CMS Ruling Clouds Medicare Revenue Clarity for Hospitals and Forces Tough Choices

SEP 25

The Centers for Medicare and Medicaid Services (CMS) issued a final ruling for CMS-1455 in August that has a significant impact on how hospitals and RAC auditors will be viewing inpatient versus observation going forward.

Currently any payment for Medicare hospital inpatient services can be reviewed and denied up to three years after the date the claim was originally paid through the Recovery Audit Contractor (RAC) program.  Once a RAC-issued denial letter is received by the provider, an extensive appeal process begins that can take months and sometimes over a year to resolve.  According to the RACTrac Survey, 75% of all appealed denials are still in the appeal process with a significant number of appeals delayed beyond the statutory limits.  In many cases, one of the last levels of appeal is done with an Administrative Law Judge (ALJ) who has the ability to overturn, uphold or partially overturn any denial.

The prospect of having three years of revenue potentially denied and a subsequent costly appeal process has put many providers in a difficult financial position.  For some, they have taken a conservative approach opting to bill for observation services and a more certain revenue stream even if the services provided warrant an inpatient payment.

In the final ruling, CMS is allowing providers to rebill previously billed Part A inpatient claims as Part B inpatient if it’s determined to be not reasonable and/or necessary after discharge. This rebilling can be done via a provider’s self-audit or after a RAC denial, however it must be rebilled within one year of the date of service.

At the same time, CMS is asking the ALJ’s to become more binary in their rulings and avoid partial overturns.  While this may appear to offer providers with more billing flexibility, according to RACTrac, a majority of hospitals reported that over two-thirds of their claims that were requested by a RAC for potential denial were requested after the timely filing window had elapsed.  Considering the lengthy appeal process, if an ALJ determines an inpatient stay is inappropriate, the likelihood that a provider will have the opportunity to rebill the claim under Part B is slim.

Providers now have some difficult questions to ask, and decisions to make.

  • For claims previously paid but nearing the one year anniversary of the original date of service, should they perform a self-audit and rebill some of their claims under Part B?
  • For claims where they have received an initial denial letter, do they proceed with the appeal process?
  • Considerations ahead of an appeal include:
    • What is the difference between Part A payment and Part B for this claim and what is the cost of an appeal?
    • What is the likelihood of getting this denial overturned?
    • RACTrac surveyindicates that nationwide, 70% of all completed appeals are overturned.


As providers consider a new approach given these changing regulations, it will be interesting to see the impact these decisions will have on other related business models that participate in the claims review and denial process.

Let us know what you think.

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Jay Ahlmer