Appeals of RAC denials have overwhelmed the Office of Medicare Hearings and Appeals

Keeping patients in observation and thus in outpatient status avoids the risk that an inpatient claim might be denied at a future date.

Appeals from RAC claims increased 506 percent between 2012 and 2013, compared to growth of 77 percent in appeals of other types of claims. In an effort to reduce this backlog, in CMS offered partial payment of 68 percent to any hospital willing to withdraw its pending appeals of claims denied based on patient status.

What’s next?

Under current law and absent additional action by Congress or CMS, Medicare contractors will begin applying the two-midnight rule in making payment determinations and reviewing claims as of . Prior to that date, CMS has said it will evaluate the results of the “probe and educate” process and may issue additional guidance to ensure consistency in application of the two-midnight policy.

In the meantime, hospital associations are continuing to fight the rule. The AHA along with some state hospital associations have filed a lawsuit challenging the two-midnight rule in general and the 0.2 percent reduction in hospital payments in particular. escort service in Oakland CA The AHA also supported bills introduced during the last congressional session that would have required CMS to develop appropriate criteria for paying for short inpatient stays (HR 3698/S 2082) and that would reform the recovery audit process (S 1012).

MedPAC is already considering alternative policy options to address short inpatient stays and has emphasized the need to strike a balance between appropriate oversight of proper billing and administrative burden on Medicare providers. Options described at the MedPAC meeting included creating new MS-DRGs for short-stay cases, targeting RAC reviews to those hospitals with the highest rate of short-stay admissions, and revising the RAC contracts to take into consideration the percentage of denials that are overturned on appeal.


American Hospital Association, Issue Brief: RAC Auditing Reform Is Essential to Fix Urgent, Critical Problems (Washington, DC: American Hospital Association, ).

Centers for Medicare and Medicaid Services, Medicare Benefit Policy Manual: Chapter 6–Hospital Services Covered Under Part B (Baltimore, MD: CMS, revised ).

Office of Inspector General, Hospitals’ Use of Observation Stays and Short Inpatient Stays for Medicare Beneficiaries (Washington, DC: Office of Inspector General, ). Report No. OEI-02-12-00040.

About Health Policy Briefs

Payment for outpatient services. In contrast to the case-based payment for inpatient care, Medicare pays hospitals for outpatient care based on the services provided. Under the outpatient prospective payment system (OPPS), hospitals bill Medicare for the individual services rendered to a beneficiary during an outpatient visit. Under the OPPS, each outpatient service is assigned to a group of clinically similar services called an ambulatory payment classification (APC).

What’s the rule?

RACs may still review shorter inpatient stays to determine the appropriateness of inpatient admission but should take into consideration all of the time a beneficiary received care from the hospital, including time during which the beneficiary received emergency department or observation services as an outpatient.

The Medicare Payment Advisory Commission (MedPAC) puts the RACs’ actions and hospital response in context: “For several years the Commission has tracked the growth of observation cases and the shift of short-stay cases from the inpatient setting to the outpatient setting. We believe these trends reflect at least in part hospitals’ responses to the ambiguity of Medicare requirements for inpatient admission, coupled with underlying payment inequities between clinically similar inpatient and outpatient cases. These factors influenced Medicare’s Recovery Audit Contractors (RAC) and Medicare Administrative Contractors (MAC) to focus on the appropriateness of short inpatient stays. Their scrutiny led hospitals in turn to increase their use of observation status.”