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Health Headlines – February 24, 2014

24 Feb 2014

CMS Announces Transition Process for RAC Contracts – On February 18, 2014, CMS announced that it is in the procurement process for the next round of Recovery Audit Contractor (RAC) program contracts and that the transition to new contracts will include a pause in RAC audits in the interim. CMS highlights the following dates of importance for providers:

  • February 21 was the last day a RAC may send postpayment Additional Documentation Requests (ADRs);

  • February 28 is the last day a Medicare Administrative Contractor (MAC) may send prepayment ADRs for the Recovery Auditor Prepayment Review Demonstration; and

  • June 1 is the last day a RAC may send improper payment files to the MACs for adjustment.

Following the transition, however, RAC operations will resume and auditors will be able to audit claims for dates of service during the period covered by the pause in operations. 

CMS published a list of five program changes that will be effective with the next RAC contract awards, including the following:

  1. RACs must wait 30 days to allow for a discussion prior to sending the claim to the MAC for adjustment, thus allowing providers to initiate a discussion as well as appeal the claim at issue.

  2. Within three days of receiving a discussion request, RACs must confirm receipt with the provider.

  3. RACs will not receive any contingency fee earned on a denial until the second level of appeal is exhausted and the denial is upheld.

  4. CMS is establishing revised ADR volume limits that will be diversified across claim types (e.g., inpatient, outpatient).

  5. CMS will require RACs to adjust the ADR levels in line with the provider’s denial rate, thus allowing for providers with low denial rates to have lower ADR limits and providers with high denial rates to have higher ADR limits.  CMS does not say, however, how it will define a “low” and “high” denial rate.

CMS’s RAC update is available here and CMS’s list of “RAC Program Improvements” is available here.    

Learn more on RAC related information from the King & Spalding Health Headlines published on February 17, 2014 on More Than 100 House Members Urge HHS to Reform RACs and January 21, 2014 on Congress Passes FY 14 Spending Bill, Includes Important Healthcare Provisions.

The King & Spalding RAC Coalition continues to press for fundamental and lasting RAC reform.  The Coalition is an ad-hoc group of hospital clients created in April 2013 in an effort to communicate jointly to CMS and Congress the need for meaningful and common-sense reforms to the RAC program.

Reporter, Juliet M. McBride, Houston, +1 713 276 7448,

CMS Provides MACs, RACs, and ZPICs With Automatic Denial Authority for “Related” Claims Effective March 6, 2014, Medicare contractors may automatically deny claims that are “related” to other claims that have been denied as a result of pre- or postpayment review.  Contractors need not issue Additional Documentation Requests (ADRs) for the “related” claims prior to issuing the denial. 

In Change Request (CR) 8425, CMS modifies Section 3.2.3 of the Program Integrity Manual, which governs ADRs during prepayment and postpayment review.  The CR expressly provides that Medicare Administrative Contractors (MACs), Recovery Auditors (RACs) and Zone Program Integrity Contractors (ZPICs) “have the discretion to deny other related claims submitted before or after the claim in question.”  Claims will be deemed “related” if documentation associated with one claim can be used to validate another claim.  CMS provided the following illustrative examples of how claims may be viewed as related:

  • An inpatient claim and associated documentation is reviewed and determined not to be reasonable and necessary and, therefore, the physician claim can be determined not to be reasonable and necessary;

  • A diagnostic test claim and associated documentation is reviewed and determined not to be reasonable and necessary and, therefore, the professional component can be determined not to be reasonable and necessary. 

CMS’s examples suggest a focus on physician services, but CMS is clear that its examples are “not exhaustive” and “claims may be ‘related’ in other scenarios.”  Accordingly, the change could impact coverage of and payment for numerous types of services and products including, for instance, episodic care (e.g., SNFs, home health, and hospice) and rented DME.  The change also could result in significant increases in the number of appeals, claims, and appellants that will be added to the already overburdened claims appeals system. 

Reporter, Tracy Weir, Washington, D.C., +1 202 626 2923,

OIG Reports on Expansion of DRG Window – The OIG recently posted a report in which it recommended expanding the Diagnosis Related Group (DRG) payment window.  In the February 2014 report (OEI-05-12-00480) (the “Report”), available here, the OIG analyzed both inpatient and outpatient claims and Medicare cost reports from 2011 and concluded that the Medicare program and its beneficiaries could save hundreds of millions of dollars per year if the current 3-day DRG payment window were expanded to include services provided in affiliated hospitals and/or to encompass a preadmission period of longer than 3 days. 

Under CMS’s current DRG payment window policy, Medicare generally does not pay separately for outpatient services that are provided within the 3 days prior to an inpatient acute care hospital admission, related to the inpatient admission, and provided in a setting wholly owned or operated by the inpatient hospital.  Medicare payment for such services is considered to be included in the DRG payment for the acute care admission. 

In the Report, OIG analyzed both inpatient and outpatient claims and Medicare cost reports from 2011 to determine how much money Medicare and Medicare beneficiaries would save if the 3-day window were expanded beyond 3 days and the setting were expanded also to include hospitals affiliated with the admitting hospital.  The OIG found that Medicare and its beneficiaries paid approximately $263 million for services at outpatient settings owned by admitting hospitals during the 11 days prior to the current DRG window, although OIG also noted that the highest cost savings would likely come during the 4 days prior to the current DRG window.  The OIG also found that if the current 3-day window were expanded to include services provided in hospitals affiliated with the admitting hospital, Medicare and its beneficiaries could save approximately $45 million for roughly 777,000 outpatient services related to the inpatient admission.  The Report found that most of these 777,000 services were provided on the day before or the day of the inpatient admission.  Finally, OIG concluded that the Medicare program and its beneficiaries would save even more if the DRG payment window were expanded beyond 3 days and to include affiliated hospitals of admitting hospitals.

Accordingly, OIG recommended that CMS seek legislative authority to expand the DRG payment window by both capturing additional days before an inpatient admission and “to include additional hospital ownership arrangements, such as affiliated hospital groups.”  CMS did not concur with either recommendation.

Reporter, Kate Stern, Atlanta, +1 404 572 4661,

CMS Announces 2015 Rate Cut for Medicare Advantage Plans – On February 21, 2014, CMS released an Advance Notice estimating a decline of 1.9% in 2015 payments for Medicare Advantage (MA) plans.  The preliminary estimate of the decline is based on the per capita MA growth percentage, estimated at -3.55%, combined with the per capita fee-for-service growth percentage, estimated at -1.65%, which CMS noted represents “historically low growth” in Medicare spending.  Nearly 30% of Medicare beneficiaries are covered by MA plans. 

In addition to announcing the decline in capitated MA payments, the Advance Notice also modifies the quality bonus payment (QBP) to MA organizations.  Between 2012 and 2014, the QBP was based on a sliding scale model associated with a MA organization’s star rating.  In calendar year (CY) 2015, the QBP percentage will be a flat rate of 5%, issued only to MA organizations with a quality ranking of four or more stars.  The final announcement of the CY 2015 Medicare Advantage capitation rates, together with Medicare Advantage and Part D payment policies, is expected to be released on April 7.  Comments must be received no later than 6:00 PM EST on March 7 and may be emailed to

Reporter, Paige Fillingame, Houston, +1 713 615 7632,

Appeals Court Sides With Hospitals, Rejects Health Plan’s Demand for Refund − The United States Court of Appeals for the Seventh Circuit recently affirmed a Wisconsin district court’s grant of summary judgment in favor of two Wisconsin hospitals, ruling the hospitals were not obligated to repay $1.7 million to a health plan in connection with services provided to a non-covered patient, even where the payments were made in error. 

Plaintiffs Kolbe & Kolbe Health and Welfare Benefit Plan, an employee benefit plan, and Kolbe & Kolbe Millwork Co., Inc., the employer (together, the “plan”), filed a lawsuit against Medical College of Wisconsin, Inc. and Children’s Hospital of Wisconsin (together, the “hospital”), seeking the repayment of medical expenses mistakenly paid by the plan.  The medical care at issue involved services provided to the daughter of a Kolbe company employee, who, in August 2007, requested coverage for his child as a dependent under the plan.  The plan covered the expenses of the child’s medical care at the hospital until June 2008, when it determined that the child was not covered.  The plan then demanded the hospital refund the amounts it had paid pursuant to the terms of a provider agreement it entered into with an intermediary.  The hospital refused, asserting it had no obligation to make a refund under the agreement.  The plan then filed its action, claiming ERISA violations and breach of contract.

The district court initially dismissed the plan’s lawsuit and awarded attorneys’ fees in favor of the hospital.  Following the Seventh Circuit’s partial reversal of the lower court’s decision, the district court granted summary judgment in the hospital’s favor on the breach of contract claim.  The plan appealed, and the hospital cross-appealed, claiming the district court should have sanctioned the plan under Rule 11.

The issue before the Seventh Circuit boiled down to whether the provider agreement implicitly required a refund where a health plan made payments to a hospital in error—i.e., initially believing the patient was covered.  (The court pointed out that this was not an instance of impermissible overcharging—in which the hospital would be required to return amounts paid by the plan—noting there was no dispute that the services at issue had actually been rendered adequately.)  The court refused to recognize a requirement to refund where the contract was silent on the issue, despite the fact that the hospital may have made refunds to the plan under similar circumstances in the past.  The court reasoned that such a step would encourage moral hazard and undercut the purpose of the underlying provider agreement: “interpolating an obligation to make a refund when the seller [the hospital] is faultless and the buyer [the plan] is asking to be compensated for his own mistakes would make the contract fail by reducing the buyer’s incentive to exercise proper care in determining the eligibility of presumed plan beneficiaries.”  As such, the court concluded, among other things, that the hospital was not obligated to refund the amounts paid by the plan.

The case is Kolbe & Kolbe Health and Welfare Benefit Plan v. Medical College of Wisconsin, Inc., Nos. 12-3837 & 12-3929 (7th Cir.).  Click here to read the Seventh Circuit’s opinion.

Reporter, Greg Sicilian, Atlanta, +1 404 572 2810,

FDA Issues Final Rule Requiring Electronic MDR Reporting – On February 14, 2014, the U.S. Food and Drug Administration (FDA or “the Agency”) issued a final rule titled Medical Device Reporting: Electronic Submission Requirements that will require medical device manufacturers and importers to submit medical device reports (MDRs) electronically, beginning on or before August 14, 2015. User facilities will have the option to use traditional paper or electronic submission methods. Electronic MDRs (eMDRs) will be submitted to FDA’s existing Electronic Submissions Gateway (ESG) through either of two options: (1) FDA’s eSubmitter program or (2) Health Level Seven Individual Case Safety Reporting (HL7 ICSR) format. 

At the same time that it released the final rule, the Agency also released a final guidance document regarding the new eMDR requirement, titled Questions and Answers About eMDR – Electronic Medical Device Reporting.  The rule and guidance finalize draft versions of each that were issued on August 21, 2009.  The final rule is largely unchanged from the draft rule, with the main substantive difference being that FDA has extended the delay before the effective date of the rule to eighteen months, increased from the one year period proposed in the draft rule.

For additional information regarding the new rule, please see our forthcoming Client Alert, which will be available on the King & Spalding website by clicking here.

Reporter, Jessica Ringel, Washington, D.C., +1 202 626 9259,

Also in the News

CMS Expands Coverage for Chronic Heart Failure – Effective immediately, CMS will cover cardiac rehabilitation services for beneficiaries with chronic heart failure.  In a final decision memo issued February 18, 2014, CMS announced it would expand coverage for cardiac rehabilitation services to beneficiaries with stable, chronic heart failure (defined as patients with left ventricular ejection fraction of 35% or less and New York Heart Association (NYHA) class II to IV symptoms despite being on optimal heart failure therapy for at least six weeks).  To view the final memo, click here

23rd Annual Health Law and Policy Forum – On March 17, 2004, King & Spalding will host the 23rd Annual Health Law and Policy Forum at the St. Regis Hotel in Atlanta, Georgia.  Featured Speakers will include United States Senator Bob Casey (D-PA) and Scott Rasmussen of Rasmussen Reports.  For more information on the Forum and to register, click here.

This bulletin provides a general summary of recent legal developments. It is not intended to be and should not be relied upon as legal advice.

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