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Recovery Audit Contractors as Experienced by One California Hospital
By Dixie Eisenhauer, BSN, MSN
For most acute care hospitals, Medicare and Medicaid (or Medi-Cal) patients represent a large percentage of the patients treated. According
to the 2007 ACMA National Hospital Case Management Survey, governmental payors represent an average of 49% of the inpatient payer mix
of acute care hospitals. As a result, anything that changes the hospital’s payment structure for treatment of these patients can critically affect
the organization’s revenue and fiscal health. One of the most significant – and aggressive – changes of the past decade to this payment
structure is the Recovery Audit Contractors (RAC) Demonstration Program. The demonstration enlists commission-based audit contractors
to perform reviews on past Medicare cases to seek out under- or over-payments.
For most acute care hospitals, Medicare and Medicaid (or Medi-
Cal) patients represent a large percentage of the patients treated.
According to the 2007 ACMA National Hospital Case Management
Survey, governmental payors represent an average of 49% of the
inpatient payer mix of acute care hospitals. As a result, anything that
changes the hospital’s payment structure for treatment of these patients
can critically affect the organization’s revenue and fiscal health. One of
the most significant – and aggressive – changes of the past decade to
this payment structure is the Recovery Audit Contractors (RAC)
Demonstration Program. The demonstration enlists commission-based
audit contractors to perform reviews on past Medicare cases to seek out
under- or over-payments.
According to the Centers for Medicare and Medicaid Services
(CMS), “The Recovery Audit Contractor (RAC) demonstration program
was designed to determine whether the use of RACs will be a cost-
effective means of adding resources to ensure correct payments are
being made to providers and suppliers and, therefore, protect the
Medicare Trust Fund.1” The Medicare Prescription Drug Improvement
and Modernization Act of 2003 (MMA) mandated a 3-year project to
demonstrate the use of Recovery Audit Contractors (RACs) in identifying
underpayments and overpayments. “The RAC demonstration
program…has provided CMS with a new mechanism for detecting
improper payments made in the past, and has also given CMS a
valuable new tool for preventing future payments.2”
The RAC Demonstration Program began in March 2005 operating
in the three states with the highest rates of Medicare utilization:
California, Florida, and New York. The demonstration program in these
three states is scheduled to end in March, 2008. However, based on the
demonstration, section 302 of the Tax Relief and Health Care Act of 2006
makes the RAC Program permanent and requires the program to
expand into all 50 states by no later than 2010.2,3 Figure A shows the
expected dates RAC will begin in each state.
A HOSPITAL’S EXPERIENCE
Community Hospital of the Monterey Peninsula (CHOMP) is a
201-bed acute care facility in Monterey, California, that was in the
second tier of California hospitals to be included in the RAC
Demonstration. This article examines the hospital’s experience with the
RAC review process and the lessons learned from striving to effectively
manage RAC financial retractions and appeals.
RAC Methodology
The process begins with a contractor’s request for charts from the
hospital to perform complex retrospective chart reviews using screening
criteria. RACs then issue determinations in cases where they conclude
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erroneous payments were made. The hospital is notified by a
Determination Letter from the RAC explaining where they determine
over or underpayments were made. A retraction is pending no less than
30 days following the receipt of the letter. All over and underpayments
are managed at the Fiscal Intermediary level by adjustments applied for
payment under CMS. Outside of this fundamental methodology,
specific practices of the RACs may vary.
Under the jurisdiction of PRG-Shultz International, Inc.,5 – the RAC
responsible for California – CHOMP began receiving general requests
for records in approximately 2005. These requests were managed by
Health Information Management (HIM). The first communication to
case management came on March 12, 2007, and was the first series of
Determination Letters faxed to the case management department. Each
notice included information identifying the case and citing the reason
for overpayment. The hospital received approximately 10
determinations per week, although this number varied significantly and
could be as little as none or as many as 25.
As the case managers reviewed the determinations, the focus of the
contractor became apparent. Early notices focused primarily on
one-day cases. The focus gradually shifted to two-day, then three and
four-day stays, both medical and surgical cases. Diagnoses receiving
auditor focus included:
• Chest pain
• Chronic Obstructive Pulmonary Disease (COPD)
• Chronic Heart Failure (CHF)
• Cerebral Vascular Accidents (CVAs)
• Transient Ischemic Attacks (TIAs)
• Pneumonia
• Back pain
RAC retractions had an immediate negative financial impact, causing
case managers at CHOMP to rapidly focus on appealing RAC
determinations. The multi-tiered appeal process for the RAC
Demonstration Program is detailed in Figure B (see page 8).
Specific Challenges
The RAC Demonstration created several specific challenges for the
organization. Since case management was the primary interface for
denials, it was also the primary interface for RAC communications and
determinations. The department was tasked to develop processes to
manage RAC activities and minimize financial losses. The primary
challenges to the organization were identified as:
• Managing RAC-related documentation – tracking,
recordkeeping, etc.
 C O L L A B O R A T I V E
RAC Expansion Schedule
D A
SPRING 2008
FIGURE A4
• Managing resource requirements – commitments of time and
staff resources.
• Defining and implementing strategies for successful RAC rebuttals
– interdepartmental collaboration.
Documentation Management
Appealing a case through the RAC appeals process involves
multiple levels of appeal, and as a case moves through these levels the
related documentation grows substantially. Typically, the file will
include the supporting medical record documentation, all RAC issued
determination letters and correspondence, rebuttals and other evidence
written by the organization. Two elements make effective management
of this documentation especially challenging:
• Length of process – The applicable deadlines vary, and the
entire appeals process – including all levels – may or can extend
over 18 months.
• Involvement of multiple services and departments – RAC appeals
require information from multiple sectors of the organization.
Additionally, deadlines rely on dates that must be provided by
various departments. For example, re-determination requests must
be submitted within 120 days of the retraction date, which is the
date the hospital is notified of the pending deduction of funds.
These rebuttals were written and submitted by case management,
but the retraction date on which further steps depend must be
provided by the hospital’s billing department.
C A S E M A N A G E M E N T
B
Although California was a
RAC demostration state,
California claims will not be
avaiable for RAC review from
March 2008 – October 2008
due to a MAC transition.
C A similar RAC blackout
period is planned for all states
undergoing a MAC transition.
FALL 2008 JAN 2009 OR LATER NOTE: All dates are flexible
Multiplying the complexity of RAC documentation management is
the volume of Determination Letters and the variable rate at which they
arrive. In addition, CHOMP had moved to a new electronic system in
2004/2005, so many of the determinations concerned cases prior to this
implementation. These records had to be retrieved from a data archive
or offsite storage warehouse for review and rebuttal.
CHOMP quickly found that effectively managing the documentation
process required interdepartmental collaboration – no single department
could manage the process and documentation alone. CHOMP developed a
team process to manage RAC appeals, including the following departments:
• Case Management
• Health Information Management (HIM)/Medical Records
• Billing
CHOMP had previously formed a team to focus on one-day stays,
and was able to merge the existing process to manage new RAC tasks
with this team.
Efficient collaboration of these departments, however, required the
ability for each to contribute and access all information on a RAC case.
To provide this access, a shared drive was set up to hold all RAC cases
and related information. All applicable personnel have access to the
most current information, and are responsible to provide/contribute
specific pieces of information to the record. For example, case
management initiated a new record in the shared drive for each
received Determination Letter, and Billing added to this record the date
of actual retraction.
continued on page 8
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Recovery Audit Contractors as Experienced by One California Hospital (continued from page 7)

APPEAL ACTION/DOCUMENT: HOSPITAL MUST SUBMIT BY: DESCRIPTION: RESPONSE BY:

Rebuttal (in writing 15 days of receiving Rebuts denial – Undefined – Contractor

with evidence) Determination Letter presents case and evidence generally responds within
30 days

Redetermination request 120 days from notification Provider appeals Fiscal Intermediary (FI)
(First Level) of retraction date following notification of must respond within 60 days
retraction date

Reconsideration request 180 days from FI Requests reconsideration 60 days for QIC review
(Second Level) redetermination response by Qualified Independent and response
Contractor (QIC)

Hearing request (Third Level) 60 days from QIC determination Requests a hearing before an 90 days to respond whether
Administrative Law Judge (ALJ) hearing has been granted
(If granted, a physician is expected
to be involved in the hearing)

Medicare Appeals Council Hospital has 60 days from ALJ Presentation of case to MAC MAC must respond within
(MAC) (Fourth Level) hearing and decision 90 days

US District Court 60 days from loss of Request hearing before Scheduled by court
(Fifth Level) MAC appeal US District Court

FIGURE B

Managing Resource Requirements Strategies for Successful RAC Appeals

When CHOMP began to receive RAC Determination Letters,
resources were reallocated to receive notices and develop rebuttals.
This created the following additional processes:
• Screening Determination Letters for “appealability” –
likelihood of successfully overturning the determination
• Researching each case, including retrieving archived charts
• Writing and submitting rebuttals within the 15-day
time window
CHOMP found the average time required for case manager
review of a determination to be approximately 35 minutes per case
– more if the medical record had to be retrieved from offsite storage.
This included obtaining the medical record, reviewing and logging
the case, and grading the “appealability” of the case (based on
criteria discussed in the next section). If the case was determined to
be appealable, preparing a rebuttal required 90 to 120 minutes per
case, including investigating the case, writing and proofing the
rebuttal, printing the medical record and/or evidence, and
preparing for mailing.
Using the estimate of receiving 10 notices per week, this would
require 5.8 hours for screening, and an additional 15 to 20 hours for
writing rebuttals. These average times apply to one-day stays, and
as the reviews expanded to include more complex and longer
length of stay cases, this time could increase to over four hours per
chart. Planning for these resource requirements was difficult
because of the sporadic arrival of RAC Determination Letters, and
by the lack of warning prior to arrival.
Because of the significant resources required to rebut RAC
determinations, developing an efficient screening process and
criteria for incoming Determination Letters was critical. CHOMP
developed a RAC screening process – screening records for correct
and adequate documentation and to discern if the case met criteria
for admission. The screening process utilized a ranking system, and
cases were ranked from zero to four, with a ranking of zero
indicating a case that was clearly non-appealable. This system
leveraged the existing utilization review expertise of the case
managers to prioritize cases for further action.
CHOMP case managers also recognized the necessity of
developing an appeal and rebuttal strategy that would prove
effective in overturning determinations, yet also economize
resources devoted to rebuttals. It quickly became apparent that the
RAC reviewers were performing strict criteria reviews using
commercially available screening criteria. If the RAC reviewer
determined that a patient did not meet criteria they would issue a
Determination Letter.
However, screening criteria products are only guidelines for
determining admission status and appropriate level of care. While
criteria products are almost universally used in case management,
federal law governing CMS holds ultimate authority regarding the
proper reimbursement for cases. These statutes make no mention
of criteria, but recognize instead the medical judgment of the
attending physician. This takes into account other factors than
those included in criteria guidelines, such as risk of adverse events
and patient history. (See Figure C)

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 C O L L A B O R A T I V E
CHOMP’s strategy for rebutting RAC Determination Letters,
therefore, centered on demonstrating a physician’s complex medical
judgment of the patient’s severity of illness. This strategy utilizes the
letter of CMS law, rather than relying on published guidelines. This
strategy also, however, necessitates significant physician
involvement in RAC rebuttals and appeals. Generally, case managers
are not able to adequately convey the attending physician’s complex
medical judgment. This requires a physician’s expertise. Further, this
strategy also requires a familiarity with and level of understanding of
federal law governing CMS as it relates to complex medical
judgment and reimbursement.
OUTSOURCING SOLUTION
When the first Determination Letters arrived at CHOMP, the
organization rapidly developed case management processes to
manage determinations and rebuttals. As the process continued,
however, CHOMP was better able to understand the level of
resources required, and as the volume of RAC determinations
continued the case management department struggled to allocate
resources to efficiently manage both case management priorities
and RAC rebuttals. Combined with case managers’ limitations in
communicating an attending physician’s thought process in
rebuttals, this led CHOMP to investigate outsourcing solutions.
Effectively, CHOMP was facing a decision to hire additional case
management staff (and physician expertise to support) or to
outsource the process. To continue in-house management of RAC
activities would have necessitated the addition of:
• Case management resources
• Physician support for appeals
• Legal expertise (either through additional staff or training)
CHOMP eventually decided to outsource RAC rebuttals and
management processes. The partner company performs the initial
rebuttal as well as all subsequent levels of appeal. Outsourcing
offered access to a company that utilizes a staff of physicians,
enabling them to efficiently follow and communicate a physician’s
medical judgment, and to communicate physician-to-physician
where clarification is needed.
PERMANENTLY CHANGING CASE MANAGEMENT
Managing RAC determinations has created lasting impact on
the focus of case management at CHOMP. Most significantly,
managing RAC determinations has led to a deeper understanding of
Medicare law and made case managers more vigilant in ensuring
compliance on all current cases to prevent future denial or
determination – especially regarding admission status,
appropriateness of the admission, and documentation
completeness. For example, for cases that do not clearly meet
criteria, CHOMP now utilizes the partner company to draft a letter
that is permanently attached to the medical record that clearly
communicates physician determination in the case, explaining the
medical judgment for an inpatient, observation, or outpatient
admission. If such a case is audited in the future, this establishes the
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C A S E M A N A G E M E N T
Federal Law
Governing Medicare
“The physician or other practitioner responsible for
a patient’s care at the hospital is also responsible for
deciding whether the patient should be admitted as an
inpatient. Physicians should use a 24-hour period as a
benchmark, i.e., they should order admission for patients
who are expected to need hospital care for 24 hours or
more, and treat other patients on an outpatient basis.
However, the decision to admit a patient is a complex
medical judgment which can be made only after the
physician has considered a number of factors, including
the patient’s medical history and current medical
needs, the types of facilities available to inpatients and
to outpatients, the hospital’s by-laws and admissions
policies, and the relative appropriateness of treatment in
each setting. Factors to be considered when making the
decision to admit include such things as:
• The severity of the signs and symptoms exhibited
by the patient;
• The medical predictability of something adverse
happening to the patient;
• The need for diagnostic studies that appropriately are
outpatient services (i.e., their performance does not
ordinarily require the patient to remain at the hospital
for 24 hours or more) to assist in assessing whether the
patient should be admitted; and
• The availability of diagnostic procedures at the time
when and at the location where the patient presents.”
Source: Medicare Benefit Policy Manual: Chapter 1 –
Inpatient Hospital Services Covered Under Part A.6
FIGURE C
concurrent review determination and communicates physician
complex medical judgment.
This preventive strategy reflects what is likely the most lasting
impact of the RAC program. This shift in the payer environment has
increased case management’s role in supporting hospital revenue.
Preventive actions that have gained renewed focus include increased
involvement in high level lobbying efforts to ensure fair hospital
auditing processes. This includes providing resource examples and
participation with the state hospital association. Concurrent actions
that have risen in priority at CHOMP include tracking and
recognizing internal rapid changes, and building strong internal
teams. Establishment and maintenance of collaborative, collegial
continued on page 12
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Motivational Interviewing as Case Management Intervention (continued from page 11)
In contrast, collaborative and non-judgmental clarification of
all that is at stake for patients regarding their self-care invariably
uncovers larger goals and values. At least some of these are, at the
end of the day, typically consistent with good self-care practices.
This provides patients with the opportunity to reach new vistas,
personal compromises, and eventually a well-negotiated change plan
that feels comfortable within the logic of their own worldview.
While authentic curiosity about the client’s perspectives is a crucial
aspect of any culturally sensitive counseling, MI’s emphasis on empathic
listening and collaboration makes it particularly useful in cross-cultural
communications. Unacknowledged and unaccepted cultural differences
between the provider and patient typically hinder providers’ capacity to
maintain a non-judgmental, curious, and genuinely open-minded
helping stance, with cultural clashes ultimately dooming the effort to
failure. It is better to “agree to disagree” than to ignore cultural or
perceptual differences, or worse, to try to correct or sanitize the patient’s
perspective in order to make it more congruent with the provider’s.
Acceptance with careful listening tends to disarm a patient’s reluctance
to entertain new possibilities and leads to collaboration.
Bridging the Transition from Hospital to Home
When a patient is hospitalized during the course of a diagnosis
or the progression of a chronic disease, case managers typically
facilitate the transition back home. Key elements of this transition
include providing information – regarding the disease, the
discharge instructions and follow-up care. Critical to the patient’s
success at long-term management of the disease will be the skills he
or she can build related to self-care and the activation of support
resources on the patient’s behalf.
Part 2 of this article will be featured in the Spring issue and will
present “A Motivational Intervention Primer.” This explores additional
conditions of brief counseling that have also been empirically
demonstrated to lead to change.
Brendali F. Reis, PhD, is Associate Faculty at the Institute for Graduate
Clinical Psychology at Widener University in Chester, PA. She earned her
Recovery Audit Contractor as Experienced by One California Hospital (continued from page 9)
relationships with other departments in the organization have become
prerequisite for managing payer changes, such as the RACs.
Dixie Eisenhauer
Eisenhauer, BSN, MSN, is Director of Social Services at Community
Hospital of the Monterey Peninsula in Monterey, CA, a position she has held
for ten years. She earned her BSN at the University of California at San
Francisco and her MSN at San Jose University in San Jose, CA. She has 34
years of experience in healthcare, and expertise in critical care, discharge
planning and utilization review.
ENDNOTES
1 Centers for Medicare and Medicaid Services. Recovery Audit Contractor:
Overview. March 10, 2008. http://www.cms.hhs.gov/RAC/
2 Centers for Medicare and Medicaid Services. Recovery Audit Contractor:
Expansion Strategy. March 10, 2008. http://www.cms.hhs.gov/RAC/10_
ExpansionStrategy.asp
12
BA and Master’s in Psychology at the Federal University of Rio Grande
do Sul, Brazil, and her PhD at the California School of Professional
Psychology in Fresno, CA. Before joining the faculty at Widener University,
she was on the research faculty of the University of Pennsylvania and was
part of the Motivational Interviewing Network of Trainers (MINT).
Victoria Vaughan Dickson, PhD, CRNP, is Adjunct Assistant Professor at
the University of Pennsylvania School of Nursing in Philadelphia, PA.
She earned her BSN in Nursing at Temple University in Philadelphia, PA,
and her MSN and PhD in Nursing at University of Pennsylvania.
Dr. Dickson is an adult nurse practitioner with more than 20 years in
primary care and employee health experience.
Barbara Riegel, DNSc, RN, FAAN, FAHA is Professor at University
of Pennsylvania School of Nursing. She has been on the faculty
at the University of Pennsylvania for six years. She earned her BS in
Nursing from San Diego State University and her MN and DNSc from
the University of California, Los Angeles. During her 30-year nursing
career, she has had experience as a cardiovascular clinical nurse
specialist, case managing many cardiac patients with both stable
and acute cardiac illnesses.
ENDNOTES
1 Riegel, B., Carlson, B., Moser, D., Sebern, M., Hicks, F., & Roland, V. (2004).
Psychometric Testing of the Self-care of Heart Failure Index.
Journal of Cardiac Failure, 10(4), 350-360.
2 Miller, W., & Rollnick, S. (2002). Motivational Interviewing: Preparing People for
Change. (2nd ed.). New York: Guilford.
3 Riegel, B., Dickson, V., Hoke, L., McMahon, J., Reis, B., & Sayers, S. (2006). “A
Motivational Counseling Approach to Improving Heart Failure Self-care:
Mechanisms of Effectiveness.” Journal of Cardiovascular Nursing
Nursing, 21(3), 232-241.
4 Rogers, C. R. (1959). A Theory of Therapy, Personality, and Interpersonal
Relationships as Developed in the Client-Centered Framework.
In S. Koch (Ed.), Psychology: The Study of a Science: Vol. 3, Formulations of the
Person and the Social Contexts (pp.184 - 256). New York: McGraw Hill.
5 Rollnick, S., Mason, P., & Butler, C. (1999). Health Behavior Change: a Guide for
Practitioners. London: Churchill Livingstone.
6 Miller, W. R., Benefield, R. G., & Tonigan, J. G. (1993). “Enhancing Motivation for
Change in Problem Drinking: A Controlled Comparison of Two Therapist Styles.”
Psychology, 61, 455–461.
Journal of Consulting and Clinical Psychology
3 The RAC Demonstration has raised several questions and concerns regarding
the RAC methodology. Based on the experience of the demonstration program,
CMS is considering significant improvements for the permanent RAC program.
These include limiting the number of years past that RACs may audit records,
and increasing monitoring and oversight.
4 Centers for Medicare and Medicaid Services. RAC Expansion Schedule. March
10, 2008. http://www.cms.hhs.gov/RAC/Downloads/RAC%20Expansion%20
Schedule%20Web.pdf
5 Centers for Medicare and Medicaid Services, Office of Public Affairs. Press
Release (March 28, 2005): Demonstration to Work Toward Assuring Accurate
Medicare Payments – Tests Ability of Recovery Audit Contractors to Track Over
and Under Payments. March 10, 2008. http://www.cms.hhs.gov/apps/media/
press/release.asp?Counter=1405
6 Centers for Medicare and Medicaid Services. Medicare Benefit Policy Manual,
Chapter 1 – Inpatient Hospital Services Covered Under Part A. (Page 6-7).
March 10, 2008. http://www.cms.hhs.gov/manuals/Downloads/bp102c01.pdf