How One Pathology Group Survived Its First RAC Audit

Recovery audit contractors (RAC) are visiting pathology labs and groups

CEO SUMMARY: Last summer, InCyte Pathology in Spokane, Washington, found itself facing demand letters from the recovery audit contractor (RAC) responsible for that region. The RAC auditor was questioning claims for technical component (TC) services and seeking repayment from InCyte Pathology. It took three months and plenty of dogged determination for the InCyte team to challenge the audit demands and prevail with its position. InCyte’s CFO shares several important lessons learned.

WHEN THE MAILROOM started delivering boxes of mail to Tom Rehwald’s office, the Chief Financial Officer (CFO) of InCyte Pathology Inc., in Spokane, Washington, took immediate notice. The boxes contained letters about Medicare claims sent by a recovery audit contractor (RAC).

Rehwald recognized that the recovery audit contractor was acting on the authority of the federal Centers for Medicare & Medicaid Services (CMS). RAC auditors are empowered to conduct audits of Medicare claims submitted by hospitals, physicians’ groups, and other providers, including pathology group practices and clinical laboratories.

The RAC auditor looks for both over-payments and underpayments. It is allowed to keep a percentage of the money that Medicare recovers or pays out as a result of the audit.

In the case of InCyte Pathology, each letter from the RAC auditor was an inquiry about a Medicare payment for technical component (TC) services that it said had been improperly billed by Incyte Pathology. Beginning in July last year, the letters from the RAC auditor came in bunches, one for each questionable payment.

The letters were the first inkling that a RAC audit was underway. These letters also marked the beginning of three months of telephone calls and communications from InCyte Pathology in Spokane to the RAC auditor, Health Data Insights (HDI) in Las Vegas, Nevada.

HDI is Medicare’s exclusive recovery audit contractor in 17 western states and three U.S. territories. Also involved was InCyte’s Medicare carrier, Noridian Administrative Services, LLC, in Fargo, North Dakota, which erroneously took $50,000 from InCyte’s current Medicare payments as a result of the RAC audit.

This money was eventually repaid to InCyte. However, it required substantial time and effort from Rehwald and his staff to properly respond and document the accuracy of the Medicare claims questioned by the RAC auditor.

Contingency Fee Payments

“One factor that drives RAC auditors is that they are paid on a contingency fee basis,” observed Rehwald. “The fee ranges from 9% to 12.5%, depending on the region of the country involved.”

Some experts have criticized this method of payment, but Rehwald believes it is useful, “Paying the RAC auditor in this way is good because it provides them with an incentive to prioritize where they think the most egregious practices are and where our taxpayer dollars may be improperly paid,” he commented.

“One issue we faced from the RAC was that we billed globally to Medicare, but the RAC said the TC claim should have been bundled back to a skilled nursing facility (SNF),” Rehwald explained. “This area is tricky.

“For us to bill the SNF in this example, the Medicare patient needs a Medicare- qualifying stay in a hospital and the patient needs to be in a Medicare-level of care in the SNF for us to bill the SNF,” he noted. “Otherwise, these patients are probably receiving Medicaid level of services in which we can bill globally. Nursing homes don’t always do a great job of notifying us on the requisition whether it’s a Medicare or non-Medicare bed.

“In the summer of 2010, we started receiving letters—initially in dribbles and later in boxloads,” recalled Rehwald. “The number eventually totaled 402 demand letters from our RAC. They all related to two hospitals that we had been billing under the grandfather rule.

“At the time, we had 12 hospitals that we were billing under the grandfather rule and the RAC focused only on two,” observed Rehwald. “So our exposure was not just 402 accounts, but it was perhaps more than 2,500 accounts. For the accounts under audit by the RAC contractor, our total exposure from these 400+ accounts was probably about $75,000.

Allegations in the Letters

“The letters alleged that we didn’t have the right to bill globally for those services and that we had to bill the hospitals,” he explained. “Our contention was that these two facilities were grandfathered and had been since 1999.”

During the three months that InCyte disputed the charges, Noridian prematurely recouped $50,000 in disputed payments. “I’m not sure why they recouped this amount,” noted Rehwald. “It might have been an error on their part.”

Not having prior experience with RAC audits and the appeals process, Rehwald and his team worked diligently to address each claim in question. By September, 2010, the matter was resolved and the case was officially closed. However, InCyte did not recover all the payments that had been prematurely recouped by Noridian until October 2010.

InCyte Pathology is a regional pathology super practice of 22 pathologists. It operates its own technical laboratory and contracts with 23 hospitals in Washington and Idaho. In April, it acquired Davis, Sameh, Meeker Laboratory (DSM) of Walla Walla, Washington, a three-pathologist practice (see TDR, April 11, 2011).

Hire an Expert

For pathologists and lab directors, the story of how InCyte Pathology survived the RAC audit is instructive. As RAC auditors seek to recover payments from pathology groups, pathologists will want to be aware of the steps Rehwald took in response to this challenge and the lessons the pathologists learned. Rehwald offered these lessons learned:

• Hire a lawyer or someone knowledgeable to challenge the RAC audit findings.

• Know the issues in question.

• Recognize that you may know more than the RAC auditor knows.

• Listen closely and be respectful.

Even though Rehwald notes in his first lesson that labs and pathology groups should hire a lawyer, InCyte did not. “We felt we could handle this challenge because in the past, I worked as a healthcare compliance officer and also I worked directly with a Medicare carrier fraud unit on a provider issue,” he explained.

“Because of this experience, I had a good sense of how this process works,” added Rehwald. “I stand by the recommendation that labs or pathology groups should always consider getting an attorney or a capable billing expert involved. Our situation was different than most.

Letters Came in Waves

“It was last summer [in 2010] when the first letters arrived from the RAC auditor,” Rehwald said in an interview with THE DARK REPORT. “At first, the letters seemed to dribble in slowly. Then they came in waves.

“When the mail room needed another box just for my mail from the RAC auditor, I knew something was amiss,” he continued. “About 400 letters arrived, approximately one for each instance of our use of the technical component (TC) for billing. Sometimes, there were multiple accounts attached to each letter, but mostly there were individual letters addressed to the compliance officer or chief financial officer.

“In addition, for each Medicare claim challenged by the RAC auditor, there was a five-page demand letter,” recalled Rehwald. “The demand letter included detailed explanations about the RAC process and a termination notice, which, if brought to the ultimate conclusion, would have excluded us from the Medicare program.

“The demand letter was basically boilerplate material identifying the RAC auditor’s role and responsibilities,” he said. “It also explained our appeal rights and the presented the details of the audit, in a manner that looks like remittance advice. The audit detail delineates where the RAC auditor thinks the error is, what the claim is, and how much is due back to the Medicare program.”

InCyte determined that most of the TC charges in question involved the so-called “technical component grandfather clause.” Under this clause, Medicare has permitted independent laboratories to bill and receive direct payments from Medicare for both specimen preparation (the technical component, or TC, of the service) and the diagnosis (the professional component or PC) of hospital patient specimens.

Extension of the Provision

Over the past several years, CMS has sought to discontinue paying labs separately for the TC, but Congress has repeatedly extended the provision. By extending the provision, Congress may have created some confusion about how RAC auditors should apply the rule.

“As soon as we realized there was an issue involving TC, we contacted HDI by phone to make sure we understood the issues,” Rehwald said. “We had been billing under the grandfather rule for 11 years. Thus, to be hit with improper billing charges for TC claims caught us off guard.

“I pulled out the regulations and anything we could get that would support us in how we billed for TC,” he stated. “Once we had all our supporting information, we called the RAC auditor back to discuss these issues in detail.

“It took two or three different phone calls before I reached someone at the recovery audit contractor who could articulate the actual concern,” continued Rehwald. “Now, at this point, our discussions with representatives of the RAC auditor became very granular and detailed.”

Rehwald said that one key issue was that InCyte Pathology should be treated under CMS designation 70, which is a group practice. There is another term, designation 69, which is for independent laboratories.

“For the past 11 years, if you were an independent lab or a pathology practice, it didn’t matter whether you were designation 69 or 70,” he explained. “Every pathologist who could use the grandfather rule did so. The rule affects hospitals, not the pathology provider.

“Therefore, once I finally found someone at HDI who was knowledgeable about the regulations governing groups and independent laboratories, I was able to help him recognize that InCyte Pathology is a group 70 designation,” noted Rehwald. “The regulations used by HDI to audit our TC claims apply only to independent laboratories with a designation 69.

“In our research of the regulations, it became apparent why this problem occurred,” added Rehwald. “In its regulations, CMS has no definition for independent laboratory versus physician practice. By never defining it for 10 years, CMS basically had an oversight in its own regulations.

“Whenever a RAC auditor goes back retrospectively and says a pathology group like ours should not have billed the TC in this way, it is a difficult position for them to defend,” observed Rehwald. “Knowing all this, we saw that the terminology actually supported our position.

Superior Level of Knowledge

“This was lesson number two: recognize that you may know more about the regulations than the RAC auditor knows,” Rehwald said. “For 10 years, there was no distinction between a pathology group and an independent laboratory in the Medicare regulations.

“During this same 10 years, Medicare paid these claims,” he explained. “So it is quite harsh and inequitable to provide clarification retrospectively. If Medicare wanted to handle it prospectively, I have no issue with that. But going back any number of years and saying we should have known there was a distinction seems wrong.

“That was our argument and we were confident that we would prevail given our
understanding of the issues, but we had to persuade the RAC auditor,” he continued. “During all the back and forth over the phone from July to September, Noridian start taking money out of our current claims payments. We recognized that taking money from our current payments was the result of a failure in communication between HDI and Noridian.

“This was lesson number two: recognize that you may know more about the regulations than the RAC auditor knows,” Rehwaldsaid.

“As a result of how we responded to the RAC letters—and after considerable time and effort on our part—virtually all money demanded by HDI was reversed, except a very small amount that we just wrote off,” he said. “This was a difficult process and required perseverance on our part.

“Ultimately, HDI closed the case, not only because of push-back from us, but from other pathology groups that HDI had audited in this region,” he added.

“Early on, as we began to challenge the demand letters issued by the recovery audit contractor, we hoped nothing would be recouped and that only interest would be tacked on until the issue was resolved,” Rehwald explained. “But ultimately we had to do a considerable amount of research and documentation, along with a vigilant tracking of our records to be sure we got the recoupment reversed. We used a spreadsheet to track every recoupment and the recovery of each one.

“One final lesson I would add involves being an attentive listener,” offered Rehwald. “In private practice pathology, we use certain terms and we know what we mean when we use those terms.

“However, although RAC auditors are experts in healthcare, they are not likely to be experts in pathology or in the operation of pathology laboratories,” he continued. “We cannot expect them to understand the vernacular we use.

“This does cut the other way, as well,” noted Rehwald. “RAC auditors might think they are communicating clearly with us, but we often don’t recognize the terms they use. This is pervasive in healthcare.”

Rehwald emphasized that this “language gap” played a role in conversations his team had with the individual auditors at HDI. “In our case, the primary issue involved what we in pathology call the ‘grandfather rule,’” observed Rehwald. “However, the recovery audit contractor might have no idea what that means.

“Additionally, there may be 20 different grandfather rules that apply in other medical specialties,” he said. “But because pathology has only one, that’s the only one we know.

“This is an example of why it is bene- ficial for you and your laboratory staff to be patient, persistent, and respectful to make sure each party is on the same page,” observed Rehwald. “And related to this point is this: It doesn’t help to be disrespectful.

Respect the Process

“As a former compliance officer, I know there is no mileage to be gained from getting defensive,” commented Rehwald. “RAC auditors are trying to discharge this case and they don’t need a reason to keep you on their radar.”

THE DARK REPORT observes that Rehwald might be the perfect person to offer advice on how to survive a RAC audit. His background as a compliance officer and his work with a Medicare carrier fraud unit provided him with an insider’s perspective on the most effective ways to settle this audit in a professional manner.

Lawyer Explains Why It’s Best for Path Groups To Respond Quickly to RAC Audit Letters

RESPONDING QUICKLY IS ESSENTIAL when a pathology group challenges the findings of a Medicare RAC (recovery audit contractor). That’s the advice of Jane Pine Wood, an attorney with McDonald Hopkins, a national law firm. Wood spoke during an audio conference about RAC audits produced last month by THE DARK REPORT.

“Speed is essential to prevent or minimize offsets,” stated Wood. “An offset is when the lab’s Medicare carrier responds to the RAC auditor’s findings and begins to deduct what the RAC auditor believes the lab owes to the Medicare program. Offsets usually begin 41 days after the date of the RAC letter.

“It’s instructive to know that RAC audit contractors are paid a percentage of recoveries and a percentage of identified underpayments,” she noted. “This is their financial incentive to identify Medicare claims that resulted in an overpayment or underpayment to the provider. Because the RAC auditors have an incentive to make as many overpayment determinations as possible, it is important to understand your appeal rights.

Know the Issue Thoroughly

“Acting swiftly in response to demand letters from the RAC is key from a legal standpoint,” Wood continued. “If a pathology group misses any time period with respect to an appropriate appeal of a RAC audit, that group has no further recourse.

“When a RAC letter arrives at your pathology group, it can be very confusing,” she observed. “That’s because the format of the letters is not clear, particularly about what steps your group must take to contest the audit presented the details of the audit, in a manner that looks like remittance advice. The audit detail delineates where the RAC findings. However, there are at least two parallel paths to follow, and they run in tandem.

“The first level of appeal is to ask for a redetermination,” explained Wood. “This must be in writing and it must be delivered to the Medicare Part A carrier.

Redetermination Request

“In order to stop the recoupment of the alleged overpayments, this request for a redetermination must be received within 30 days after the RAC audit letter. A copy should also be sent to the RAC contractor,” she added.

The tandem path is with the RAC. “Your option with the RAC is called a discussion period,” said Wood. “Basically, it gives you 40 days to talk to the RAC informally. It allows you to discuss the Medicare claims in question and explain why you think the determination is wrong. When you make this call, take good notes, including the name of the person with whom you spoke, the date and time of the call, and what was said.

“If, as a result of these discussions, you get a sense that the RAC contractor may issue a letter that will revise the audit, or possibly even revoke the audit, don’t relax and wait for that letter to arrive,” advised Wood. “That’s because the ‘offset clock’ is ticking against your pathology group.

“On day 41 after the date of the RAC audit overpayment determination letter, your Medicare carrier may begin deducting offsets from your pathology group’s Medicare payments,” Wood said. “In order to stop those offsets from occurring, it is essential that your request for a redetermination is filed prior and within 30 days.”


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