Public Policy

As Medicare Auditors Seek to Rein in Costs, Hospital Admission Decisions Are Under Microscope


The government has made extensive efforts to combat fraud in the Medicare and Medicaid programs, recovering a record $4.2 billion in fiscal 2012 from individuals and companies trying to cheat the system. One of the largest sources of recovered monies is the Recovery Audit Contractor (RAC) program.

The RAC program was created through the Medicare Modernization Act of 2003 (MMA) to identify and recover improper Medicare payments to health-care providers under fee-for-service (FFS) Medicare plans. The goal of the RAC program is to identify improper payments made on claims of health-care services provided to Medicare beneficiaries. Improper payments could be overpayments or underpayments. Hospitals have been hit by the audits, with recoveries reaching $3.6 billion since the national program launched in 2010, according to Centers for Medicare & Medicaid Services (CMS) data.1 About $895 million was reclaimed from just six states during the RAC Demonstration Project between 2005 and 2008.1,2

CMS is more alert on the medical necessity of one-day length of stay (LOS) for inpatient admissions and is trying to detect and reduce Medicare waste, fraud, and abuse. Hospital charges represent about a third of the $718 billion spent on U.S. health care annually. Medicare reimbursement is a major source of revenue for hospitals, but some hospitals claim Medicare pays them only 93% to 97% of what it costs to provide patient care, whereas private insurers pay between 115% and 125% of those costs.3,4 These data suggest that private insurers are paying hospitals far more than they need to make up for Medicare’s “underpayment.”

So the first question is: Do hospitals overcharge for care? The next question is: What can be done? Or, in today’s economy, what is being done?

How It All Works

When an RAC determines that a provider was paid for inpatient hospital services but that the patient in question should have been treated as an outpatient, CMS takes back the entire Part A payment. Moreover, CMS takes the position that once an inpatient claim paid under Medicare Part A is later denied (usually years later), the hospital cannot receive Medicare Part B payment except for a few ancillary services. As a result, when an RAC concludes that a hospital should have provided items and services on an outpatient basis rather than an inpatient basis, the hospital ends up receiving little, if any, reimbursement for reasonable and medically necessary items and services provided.5,6

RACs function through a different model. They keep a contingency percentage—9% to 12.5%—of the entire Part A payment.5

Imagine a situation in which a physician decides that a patient needs to be admitted to the hospital for a surgical procedure, and the cost of care provided to the patient—surgery, drugs, and the like—amounts to $20,000. CMS reimburses the hospital under Part A. Two years later, an RAC employee reviewing hospital records overrules the physician’s judgment and decides the patient should have received basically the same care but on an outpatient basis. That decision, taken together with CMS’ Payment Denial Policy, means the hospital will end up receiving essentially no payment for the surgery and other care it provided. The RAC, by contrast, will receive approximately $2,000 for that one case alone.

When an RAC determines that a provider was paid for inpatient hospital services but that the patient in question should have been treated as an outpatient, CMS takes back the entire Part A payment.

To Admit or Not to Admit

Medicare expects attending physicians and physician reviewers to make the appropriate bedding status based on severity of signs and symptoms, comorbid and complicating conditions, and the practicality of outpatient management.

Let’s take two examples of patients presenting with acute asthma exacerbation (AAE) to differentiate observation and inpatient status. Asthma affects 20 million Americans, and 450,000 patients present to the ED annually with AAE. One third of these patients are hospitalized, which translates to more than $1 billion in costs annually.

Case 1: A 62-year-old female presents with two weeks of progressive shortness of breath and cough productive of white sputum. She has a history of asthma and hypertension. She presented to the ED with blood pressure of 140/90, heart rate of 101, respiratory rate of 20, temperature of 99.6°F, and pulse oximetry of 93% on room air, which increased to 99% on 2L of oxygen. She was given two breathing treatments with albuterol in the ED, IV methylprednisolone, and IV magnesium sulphate. Over the course of two hours, her wheezes improved, her heart rate decreased to 90 BPM, and her oxygen requirements were weaned to 1L of oxygen. Her WBC count was 9,800, with a potassium level of 4.0 and a creatinine level of 1.0. Her EKG showed sinus tachycardia, and her chest X-ray was negative for any infiltrates. The ED physician called the hospitalist for admission. What status should she be in?

Case 2: A 62-year-old female presents with a three-day history of shortness of breath and wheezing associated with vomiting. She was sent from her PCP’s office for asthma exacerbation and failure of resolution of symptoms despite one week of oral antibiotics and prednisone. Her past medical history includes asthma, diastolic congestive heart failure, hypertension, diabetes, and end-stage renal disease on hemodialysis. She presented to the ED with blood pressure of 90/63, pulse of 120, temperature of 97.7°F, respiratory rate of 24, and pulse oximetry of 89% on room air. She had bilateral wheezes on respiratory examination, and her WBC was 16,500, with a creatinine level of 3.5 and BNP level of 190. Her chest X-ray showed peribronchial thickening, and an EKG showed sinus tachycardia. She was given IV Solu-Medrol and two breathing treatments with albuterol, and the hospitalist was called for admission. What status should she be in?

Case 1 answer: Observation. The medical predictability of adverse clinical outcome from AAE is low due to hemodynamic stability, absence of fever, improvement in hypoxia, and negative chest X-ray for acute bronchopulmonary process in the setting of normal blood counts. She improved dramatically in the ED with no history of previous intubation or hospitalization or use of previous steroids. Her oxygen requirements decreased within 12 hours of first treatment. Even though FEV1 was not monitored, there is documented improvement in her vital signs as well as respiratory examination.

Case 2 answer: Inpatient. The medical predictability of adverse clinical outcome is significant due to hemodynamic instability evidenced by hypotension, tachycardia, and hypoxia; wheezes on respiratory examination with leukocytosis; and abnormal chest X-ray in the setting of comorbid diseases, such as end-stage renal disease and congestive heart failure.

The treatments given to both patients were similar; however, Case 2 had a higher predictability of adverse clinical outcome and would require medical evaluation and management that would exceed 24 hours. An inpatient level of care is justified based on her clinical presentation, comorbidities, and the risk for adverse clinical outcomes.

It is important that the patient be described appropriately in the medical record to support the status. Documentation should include clinical decision-making and rationale of the attending, objective findings, and the treatment given in the ED as well as the treatment planned during the hospitalization. It is expected that the physician will document the possibility and probability of adverse clinical outcome as well as follow evidence-based guidelines for treatment.

Financial Facts

The AHA collects data and anecdotal evidence from member hospitals regarding the RAC program and its effects. Those data show the following:

  • More than 95% of the general medical-surgical hospitals that provided information to the AHA have been targeted by RACs;
  • RACs have demanded more than a half-million medical records to audit;
  • Many audits result in RAC determinations of “overpayment”; and
  • Of those overpayment determinations, more than 60% relate to one- or two-day inpatient admissions that RACs deem medically unnecessary.

Hospitals thus have been required to give back hundreds of millions of dollars per year due to RAC determinations that services should have been provided in an outpatient, rather than inpatient, setting. In the first quarter of 2012 alone, information provided to the AHA by hospitals shows that they were forced to repay $236 million for medically necessary items and services that RACs deemed should have been provided on an outpatient, rather than inpatient, basis. And this amount does not include the millions of dollars recovered from hospitals that did not report data to the AHA.

The RAC program has been a continued financial success for CMS and the auditors: RACs collected $1.86 billion in overpayments from October 2009 through March 2012. Over that same time period, RACs identified only $245.2 million in underpayments.7

The government, no doubt, is on a mission to rein in health-care costs. All stakeholders in the system, including hospitalists and administrations, need extensive education to document appropriate patient status to ensure accurate reimbursement and prevent the fallout of future repayments.

Dr. Pahuja is founder and CEO of Aerolib Healthcare Solutions ( He is pursuing his MBA in health-care administration from the Isenberg School of Management at the University of Massachusetts in Amherst.

Medicare Proposes Two-Midnight Rule

On May 10, CMS proposed the two-midnight rule (CMS 1599-P).8 Under this rule, CMS proposes that hospital inpatient admissions involving at least two consecutive midnights will qualify for appropriate payment under Medicare Part A. It also means that if the hospital stay is less than two midnights, it will be inappropriate for payment under Medicare Part A.

Admitting physicians will be required to document in the medical record their recommendation that the patient will need medical care spanning at least two midnights, with supporting notes in their admission orders. The message sent from CMS is that length of treatment in the hospital will determine whether patients will be inpatient or observation.


  1. PR Web. Medicare anti-fraud recovered $19 billion, how much for private self-insured plans? Fiduciary overpayment recovery programs announced from PR Web website. Available at: Accessed April 4, 2013.
  2. Viebeck E. GAO reports billions in overpayments to private Medicare plans. The Hill website. Available at: Accessed April 4, 2013.
  3. Centers for Medicare & Medicare Services. Cost reports. Centers for Medicare & Medicare Services website. Available at: Accessed April 4, 2013.
  4. Whelan D. America’s most profitable hospitals. Forbes website. Available at: Accessed April 4, 2013.
  5. American Medical Association. Recovery Audit Contractors. American Medical Association website. Available at: Accessed April 4, 2013.
  6. American Hospital Association, Missouri Baptist Sullivan Hospital, Munson Medical Center, Lancaster General Hospital, and Trinity Health Corporation v. Kathleen Sebelius. American Hospital Association website. Available at: Accessed March 12, 2013.
  7. Centers for Medicare & Medicare Services. Medicare fee-for-service Recovery Audit Program, May 2012. Centers for Medicare & Medicare Services website. Available at: Accessed April 4, 2013.
  8. Centers for Medicare & Medicaid Services. FY 2014 IPPS proposed rule home page items. Centers for Medicare & Medicaid Services website. Available at: Accessed June 10, 2013.

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