Officials at Lawrence Memorial Hospital say the federal government is withholding millions of dollars worth of Medicare reimbursements that are owed to the hospital, and they are looking to Congress for legislation to reform what they say is a flawed auditing system.

“LMH has appealed virtually every account that has been disallowed, and to date we’re winning 96 percent of our appeals,” said Joe Pedley, chief financial officer for the hospital. “We have a lot of money that they’re holding today — about $4.5 million — that is still under appeal.”

At issue, Pedley said, is a relatively new federal policy to scrutinize any Medicare payments for short inpatient hospital stays, defined as any stay lasting less than two nights.

Since about 2010, the Center for Medicare and Medicaid Services, or CMS, the federal agency that oversees those programs, began targeting those short stays for audits. That policy was later formalized in the form of a regulation adopted earlier this year.

Under that policy, if a Medicare patient is admitted to a hospital for a minimum of two midnights, the stay is generally deemed to be “reasonable and necessary” as an inpatient stay.

But if the stay covers less than two midnights, they are deemed suspect and flagged for auditing.

According to CMS, the purpose was to cut down on the practice of holding patients overnight for “observation” when their conditions could be treated less expensively on an outpatient basis.

But hospitals complain that the policy has resulted in an onslaught of payment denials, requests for documentation that drive up administrative costs and legal expenses, not to mention a huge backlog of appeals, resulting in higher costs and, potentially, compromising patient care.

“When you think about the operations of a hospital, they operate on a very tight bottom line,” said Cindy Samuelson, spokeswoman for the Kansas Hospital Association. “The money invested in defending the work being done is now no longer available to provide patient care.”

Targeting waste, fraud and abuse

For many years, CMS has used private firms known as Recovery Audit Contractors, or RACs, to go after what is commonly thought to be “waste, fraud and abuse” in the taxpayer-funded health insurance plans.

RACs sift through the records of claims that were paid using a variety of methods to identify those that may have been billed improperly or should never have been paid at all. When they find suspect payments, they “recover” the money by withholding an equal amount from future payments to that hospital, doctor, clinic or other health care provider.

According to a study CMS released in August, RACs recovered $1.3 billion of improper payments nationwide in fiscal years 2010 and 2011. The contractors are paid a percentage of what they recover.

But Pedley said that number only reflects the gross amount that RACs identified as improper payments. It doesn’t reflect how much is eventually paid back to providers who successfully appeal their audit findings.

Nationally, according to the American Hospital Association, about 42 percent of all RAC audits result in denied claims. About half of those are appealed, and of those, 72 percent end up being fully overturned on appeal.

Meanwhile, LMH and other hospitals say the process is putting a squeeze on their finances.

“We are very confident that we’ll continue to win those appeals,” Pedley said. “And there’s been a lot of money just administratively complying with these requests and following these through the auditing process.”

Congressional action pending

Both the state and national hospital associations have been prodding Congress in recent months to rein in the auditing process and hold the auditors themselves more accountable. And U.S. Rep. Lynn Jenkins of Kansas is among those who is giving them support.

A bill introduced in the U.S. House last year that would, among other things, impose limits on the number of documents that RACs could demand from providers and impose penalties when their audits are overturned on appeal.

Jenkins, a Republican whose district includes Lawrence, serves on a House Ways and Means subcommittee that held hearings on the bill May 20. During questioning of CMS Director Sean Cavanaugh, Jenkins cited the concerns of LMH as an example of why some people think the auditing process should be reformed.

“This is just one of countless hospitals in Kansas that is experiencing the immediate and ancillary effects of the current, flawed system,” Jenkins said. “As we continue to discuss a way forward on this topic, please take this problem into account.”

Samuelson, of the Kansas Hospital Association, said passage of the bill is a high priority for hospitals statewide.

“It has really become a financial and administrative drain on hospitals,” she said. “The whole Kansas delegation has been very supportive of the changes we’re hoping will happen to one degree or another.”