Beware of RACs Bearing Gifts

In this edition of IMA Insights we discuss the increasing effect of the Recovery Audit Contractors (RAC) on hospitals Transfer DRG cases. There has been a significant increase in activity where RACs are identifying what are believed to be underpayments to hospitals. This article will explore the potential compliance issues that may arise as a result of these RAC findings.

As initially enacted by Congress and implemented by The Centers for Medicare and Medicaid Services (CMS), the scope of the transfer payment policy was relatively narrow. Effective for discharges that occurred on or after October 1, 1998, CMS identified 10 DRGs as those likely to result in a transfer to a post acute care provider that might require a PPS payment adjustment through DRG proration.

Changes effective for Federal Fiscal Year 2012 (beginning October 1, 2011) will bring the total number of Transfer DRGs to 275. This means that for any patient who is admitted to a hospital under one of the 275 DRGs identified by CMS, the hospital will be paid a per diem rate as opposed to the full DRG payment if the patients' stay is less than the geometric length of stay and the patient is discharged to a post acute care setting. As defined by the regulation, this includes patients who are discharged to Skilled Nursing Facilities and Home Health Agencies under a written plan of care or a hospital or distinct part hospital unit excluded from the prospective payment system.

Since the inception of this rule, CMS has had edits in place to identify overpayments to hospitals; however, there has been no effort to identify cases where a hospital has been underpaid until now. Recently hospitals have been reporting instances where their respective RAC is identifying hospital underpayments related to Transfer DRG cases.
Since the inception of the Medicare RAC Program as a demonstration project in California, Florida, and New York in 2005, Providers have been faced with the challenge of how to respond to issues raised during RAC audits. With the expansion of the RAC Program to a National Program in 2008, all Providers are now faced with the burden of "validating" and "challenging" findings of the RAC in a timely manner to ensure proper reimbursement for services rendered (even when the RAC is trying to return possible underpayments).

To date, most of the issues raised by the RAC have been related to overpayments to the Provider. This has included areas such as one-day stays, observation status and documentation issues for medical necessity. We are all too aware that the RAC has been successful in identifying and recouping overpayments for CMS. We are also aware of the fact that the RAC is often incorrect in their "overpayment" determinations and that those determinations are often overturned. What we may not be aware of is the simple fact that the RAC is often incorrect in their "underpayment" determinations as well.

A disturbing new trend has emerged recently where RACs are identifying cases where the Provider is being told they have been underpaid due to the Transfer DRG rule. These findings have primarily been focused in two areas. First are cases where hospitals discharged patients to Skilled Nursing Facilities, and second are situations where patients were discharged for Home Care Services.

As with the overpayments identified by the RAC, the hospital must verify the accuracy of the RAC findings and determine if the finding is correct. This may result in instances where the hospital finds itself disputing a finding that would result in greater reimbursement for the hospital!

The RAC TDRG underpayment findings fall into several distinct areas (discussed below), including claims where the beneficiary has no skilled day benefits remaining, claims where home care services were not started within three days of discharge, and claims where there were multiple hospital admissions.

First, for claims where the beneficiary has no skilled benefits remaining and the hospital has indicated the patient was discharged to a SNF (status code 03) we are finding that the RAC is incorrectly flagging these claims and is indicating that the proper discharge status should be discharge to home (status code 01). We feel strongly that the RAC is incorrect on these claims and is creating potential compliance problems for hospitals by creating overpayment situations. The original post-acute transfer rules and regulations from 1998 made it very clear that if someone's "skilled nursing benefit coverage" was expired and the patient was sent to a nursing home for skilled nursing care, the transfer would be subject to the Transfer DRG per diem payment.  Furthermore, Med Learn Matters number 4046, from September of 2005, clearly states on page 5 under the header of Patient Status Code 03 that "This code should be used whether or not the patient has skilled benefit days."

IMA Consulting continues to rely on this regulatory guidance when reviewing Transfer DRG claims for our clients. It is our strong belief that a compliance issue would be raised if we were to include any such claim in our findings. With our thorough understanding of the workings of the post-acute care environment, it is our experience that the lack of compliance in the SNF industry with regard to the regulations pertaining to the billing of claims where a patient has "exhausted benefits" creates a situation where the CMS edits will not flag these RAC findings as incorrect, thereby creating an overpayment for the hospital.

Second, we have seen numerous instances where the RAC is flagging claims previously identified by the hospital as having not received home care within three days of discharge as discharge to home. In these instances the hospital has correctly billed these claims with a discharge status code of 06 (discharge to home care) with a condition code 43 (services not received within three days of discharge). This properly results in the hospital receiving the full DRG payment for these patients. The RAC has determined that these patients should be coded as 01 (discharged to home). The changing of the coding from what the hospital coded to the RAC's coding will not result in any additional recovery for the hospital. Furthermore, where the patient does get the home care the hospital expected when discharged, but begins such care after three days post discharge, the code initially utilized by the hospital more accurately & correctly portrays the patient's discharge status.

Third and finally, the RAC has identified claims where there were multiple admissions within a short time period for the hospital and skilled days were used by the patient. In these cases it is important to follow up with your Medicare Audit Contractor (MAC) to ensure that the RAC finding is correct as these claims fall into a "grey area".  Simply relying on the Common Working File (CWF) and calls to SNFs and HHAs is not enough.

This RAC activity may lead Providers to believe that it would be beneficial to allow the RAC to identify their Transfer DRG recoveries as opposed to investing the time and resources to review this area. It is our experience that this would leave significant monies on the table. While the RAC is identifying a few claims related to TDRGs, IMA Consulting has performed reviews after the RAC has done their review and in these cases found that the RAC identified less than 5% of the monies that should have been recovered.


Each of these examples illustrate the need for thorough due diligence on the Provider's part when reviewing a RAC finding whether the finding is an over or under payment. In order to demonstrate your commitment to compliance and to ensure accurate payment for services rendered, it is incumbent on the Provider to perform all steps necessary to verify the accuracy of any RAC audit results. Accepting any overpayment with knowledge that the payment is incorrect would most likely be considered fraudulent and could subject a Provider to financial penalties. The Office of Inspector General previously addressed similar issues with Medicare Cost Report settlements. In situations where the Provider had knowledge of being over paid by CMS on a cost report settlement, it was the Provider's obligation to report such overpayment and refund the money.
Understanding the problems that these reviews create for the Hospital, it is important that you have your RAC committee review the claims to ensure that the adjustments are correct. Where your RAC Committee does not have the time or expertise to review these claims, external assistance should be sought to review these findings. We are pleased to have the opportunity to present this information to you. If you have any questions or need assistance with evaluating your hospital's exposure to this issue, please do not hesitate to contact Jim Collins at (267) 626-1192.

Best Regards,

James F. Collins

IMA Consulting