Tag Archives: CMS

RACs and The Two-Midnight Rule Enforcement

The Two-Midnight Rule Enforcement

Elizabeth Weeks Leonard, Professor of Law at the University of Georgia Law School in Athens, Georgia,   has written a clear and concise article on the issues surrounding the Two-Midnight Rule: “CMS’ Proposed Changes To The Two-Midnight Rule: Partial Restoration Of Medical Judgment” in the Health Affairs Blog.

An expert on health care issues, Professor Leonard is widely published in the field and teaches courses on Health Care Financing and Regulation and Health Care Fraud and Abuse at the University of Georgia Law School.

Barraclough LLC recommends this article to our readers; it is available at this link.


The CMS Two-Midnight rile “clarifies the circumstances under which Medicare will consider a given hospital stay to be an inpatient service (and therefore reimbursable at a higher rate under Medicare Part A), versus an outpatient service (and therefore reimbursable at a lower rate under Part B).”

“The Two-Midnight Rule largely replaced medical judgment with regulatory benchmarks for inpatient versus outpatient admissions.”

Professor Leonard further explains:

  • The Two-Midnight Rule was precipitated by a number of factors. One was a trend of aggressive Recovery Audit Contractor (RAC) claims reviews, identifying a high error rate for medically unnecessary Part A inpatient services that should have been submitted by the provider as lower reimbursement Part B outpatient services.
  • The RAC Program is a component of the federal government’s crackdown on health care fraud. RACs are essentially private bounty hunters, authorized to ferret out improper payments. They are paid on a contingency basis, typically receiving 9 percent to12.5 percent of any amounts recovered.

RAC Involvement and Rise in Appeals

“Short-stay hospitalizations became a favorite RAC target. But given the regulatory uncertainty and complex medical judgment involved in determining the appropriateness of an inpatient versus an outpatient stay, RAC audits also spawned high rates of provider appeals.”

Barraclough notes that  “The number of pending appeals overwhelmed the Office of Medicare Hearings and Appeals, leading to CMS’ offer to settle hospitals’ claims for partial payment—68 cents on the dollar—of net allowable amounts.”

Hence, one of the reasons for all the settlements that have been in the news lately.

As a result,  CMS recently proposed incremental changes to the Two-Midnight Rule.”

Read more about how the RACs lost control of the Two-Midnight rule and the issues of claims and settlements going forward.


New CMS Ruling Limits Scope of Audit Review

MACs and QICs limit their  Audit Review

In RACmonitor,  Dr.  Ronald Hirsch recently wrote that “Nothing is more frustrating to a provider than having a claim denied, preparing a comprehensive appeal, submitting that appeal, and then having the appeal denied – not because the appeal wasn’t compelling or correct, but because the auditor found a second issue and the denial was upheld based on that new issue.”

“Fortunately, this frustration should be going away very soon.”

The Centers for Medicare & Medicaid Services (CMS) have limited the scope of review in certain circumstances, whereby “MACs and QICs to limit their review to the reason(s) the claim or line item at issue was initially denied.”

And this Means…

This means that a claim review can not be modified later with additional objections. The auditor will not be able to “pile on” additional objections if they fail to have a claim rejected based on their initial review.  The auditor must submit all of its objections to a claim from the beginning, and after that, the auditor loses the right to add more objections.

For complete information on this new ruling, see RacMonitor, CMS Announces Limits on Reviews by MACs and QICs.

For more information on how to Reverse Medicare and Medicaid audits, and effectively deal with claims brought against you, contact Barraclough Health (email to info@barracloughllc.com)  to talk about your issues. 

RAC Audit Medicare Data Snapshot

RAC Medicare Audit  Data  From Senate Chairman Hatch

RAC Medicare Audits recovered over $3 billion

  • A large portion of the initial payment determinations are reversed on appeal.  The Department of Health and Human Services Office of Inspector General reported that, of the 41,000 appeals made to Administrative Law Judges in FY 2012, over 60 percent were partially or fully favorable to the defendant.
  • In Fiscal Year 2014, Medicare covered health services for approximately 54 million elderly and disabled beneficiaries at a cost of $603 billion.
  • Of that figure, an estimated $60 billion, or approximately ten percent, were improperly paid, averaging more than $1,000 in improper payments for every Medicare beneficiary.
  • The large number of appeals being filed can’t be put on the docket of the Office of Medicare Hearings and Appeals for 20-24 weeks.
  • In FY 2009, the majority of appeals were processed within 94 days.  In Fiscal Year 2015, the average for an appeal is 604 days.

Source: Hatch Statement at Finance Markup of the Audit & Appeal Fairness, Integrity, and Reforms in Medicare Act of 2015 (June 3, 2015) Senator Hatch (R-Utah) is the Chair of the Senate Finance Committee.

The Barraclough Blog features latest news on events and policies, as well as original Barraclough features and blogs  about Litigation support for Medicare and Medicaid appeals and statistical overpayment extrapolations.


The Centers for Medicare & Medicaid Services (CMS) recently released its annual report to Congress:   Recovery Auditing in Medicare for Fiscal Year 2013: FY 2013 Report to Congress as Required by Section 1893(h) of the Social Security Act.

The report is full of statistics on the Medicare auditing program.  It presents a picture of “profit”, that is, less money is spent by the government on running the auditing program than is recovered.  It is “cost effective” to use government parlance.   (This calculation does not account for the costs born by the health care providers.)

One would think that from state to state, the amount recovered “clawed back” by the Recovery Audit Contractors (RACs) would be about the same, but it is not.   See the Figure below.

2013_RAC_DATA_Analysis_doctorsBy taking the amount recovered in a state and dividing it by the number of doctors in the same state, we can see that in Mississippi the recovery per doctor was around $18,000 dollars.   But in Maryland, it was around $1,000 dollars – an eighteen times difference! 

It would be interesting to learn more about why this occurs.



The Centers for Medicare & Medicaid Services (CMS) recently released its annual report to Congress:   Recovery Auditing in Medicare for Fiscal Year 2013: FY 2013 Report to Congress as Required by Section 1893(h) of the Social Security Act.

The report is full of statistics on the Medicare auditing program.  It presents a picture of “profit”, that is, less money is spent by the government on running the auditing program than is recovered.

The report, however, does not address the discrepancies between states for recovery “claw back” of Medicare claims.   The calculation is shown in the figure below.

2013_RAC_DATA_AnalysisWhen we chart the amount recovered and compare it to the number of persons living in the state, the difference is vast.   In Maine, for example, there was $2 per state resident recovered.   However, in North Dakota, there was $36 dollars recovered for each resident.

Does this mean that the health care providers in some states are being more strictly audited than in others?   The CMS report does not give any clue to the answer.

Which States Use Extrapolation for Medicaid

A survey by the National Conference of State Legislatures (NCSL) identifies which states use statistical extrapolation for Medicaid Audits.   Here is some of the detail:

States Using Statistical Extrapolation with Medicaid Audits

  1. Connecticut;
  2. Iowa;
  3. Massachusetts;
  4. Nebraska;
  5. New Jersey;
  6. New York;
  7. North Carolina;
  8. Oklahoma;
  9. Oregon;
  10. Washington
  11. Rhode Island may be using extrapolation in the future.

States NOT Using Statistical Extrapolation with Medicaid Audits:

  1. Delaware;
  2. Maryland;
  3. New Hampshire;
  4. Pennsylvania;
  5. Vermont;
  6. West Virginia;
  7. Wisconsin

Under the Affordable Care Act (*) states contract with Recovery Audit Contractors (RACs) to identify under and over-payments and recoup the over-payments.

For Medicaid audits sponsored by the Centers for Medicare and Medicaid Services (CMS), a Medicaid Integrity Contractor (MIC) is used.

Medicaid Integrity Contractors (MMICs) work out of five jurisdictions:

  • New York (CMS Regions I & II)
  • Atlanta (CMS Regions III & IV)
  • Chicago (CMS Regions V & VII
  • Dallas (CMS Regions VI & VIII)
  • San Francisco (CMS Regions IX & X)


(*) Affordable Care Act was passed by Congress and signed into law 23 March 2010.  It was reviewed by the Supreme Court and was upheld.  See USSC, National Federation of Independent Business et al. v. Sebelius, Secretary of Health and Human Services, et al. Syllabus, October, 2011.

Federal Precision Standards for Medicare and Medicaid Statistical Sampling and Extrapolations

As we have seen from other entries to this blog, Recovery Audit Contractors (RACs) operating under the Centers for Medicare & Medicaid ServicesRecovery Audit Program who are involved in conducting Medicare and Medicaid audits of health care providers have been granted an incredible bit of leeway in acceptable standards for their work.   It is not uncommon to see precision that is far more than +/- 20%, and even when the precision is as poor as +/- 49%, the Medicare Appeals Council (MAC) as well as Federal Courts will not throw out the extrapolation.

So the question that arises is this:  Are contractors free to employ any accuracy they wish in their work, or are there standards that have been suggested or published by the Federal Government?

As it turns out, there appears to be some guidance from two sources.

Source One:

In the May 5, 2010, report by the Acting Administrator and Chief Operating Officer of the Centers for Medicare & Medicaid Services (CMS)  On page 3 of that report, the section titled “Precision-level requirements” states:

“[Office of Management and BudgetOMB Circular A-123, Appendix C, states that Federal agencies must produce a statistically valid error estimate that meets precision levels of plus or minus 2.5 percentage points with a 90-percent confidence interval or plus or minus 3 percentage points with a 95-percent confidence interval.”

There is a note in the document: Under these assumptions, the minimum sample size needed to meet the precision requirements can be approximated by the following formula, which is used in the examples:

BLOG_ACCURACY_FORMULA.001Where n is the required minimum sample size and P is the estimated percentage of improper payments (Note: This sample size formula is derived from Sampling of Populations: Methods and Applications (3rd edition); Levy, P. S. & Lemeshow, S. (1999); New York: John Wiley & Sons; at page 74. The constant 2.706 is 1.645 squared.

Source Two:

In the CMS-issued Federal Register, 72 Fed. Reg. 50490, 50495 (Aug. 31, 2007), the error estimate should meet precision levels of plus or minus 2.5 percentage points with a 90-percent confidence interval, and the State error estimates should meet precision levels of plus or minus 3 percentage points with a 95-percent confidence interval.”

So it appears that these standards, which are fairly good, have been twice promulgated by the Federal Government.

The question is:  Why are they routinely ignored by Administrative Law Judges (ALJs), and the Medicare Appeals Council (MAC)?



The Recovery Audit program from CMS used four companies in FY 2012.   These are HDI, CGI, Performant, and Connolly.   These companies each are responsible for a specific part of the United States.


(Source: Barraclough analysis.)

One would assume that the audit patterns would be roughly similar, but they are not.

If we use as a basis the total number of active physicians practicing in each region(*) and compare this to the activities of the Recovery Auditors, then an uneven pattern emerges.

RAC_regions.001NOTE: (*) Source: The Henry J. Kaiser Family Foundation


The Centers for Medicare & Medicaid Services released its report “Recovery Auditing in Medicare and Medicaid for Fiscal Year 2012: FY 2012 Report to Congress as Required by Section 1893(h) of the Social Security Act and Section 6411(c) of the Affordable Care Act.”

There were $2.3 billion claw-backs from health care providers.   Audits also identified $109.4 million in underpayments, and these were paid back to the health care providers.

In other words, out of 100% improper payments, the auditors found that 98% were overpayments, and 2% were underpayments – this is a 49:1 ratio.  For every $49 dollars clawed back, $1 dollar is returned.