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On November 15, 2011, in response to the Improper Payments Elimination and Recovery Act of 2010, the Centers for Medicare & Medicaid Services (CMS) announced three new demonstration projects that are part of the Obama administration's Campaign to Cut Waste. The Office of Management and Budget announced that the administration has already cut wasteful improper payments by $17.6 billion in 2011. The administration hopes that the new demonstration projects will move them closer to their goal of preventing $50 billion in improper payments by expanding the use of Recovery Audit Contractors (RACs), preventing the performance of inpatient services that Medicare requires to be conducted in an outpatient setting, and changing the process for approving payments for certain types of medical equipment.

Tuesday's announcement gave few details about the three demonstration projects, however, two of the projects — the Recovery Audit Prepayment Review and Part A to Part B Rebilling — could have a dramatic impact on providers. These projects target common factors that CMS believes result in erroneous payments, specifically site-of-service and medical necessity.

Recovery Audit Prepayment Review

The Recovery Audit Prepayment Review demonstration (RAPR) expands utilization of private RACs who had previously reviewed payments and identified provider billing errors on a retrospective basis. Under the newly announced demonstration project, RACs will now screen certain hospital claims before payments are made to the providers. RACs will focus reviews on diagnosis-related groups (DRGs) with historically high rates of improper payments, typically short-stay, inpatient hospital claims.

The RAPR will begin January 1, 2012, and will run for three years in eleven states: seven with a high population of fraud and four with high claims volumes of short inpatient hospital stays. The eleven states targeted include Florida, California, Michigan, Texas, New York, Louisiana, Illinois, Pennsylvania, Ohio, North Carolina and Missouri.

Unrelated to CMS' November 15th announcement, Medicare Administrative Contractors (MACs) are currently performing prepayment reviews. Currently, MACs choose the types and volumes of claims reviewed based on a data analysis of error rates. For example, First Coast Service Options, Inc. (FCSO), Florida's MAC, is preparing to implement a 100 percent prepayment medical review of inpatient hospital claims and related Part B services for 15 DRGs beginning January 1, 2012. A list of DRGs affected can be found in First Coast's prepayment review announcement. This is in addition to prepayment medical reviews that First Coast already performs on other DRGs. By also utilizing RACs in the review process, CMS expects to increase the overall number of claims reviewed.

It is still unclear whether there will be overlap between local MAC and RAC reviews. Specific information on the types of claims that will be targeted by the RACs has not yet been made available by CMS.

Commentators believe that the RAPR demonstration will have an overall positive impact on providers since providers will be given an opportunity to amend and resubmit denied claims before resorting to the appeals process. Likewise, the detection of billing errors early in the process may serve to help providers identify and correct potential problem areas on a go-forward basis. As a result, CMS supposedly views the RAPR demonstration as a win-win for both providers and the federal government.

Nevertheless, hospitals and physicians will need to be well advised on the types of claims that are targeted, as well as how to avoid denials. It is important to note that both MAC and RAC reviews can result in Part A and Part B denials, and reviews focus primarily on providers' chart documentation. Providers may need to consider amending existing policies in order to accommodate the RAC review process. For example, if a facility gives physicians 30 days to complete documentation, such as discharge summaries, an incomplete record may be submitted for review and the claim would likely be denied. As more information regarding the criteria for review is provided by CMS, it will be imperative for hospitals to educate medical and ancillary staff on the importance of documentation in the patient record. 

Part A to Part B Rebilling

Also included in CMS' recent announcement is the Part B rebilling demonstration project. Historically, when inpatient short-stay services were denied as a result of an improper care setting, they were denied in full. The demonstration project will allow providers to resubmit a claim for covered services to Medicare and be reimbursed 90 percent of the payable Part B amount in return for their waiver of appeal rights.

CMS anticipates that the project will lower the appeals rate which will protect the Medicare trust fund and reduce hospital burden. Providers have generally been frustrated with the fact that they could not rebill, often resorting to appeals. Seemingly, CMS believes that providers will be more willing to accept the 90 percent reimbursement in exchange for waiver of their appeal rights rather than file appeals to obtain a 100 percent reimbursement. Currently, however, hospitals have had some measure of success with administrative law judges or the Department of Health and Human Services' Departmental Appeals Board awarding the full Part B payment following an appeal of a RAC denial.

CMS will also conduct training sessions and provider outreach related to proper Part A and Part B services. The demonstration project will last from January 1, 2012 to December 31, 2014, and is first-come, first-served for the first 380 hospitals in certain categories that volunteer. Details regarding how to volunteer and the criteria for doing so have not yet been made available by CMS.

Prior Authorization for Certain Medical Equipment

The final demonstration project announced this week requires prior authorization for certain medical equipment and will target the states of California, Florida, Illinois, Michigan, New York, North Carolina and Texas. Initially, the demonstration will be focused on claims for Power Mobility Devices (PMD). In the first phase of this demonstration, claims will go through a prepayment review process. In the second phase, practitioners will submit prior authorization requests before a supplier can submit a claim for the PMD. CMS hopes this will ensure that Medicare only pays for PMDs that are medically necessary. 


The recently announced demonstration projects serve to underscore the increased wave of regulatory action by CMS and MACs that has been experienced over the past few years. In conjunction with CMS, MACs and other contractors across the country have ramped up review of billing procedures and are bearing down on providers that fall outside of normal billing patterns with documentation being the key component of review. We expect more of these reviews in the future.

For more information on the recently announced demonstration projects and what your facility can do to prepare, please contact a member of Buchanan Ingersoll & Rooney’s Health Care team.