House Ways & Means Health Chair Introduces Draft Legislation Impacting RAC Audits and Short-Term Hospital Admissions

On November 19, 2014, the House Ways & Means health subcommittee Chair Kevin Brady (R-TX) introduced draft legislation that would revamp the Medicare payment structure for short-term hospital admissions, aiming to resolve the backlog of appeals and to improve the current Recovery Audit Contractor (“RAC”) program.

The draft bill–called the Hospital Improvement for Payment (“HIP”) Act of 2014, provides for a new payment model called the Hospital Prospective Payment System (“HPPS”) that would apply to short-term stays. Short-term stays are defined under the bill as: (1) stays that are less than 3 days; (2) stays that have a national average length of stay less than 3 days; or (3) stays that are “among the most highly ranked discharges that have been denied for reasons of medical necessity.” The Department of Health and Human Services (“HHS”) would be permitted to raise the 3-day threshold “if justified.”

HHS would also be required to establish a base rate of payment for the new HPPS through the rulemaking process. The base rate would be calculated by blending the base operating rate for short stays and an equivalent base operating rate for overnight hospital outpatient services.

The draft bill also impacts policies associated with the two-midnight rule–a standard that presumes inpatient hospital stays are reasonable and necessary if the stay crosses two or more midnights. Under the new legislation, the 0.2 percent ($200 million per year) reduction that CMS implemented with the two-midnight rule would be repealed.

Representative Brady’s bill also sets out to improve the current RAC program by reducing the current statutory look-back period for RAC audits to 3 years. Additionally, the bill would statutorily mandate that a 30-day discussion period would be available to providers and suppliers prior to issuing a full or partial payment denial. Further, in order to prevent duplicative audits, all Medicare contractors who perform pre- and post-payment reviews would be required to enter active audits into the RAC data warehouse.

The legislation also extends the moratorium on RAC audits by six months to September 30, 2015. Previously, Congress restricted RACs from auditing short-stay admissions under the two-midnight rule through the end of March 2015. RACs would also be prohibited from conducting audits on short-term hospital stays until the HPPS is available.

Finally, the legislation aims to address the staggering increase in provider appeals. In fact, there is a current backlog of more than 800,000 claims at third-level appeals which Brady called “a complex problem” requiring a “comprehensive solution.” Brady’s bill sets out to relieve the backlog by extending a voluntary settlement process where hospitals would be reimbursed at a settlement rate that is “empirically derived through the rulemaking process.”

For more information, or for questions regarding RAC audits and appeals, please contact Abby Pendleton, Esq. or Jessica Gustafson, Esq. at (248) 996 – 8510 or via email at or

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