an example, Billings Clinic (a participant in the Medicare Shared Savings Program) estimates it spends 8,600 staff hours (over four full time equivalent employees) and $740,000 annually ($2,731 per staffed bed) managing RAC reviews (as a point of comparison, 30 percent of respondents to a recent HFMA survey report spending less than $2,500 per bed to achieve meaningful use). Their experience is not uncommon from what we hear from our members. These resources could be better spent by Billings Clinic (or any hospital) improving care coordination and the quality of patient care, leading to better outcomes at a lower cost to the Medicare program. 

HFMA strongly believes the RAC program is misaligned with the goal of improving the quality of care delivery. We believe this is especially true for hospitals participating in population-based reimbursement programs such as the MSSP, Pioneer ACO, PGPTD, and other similar programs. Not only will this allow these organizations to allocate scarce resources more effectively to improving patient care, but it will also serve as an additional incentive for other hospitals to participate in these programs. 


The RAC program has the potential to distort hospital readmission measures and related penalties. For example, the penalties—up to 2 percent of a hospital’s base IPPS payments—assessed during federal fiscal year 2014 are based on a performance period that spans 7/1/2009 – 6/30/2012. However, given the three year look-back window, more than half of the 36 months included in the readmissions performance period is still subject to RAC review and adjustment. This performance period will not be closed until three years after the last day of the performance period—June 30, 2015. 

HFMA is concerned that there is significant potential for hospitals’ readmission measures to be distorted by cases that are ultimately deemed inappropriate admissions by the RAC program after the performance period is closed and penalties have been assessed. Analysis by a provider who participated in the development of this letter found that 2.3% of their organizations readmissions were commonly targeted DRGs (DRGs 247, 312, 392, 313, 491, 166, 981). HFMA strongly believes that CMS needs to review the readmission measures for a given fiscal year once the RAC look-back period is closed. CMS should revise the readmission measures to accurately reflect any cases denied by the RAC, recalculate the readmission penalties for each measure, and refund any amounts due providers as a result of an overestimated penalty. 

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

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 39,000 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.

Part B Rebilling Proposed Rule Comment Letter

Exhibit I: Sample Contracting Language for Observation/Short Stay Case Rates

OBSERVATION/1-DAY LENGTH OF STAY REIMBURSMENT: Plan and Hospital agree to the following case rate reimbursement for all observation and all inpatient 1-day length of stay services provided to the Plan’s Medicaid Members. The Plan shall reimburse Hospital a per case rate of TBD for each medical observation service and/or 1-day length of stays provided to the Plan members. A 1 day length of stay shall be defined as approximately a 24-hour period after stabilization of the member, for the purposes of administration of claims payment all outpatient claims including revenue code 762 and inpatient claims with the same admission and discharge date or a discharge date within 1 day of the admission will be reimbursed at the agreed upon case rate. This rate includes all nonprofessional facility services rendered at Hospital during the observation and 1-day length of stays. 


1 “How Medicare Covers Self-Administered Drugs Given in Hospital Outpatient Settings,” CMS Product No. 11333, Revised, February 2011.

2 Medicare Policy Manual, Chapter 8, section 20.1



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