DRG Down-Grades



PART IV – DRG Downgrading: Is it auditing or racketeering?

Edward M. Roche, Ph.D., J.D.
Prior to joining the California Bar, Dr. Roche served as the Chief Research Officer of the Research Board (Gartner Group), and Chief Scientist of the Concours Group, both leading IT consulting and research organizations.

Interviews with hospitals facing a tsunami of DRG downgrades reveal that auditors are engaging in a pattern of abuse and intimidation that resembles the type of scams usually prosecuted by the Racketeer Influenced and Corrupt Organizations Act (RICO). Here are some of the facts; you judge for yourself.

Unilateral Re-Diagnosis of Patients

It is very common the the auditor to re-diagnose a patient. The result of this usually is a substantial cut in the revenue paid to the hospital.

For example, in one case a patient had pneumonia plus a cardio problem. The auditor said that it would pay for treatment of the pneumonia, but that the cardio problem was merely “incidental”. When the hospital pointed out that the heart condition was so bad it required installation of a pacemaker, the auditor then said it would pay for the cardio treatment, but that the pneumonia was incidental, and thus would receive no payment. This was the same pneumonia that in the first round had been approved. When asked to explain, the auditor didn’t answer.

In one case, the patient had streptococcus pharyngitis and also sepsis. Sepsis is a “life-threatening organ dysfunction caused by a dysregulated host response to infection.” (*) It is a very dangerous condition that can lead to death, and frequently occurs in conjunction with other conditions. The patient presented five (5) of the American Medical Association (AMA) diagnostic criteria for sepsis (e.g., Fever, tachycardia, etc.), even though the AMA requires only two be present for a sepsis diagnosis. The auditor wrote that although “the patient presented symptoms that warranted consideration of sepsis” it was not there, and only the pharyngitis would be paid for. Of course, sepsis is more expensive to treat.

(*) See Singer, M. et al., The Third International Consensus Definitions for Sepsis and Septic Shock (Sepsis-3) , J. of the Am. Med. Assoc., (2016) 315(8):801-10, doi:10.1001/jama.2016.0287. (Soon a new criteria “Sepsis-3” will replace the current criteria “Sepsis-2”.)

What is the hospital to do?  If they rely on the AMA diagnostic criteria which is used by CMS, and these criteria are followed, and consequently the diagnosis is valid, then how can the auditor simply ignore it? To put it another way, of the hospital and coders are unable to rely on the AMA diagnostic criteria, then what are they supposed to do?

In another case, the hospital was treating a functional quadriplegic who had dementia. In particular, the patient was treated so as to avoid Stage 4 decubitus (bed sores and ulcers). The auditor said that the decubitus was “clinically insignificant”, so the hospital would not be paid. In addition, the patient was not considered to be a “real” quadriplegic.

“Flavor of the Month”

The auditors seem to roam from one area to another in their targeting. According to the interviewee, “Sepsis is the current flavor of the month”.

These examples show the general pattern. If the patient is treated for more than two major problems, the auditor will always ignore the more expensive DRG and pay for only the cheaper DRG.

Cheap Tricks to Cheat the Hospital

One of the must alarming practices by the auditors is the continued use of a number of cheap tricks. For example, appeals have a cut-off time of 30 days from the date of the demand letter from the auditor, but letters routinely are mailed as much as a week or more after the letter date, usually leaving the provider with only a few days to appeal.

The auditor refuses to use trackable mail, and fully one-third of appeals are lost because the provider never even receives the demand letter.

The auditor refuses to accept any electronic records, leaving the provider hospital with a requirement to send physical copies of all the documentation by certified mail.

Unlike most correspondence, the time of submission of an appeal is counted from when the documentation is received, not when it is mailed. This tends to take another week out of the 30-day time window for an appeal.

No Transparency

When the auditor is asked to explain their opinion, they refuse. When asked about the credentials of the person(s) making the decision, the auditors point out that they are not required to provide this information. When shown how a claim meets the criteria set forth by the American Hospital Association, the auditor simply says it disagrees.

How much money is seized?

We asked for specific examples of DRG downgrading to get a picture of the amounts of money involved. In the pharyngitis/sepsis case, the billing was $23,000 and this was downgraded to $3,000 dollars. In the cardio case, the billing of $53,000 was downgraded to $35,000 dollars.

Administrative Cost to the Hospital

To give an example of the costs involved, we spoke with one hospital that is a 600 bed facility. Since the wave of DRG downgrading started, it has been forced to hire two RN who possess AHIMA certification in coding, one physician advisor, and two certified coding specialists acting as consultants, plus administrative support just to keep up.

No Due Process

Some of the most egregious abuse takes place in cases where state medicaid services are sub-contracted to a private insurance company. In these cases, there frequently is not appeal possible at all. Or if there is, then is is limited to a one-level appeal (to be reviewed by the same company). Most contracts have not external appeals process at all. What this really means, is that the auditor can simply remove money from payment to the hospital, and there is no due process to review to see if it is justified.

From a legal standpoint, this is insanity. It is un-American, and goes against every concept of due process known in our legal system.

Application of RICO

Under 18 U.S. Code § 1961(1) “racketeering activity” has a very broad meaning and includes “any act . . . involving . . .  robbery [or] extortion.” It perhaps would be a stretch to apply RICO to what is happening with DRG downgrades. But lets ask a simple question: Do you know of any other legal process in the United States where an organization can simply take more than $50,000 dollars from a party with no due process, no explanation, and no serious review? And if that is happening, then how would it be characterized? The reality is that the auditors are in a position where they can act this way because there are no constraints on them. They can simply take the money from the hospital, but without any clear explanation, and with no meaningful medical analysis. How would you characterize this?

AI and Audits

Medicare audits growing rapidly. Artificial intelligence is being used to replace medical judgment. Cost of audits dropping rapidly. Health care providers forced to allocate ever-increasing amount of resources to audits.


Edward M. Roche, Ph.D., J.D. — Barraclough NY LLC

Part III — Artificial Intelligence and the Audit-Free Future

In Part I of this series, we discussed the exploding number of Medicare claims and the inability of the current appeals regime to handle the workload.  We also reviewed how special computer algorithms are being used to down-code Diagnosis-Related Group (DRG) claims, and argued that these actions are not really “audits” because artificial intelligence (AI) algorithms using statistical comparison are being substituted for medical judgment.

In Part II we examined the emerging arguments being made in “algorithm law”, but suggested that this area of litigation will need to be developed further, and the type of experts needed in the appeals hearings will change dramatically, because they will need to be familiar with artificial intelligence (AI).

In this closing part of the series, we will examine scenarios for the future. But in looking at the future, we must make a few reasonable assumptions.

The number of audits will continue to increase, and one reason for this is that due to automation the cost of audits is dropping rapidly.
The ability of the appeals system (re-determination; reconsideration; Administrative Law Judge; Medicare Appeals Council) will remain under pressure to handle the litigation workload.

The quality of audits, which most agree is very poor, will not improve, primarily because there is no incentive for the RACs do do so.

Health care providers will be forced to allocate an ever-increasing amount of their already scarce resources to dealing with audits.

Given these assumptions, there are a number of scenarios that seem reasonable ten to fifteen years hence.

Future Scenario One

More of the same. The system will continue as it is, but will simply become worse for the health care provider. The burden of audits (uncertainty, claw-backs and litigation expenses) will continue to grow. Health care will become a sector that few will wish to enter into as a career. More providers will become bankrupt.

Future Scenario Two

Change in appeals procedures. CMS already recognizes the backlog problem in appeals and has started to take action. In these proposals, there is little discussion aimed at re-thinking the overall auditing process. The primary change is in improving the capacity of CMS to handle the litigation.

There are many variations of Scenarios One and Two. But lets take a look at the future using an “out of the box” approach.

Future “Out of the Box” Scenario Three

In this scenario, algorithms using artificial intelligence continue to be used, but the provider’s medical information system will be designed to intervene before the claims billing stage. Here is the logic: If it is possible to find a different coding solution looking backwards, as current auditing approaches now do, then it should be possible to apply the same algorithms to prevent bad claims from being filed in the first place.

The optimum solution would be to replace the auditing system, and instead insert the artificial intelligence algorithms between the health care provider and the government.  Instead of being brought in after the fact, these algorithms will be injected into the space between the provider and the claims system beforehand. (See Figure) The AI system would simply stand as a front end for claims processing. It would correct deficient claims and prompt for additional information as needed.


The standing algorithm could be standardized across the United States, and as we know, today’s technology allows constant updating to the algorithm software, much like computer security updates today are pushed out from vendors.

And what would happen to the RACs? We don’t want these poor people to lose their jobs. They would transition into working for the health care providers and operating the algorithm engines. In so doing, they would focus on making sure that the AI reflects sound medical judgment, and not merely the desire to extract as much money as possible out of the hide of the provider, which is the case now.

This would eliminate the need for auditing altogether, and end this scourge of litigation and chaos that sits on the shoulders of the provider. Perhaps this type of solution might be considered by public policy makers and perhaps CMS needs to think about a more intensive R&D program. Carpe Diem — the future is there for the taking.

Note: Prior to entering law, Dr. Roche served as the Chief Research Officer of the Research Board (Gartner Group), and Chief Scientist of the Concours Group, both leading IT consulting and research organizations.

This article was originally published in RACmonitor.





Tyranny of Algorithms


Edward M. Roche, Ph.D.,J.D. — Barraclough NY LLC

Part II — Defending Against the Tyranny of Algorithms

In Part I of this series, we reviewed how the number of Medicare audits has increased by almost 1,000% in the past five (5) years, and how virtually no decisions by ALJs are being handed back within the statutory time frame.

We discussed also how RACs have started to rely on big data mining of hospital claims to generate large numbers of Diagnosis-Related Group (DRG) downgrades. This is costing hospitals plenty, not only in the reduction in payment revenue, but also in the constantly increasing cost of defending against audits.

The use of computer algorithms has drastically reduced the cost of conducting audits, but there has been no corresponding reduction in defensive costs for hospitals, and this is an example of what military people call “asymmetric warfare”, where the cost of defense is always disproportionately greater than the cost of offense. It is an impossible game to win.

We will now examine a few of the legal issues that are presented by the need to defend against not an audit, but against an algorithm.

The MPIM specifies that the decision to conduct an audit is “not reviewable” in a hearing. This means that even if a provider is being profiled or targeted through an artificial intelligence algorithm, they are fair game, no matter what the reason.

This lack of review-ability does not extend to the review itself. That is handled by the appeal system. The typical appeal has little success in the first two levels — reconsideration, redetermination — so the grass gets mowed with the Administrative Law Judge (ALJ). Appeals generally are based on a claim-by-claim argument regarding each patient or procedure, combined with a refutation of the statistical extrapolation, which is almost always based on shoddy work.

This litigation profile will change. Why? Rather than challenging the expertise or judgment of the audit reviewer who rejected a claim, the argument instead will be aimed at dis-crediting the algorithm responsible for the claim rejection.

But since these algorithms do not make decisions based on medical logic, but only on a pattern of statistical probabilities, the arguments against them will by necessity be couched in quasi-mathematical terms. To do so will require resort to an entirely different type of expert, and understanding of what we might call “algorithm law”. Yet, for the most part, many of today’s health law attorneys are ill-prepared to litigate this type of case.

This article appeared also in RACmonitor.