RAC Audits are Becoming Increasingly Frequent and Costly to Hospitals but Appeals can Succeed

The latest report published by the American Hospital Association (AHA) detailing the results of its RAC Trac survey1 reveals that RAC activity in hospitals has significantly increased in 2013. Not surprisingly, the financial impact of this increased RAC activity has grown substantially as well, both in terms of claims denials and the costs associated with responding to the RACs. Nevertheless, hospitals that have challenged denials of claims by RACs, either through the appeal process or through utilization of the discussion period, have had significant success in overturning denials.
 
The CMS RAC Program
 
The Centers for Medicare and Medicaid Services Recovery Audit Contractors (RACs) conduct retrospective reviews of Medicare payments to health care providers to identify improper payments, such as incorrect payment amounts, incorrectly coded services, non-covered services, and duplicate services. RACs use a variety of methods to identify potentially improper payments, including reviews of medical records and other medical documentation by human auditors in addition to using computer software to detect irregular patterns or other indicia of improper payments. Most hospitals report that they are experiencing RAC reviews now. (Although the majority of hospitals reporting RAC activity are general medical and surgical hospitals, hospitals of all types, including critical access hospitals, long term acute care hospitals, inpatient rehabilitation centers, psychiatric hospitals, and children’s hospitals also have been subject to RAC reviews.) The expanded use of the RAC program is consistent with the U.S. Department of Health and Human Services (HHS) Office of Inspector General (OIG) Work Plan for Fiscal Year 2013 which outlined hospital billing as a priority during the next fiscal year and beyond
 
AHA’s RAC Trac Survey
 
The AHA RAC Trac survey is a web-based survey that hospitals use to submit data regarding the impact of the RAC program on a quarterly basis. The survey is designed to collect data regarding the cumulative impact of the RAC program in hospitals from the inception of the RAC Trac program in 2010 through the third quarter of 2013. Well over two thousand hospitals have participated in RAC Trac since its inception in 2010. 
 
The latest RAC Trac Report (the Report) shows survey response data from 1,269 hospitals on RAC activity through the third quarter of 2013. According to the Report, there have been a total 441,936 complex denials and 1,147,073 medical record requests since the program’s inception in 2010. The Report indicates that RACs have become increasingly active in 2013 with both cumulative medical record requests and complex denials having increased precipitously through the third quarter. Specifically, cumulative medical record requests have increased by 13 percent from the first quarter of 2013 and complex denials have increased by 28 percent in the same time period.
 
The Impact of RAC Audits on Hospitals
 
Despite the fact that more than half of the records reviewed by RACs contained no evidence of overpayments, the RAC audits have proven to be very costly for hospitals. More than two-thirds of hospitals responding to the RAC Trac survey reported spending more than $10,000 managing the RAC process in the third quarter of 2013 alone. Nearly half spent more than $25,000 and 12 percent reported spending more than $100,000 managing the process. Denials related to medical necessity were reported to be the most costly to address.  
 
It is particularly important to note the Report’s findings that hospitals have had significant success in challenging RAC denials. RAC Trac participating hospitals appealed 47 percent of all RAC denials, and were successful in 67 percent of these appeals. Additionally, 43 percent of participating hospitals report having a denial reversed during the discussion period. These success rates are based on the data reported by participating hospitals and have been questioned by the RACs. Nevertheless the sheer volume of successful appeals reported clearly indicates that there is value to engaging with RACs when denials are issued.
 
Overturning RAC Denials
 
The formal RAC appeals process has multiple levels:
 

• The first stage involves a written request for redetermination.  Providers have 120 days to request a redetermination in writing.
• Second, if the request for redetermination is unsuccessful, a provider may request a reconsideration from a qualified independent contractor within 180 days.
• The third level of appeal involves a hearing before an administrative law judge (“ALJ”). A request for an ALJ hearing must be made within 60 days from receipt of the reconsideration notice.
• Fourth, providers may appeal ALJ decisions to a Medical Appeals Counsel.  Requests must be made with 60 days of receipt of the ALJ decision.
• The fifth and final stage of the formal RAC appeals process is an appeal to the federal district court, which must be filed within 60 days from the Medical Appeals Counsel determination.

Appeals through the formal RAC appeals process are frequently costly, labor-intensive, and time consuming. As noted, however, two-thirds of the appealed denials were overturned in favor of the provider. It is interesting to note that while providers have to spend more money responding to denials based on medical necessity, these types of denials are the group most commonly overturned on appeal. 
 
Using the Discussion Period
 
In addition to the formal appeals process, many hospitals are reporting success in reversing denials through utilization of the discussion period. The discussion period gives providers the opportunity to discuss the reasons for the denial with the RAC and provides an opportunity for hospitals and other providers to communicate their position regarding the determination before entering the formal appeals process. The discussion period is significantly less burdensome and costly, and offers a more expedient resolution than the formal appeals process. According to the RAC Trac Report, 43 percent of participating hospitals report having a denial reversed during the discussion period. A provider can still pursue the formal appeals process if it is unable to achieve a satisfactory resolution in the discussion period.
 
Conclusion
 
The latest RAC Trac Report confirms what many hospitals already know, i.e., that RAC activity in hospitals has increased precipitously, and that regardless of the outcome, managing RAC audits can be very costly and extremely burdensome for the hospitals under review. Perhaps most importantly, the Report demonstrates that a substantial number of hospitals that challenge RAC determinations, whether through the discussion period or the formal appeals process, are enjoying significant success in getting payment for claims the RACs initially denied.  

If you have questions about RAC audits or related issues, please contact one of the Arent Fox professionals listed at the right, or the Arent Fox attorney who regularly handles your legal matters.

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1 Results of AHA RAC Trac Survey, 3rd Quarter 2013 (Nov. 21, 2013), available here.