Hospitals Report Wrong Setting as Most Common Reason for RAC Denial

During the 4th quarter of 2012, 61 percent of medical necessity denials by Recovery Audit Contractors (RACs) were for 1-day stays provided in the wrong setting, not because the procedure was medically unnecessary, according to results from the American Hospitals Association (AHA) RACTrac Survey.  Hospitals succeeded in 72 percent of all the denials they appealed, but hospitals appealed only 40 percent of RAC denials. RACs are authorized to look at claims from hospitals going back three years to determine if an overpayment or underpayment has been made.

Reports From Hospitals

RACTrac results for the fourth quarter of 2012 came from reports of RAC activity from 1,233 hospitals.  These hospitals reported nearly 60,000 requests for medical records with over 30,000 complex audit denials during the fourth quarter of 2012. Nearly two-thirds of medical reviews did not contain an over payment the hospitals reported.  Since RACTrac began collecting data in January 2010, 58,426 automated denial have been made by RACs.  Automated denials are made based on information from a claim processed by a computer program.  Complex denials require a review of the medical record by a person.  Overall RACs have requested 720,590 medical records for reviews, but of that amount there have been 233,769 denials.  Only 41 percent of claims that go through a complex medical review result in a denial.

Common Errors

Outpatient billing errors were responsible for 41 percent of automated denials. Inpatient coding errors were responsible for 23 percent of automated denials.  The average dollar value of an automated denial was $734.00, while the average dollar amount for a complex denial was $5,358.00.  Seventy percent of hospitals reported that complex medical denials were for short stays and were primarily for care provided at the incorrect location; i.e. should not have been provided as Claims with Medicare Severity Diagnosis-Related Group (MS-DRG) code 247 for percutaneous cardiovascular procedure with drug-eluting stent without MCC  were the claims denied for medical necessity reasons that had the largest financial impact on a hospital, according to RACTrac results.

Increased administrative costs were reported by 55 percent of hospitals reporting to RACTrac during the fourth quarter of 2012.  Most hospitals, 63 percent, report spending more than $10,000 managing the RAC process in the fourth quarter of 2012 and 13 percent reporting spending more than $100,000 on administrative costs for the RAC process during the fourth quarter of 2012.

RACTrac reported that nearly three-quarters of participating hospitals received at least one underpayment determination during the fourth quarter of 2012.  Hospitals reported that 69 percent of underpayments resulted from an incorrect MS-DRG, and 22 percent were due to inpatient discharge disposition.

RACs are paid a contingent fee based on the amount of overpayments collected. In FY 2009 and FY 2010, CMS reports, contingent fees ranged from 9.0 percent to 12.5 percent.  Fees are paid to a RAC only when the overpayment has been collected, not when it is first identified.