California Seeks Changes to Medicare Audit Program

Next month, the federal agency in charge of Medicare plans to roll out an auditing system aimed at eliminating improper payments in 20 states. The program is scheduled to spread to all 50 states next year.

If the new program is anything like its pilot project in California, everybody involved — hospitals, nursing homes, legislators, CMS and perhaps patients — should get ready for some turbulence.

Started in 2005, the pilot project caused so much strife that two California representatives were moved to ask their colleagues in Congress to put the program on hold.

“We should not be expanding this program if it’s not working correctly, and it clearly is not working correctly,” says Emily Kryder, press secretary for Rep. Lois Capps (D-Calif).

Capps and Rep. Devin Nunes (R-Calif.) co-authored HR 4105, which seeks a one-year moratorium on the program’s expansion, as well as oversight by the Government Accounting Office.

It Began as a Pilot

California is one of three pilot states where CMS tested its congressionally mandated auditing system, known as the Recovery Audit Contract, or RAC, program.

The contractor in California, PRG-Schultz International, denied millions of dollars in Medicare reimbursements for hospitals, rehabilitation centers and nursing homes. In some clinical areas, Atlanta-based PRG-Schultz, which bills itself as the “world leader in recovery auditing,” rejected 90% of the Medicare claims filed.

New York and Florida are the other pilot states; a different contractor was hired in each one.

The high percentage of rejections and loud outcry from providers prompted CMS to temporarily suspend PRG-Schultz’s audits in 2007 and to order an independent review — essentially an audit of the auditor. The review disagreed with nearly 40% of the denied claims.

“The relationship between California’s RAC and providers was not as cooperative as it was in the other two pilot programs,” Don May, vice president for policy at the American Hospital Association, explained.

“That said, there were problems in all the states with RACs,” May adds. “We see the same issues played out in different ways.”

Questions About Commissions

The heart of the problem, according to critics of the program, is a commission incentive built into the auditing contract.

When Congress called for independent audit contracts, it stipulated that payment must be commission-based, not a flat fee for services. Basically it means the more claims an auditor rejects, the more money the company makes.

“That seems like such a clear, built-in conflict of interest,” says Jan Emerson, spokesperson for the California Hospital Association.

“Our understanding is that PRG-Schultz received 25 to 30 cents on every dollar they rejected,” Kryder says. “That, combined with a denial rate of 90%, raises some eyebrows.”

AHA and CHA are asking Congress to change the payment structure before the program goes national.

‘No Comment’

CMS and PRG-Schultz International declined comment.

“Our client, Centers for Medicare & Medicaid Services, requires that media inquiries regarding the RAC program be directed to the CMS Public Relations Department,” a PRG-Schultz spokesperson wrote in an e-mail.

After three invitations to comment at the California, Washington, D.C., and Baltimore offices of CMS, a spokesperson wrote, “CMS senior staff say they have nothing for you at this time.”

The inability to get a response from CMS is not an isolated occurrence. In fact, CMS’ unresponsiveness played a significant role in the call for a moratorium.

After months of complaints from hospitals, rehabilitation centers and nursing homes, California legislators began asking for more information from CMS early last year. The issue came to a head last fall. Specifically seeking details on a “pause” in the program, the California delegation stepped up its call for information beginning in September.

“We got virtually no response until finally in November, we said, ‘OK, you have seven days to respond,’ ” says Kryder from Rep. Capp’s office. “They did not respond and then we introduced our legislation.”

The California delegation is still awaiting word from CMS.

“CMS was supposed to be providing us a more in-depth report in January. Then it was early February, and now it’s the end of February, and we still have not seen that report,” Kryder says.

Unintended Consequences?

The RAC program is the main tool in the Bush administration’s campaign to identify and get rid of waste, fraud and abuse in Medicare. Some say the program will end up costing more than it saves.

The three pilot projects identified $357 million in overpayments in 2007, but most of those rejected claims are under appeal. So far, $17.8 million — more than 7% — have been overturned in the appeal process. Payments for contingency fees and other administrative expenses totaled $77.7 million.

Auditors also found $14.3 million in Medicare underpayments.

Hospital administrators understand the motive behind the RAC program, but many question its efficacy.

“CMS is under so much pressure to shrink Medicare and Medicaid, and we understand that,” says Roland Rapp, chief administrative officer for Skilled Healthcare Group, which operates more than 30 nursing homes in California.

“But frankly, we think they’re grasping at straws to come up with a program like this that, in the end, will cost more than it saves,” Rapp says.

“From my perspective, this is wasted effort because there are already fiscal intermediaries in place that serve essentially the same function — identifying claims that should not be paid,” Rapp says.

“We have considered litigation and may still go that route,” Rapp says, “but we prefer to work with our elected officials.”

What Have the Costs Been?

Financial hardships were incurred as a result of the auditing program, California officials say. Hospitals, rehab centers and nursing homes have to devote money, staff and energy to dealing with audits and appeals, both of which are time-consuming and expensive.

“And then there’s the whole issue of what this means to patients,” says CHA’s Emerson.

“PRG-Schultz, for the first year of this program, did not have a medical director on board,” Emerson continued. “They have since hired one, as well as some nurses, only one of whom I’m told has experience in rehabilitation medicine. So for much of the time, we’ve had unqualified personnel reviewing decisions made by doctors and nurses.”

“How that kind of situation will ultimately affect patient care is unclear, but I think, if left unchecked, it would certainly have an impact,” Emerson says.

It’s unlikely the moratorium bill in the House of Representatives will gain any traction before the RAC program is scheduled to expand, but critics are hopeful the hue and cry will have an impact on how and when the program grows.

“Even if legislation is not enacted before the next step is due to be taken, there’s still a lot of pressure that Congress can apply to make the administration make some changes, maybe slow down,” May says.

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