    [House Hearing, 113 Congress]
    [From the U.S. Government Publishing Office]

                CURRENT HOSPITAL ISSUES IN THE MEDICARE PROGRAM

    =======================================================================

                                    HEARING

                                   before the

                             SUBCOMMITTEE ON HEALTH

                                     of the

                          COMMITTEE ON WAYS AND MEANS
                         U.S. HOUSE OF REPRESENTATIVES

                        ONE HUNDRED THIRTEENTH CONGRESS

                                 SECOND SESSION

                                   __________

                                  MAY 20, 2014

                                   __________

                                Serial 113-HL12

                                   __________

             Printed for the use of the Committee on Ways and Means

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                        U.S. GOVERNMENT PUBLISHING OFFICE

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                          COMMITTEE ON WAYS AND MEANS

                         DAVE CAMP, Michigan, Chairman

    SAM JOHNSON, Texas                   SANDER M. LEVIN, Michigan
    KEVIN BRADY, Texas                   CHARLES B. RANGEL, New York
    PAUL RYAN, Wisconsin                 JIM MCDERMOTT, Washington
    DEVIN NUNES, California              JOHN LEWIS, Georgia
    PATRICK J. TIBERI, Ohio              RICHARD E. NEAL, Massachusetts
    DAVID G. REICHERT, Washington        XAVIER BECERRA, California
    CHARLES W. BOUSTANY, JR., Louisiana  LLOYD DOGGETT, Texas
    PETER J. ROSKAM, Illinois            MIKE THOMPSON, California
    JIM GERLACH, Pennsylvania            JOHN B. LARSON, Connecticut
    TOM PRICE, Georgia                   EARL BLUMENAUER, Oregon
    VERN BUCHANAN, Florida               RON KIND, Wisconsin
    ADRIAN SMITH, Nebraska               BILL PASCRELL, JR., New Jersey
    AARON SCHOCK, Illinois               JOSEPH CROWLEY, New York
    LYNN JENKINS, Kansas                 ALLYSON SCHWARTZ, Pennsylvania
    ERIK PAULSEN, Minnesota              DANNY DAVIS, Illinois
    KENNY MARCHANT, Texas                LINDA SANCHEZ, California
    DIANE BLACK, Tennessee
    TOM REED, New York
    TODD YOUNG, Indiana
    MIKE KELLY, Pennsylvania
    TIM GRIFFIN, Arkansas
    JIM RENACCI, Ohio

            Jennifer M. Safavian, Staff Director and General Counsel

                      Janice Mays, Minority Chief Counsel

                                     ______

                             SUBCOMMITTEE ON HEALTH

                          KEVIN BRADY, Texas, Chairman

    SAM JOHNSON, Texas                   JIM MCDERMOTT, Washington
    PAUL RYAN, Wisconsin                 MIKE THOMPSON, California
    DEVIN NUNES, California              RON KIND, Wisconsin
    PETER J. ROSKAM, Illinois            EARL BLUMENAUER, Oregon
    JIM GERLACH, Pennsylvania            BILL PASCRELL, JR., New Jersey
    TOM PRICE, Georgia
    VERN BUCHANAN, Florida
    ADRIAN SMITH, Nebraska

                                C O N T E N T S

                                   __________
                                                                       Page

    Advisory of June 20, 2013, announcing the hearing................     2

                                   WITNESSES

    The Honorable Jim McDermott, Representative from the State of
      Washington.....................................................     7
     Panel 1:
      Sean Cavanaugh, Deputy Administrator and Director, Center of
        Medicare, Centers for Medicare and Medicaid Services.........     9
      Judi Nudelman, Regional Inspector General for Evaluation and
        Inspections, NY Region Office of the Inspector General,
        Department of Health and Human Services (OIG-HHS)............    21
     Panel 2:
      Amy Deutschendorf, Senior Director of Clinical Resource
        Management, Johns Hopkins Hospital and Health System.........    94
      Toby S. Edelman, Senior Policy Attorney, Center for Medicare
        Advocacy, Inc................................................   131
      Ellen Evans MD, Corporate Medical Director, HealthDataInsights.   102
      Ann Sheehy MD, Member, Public Policy Committee, Society of
        Hospital Medicine............................................   118

                           SUBMISSIONS FOR THE RECORD

    Wisconsin Hospital Association, Statement........................   156
    Watertown Regional Medical, Letter...............................   161
    Walter F. O'Keefe, Letter........................................   163
    Thomas M. Horiagon, MD MOccH, Letter.............................   165
    Texas Organization of Rural & Community Hospitals, Statement.....   168
    Sherry Smith, LCSW, Letter.......................................   171
    Pocono Medical Center, Statement.................................   173
    Patricia Windle, Letter..........................................   176
    Patricia Klaiber, Letter.........................................   180
    New York StateWide Senior Action Council, Statement..............   182
    National Senior Citizens Law Center, Statement...................   186
    National Kidney Foundation, Statement............................   187
    National Association of Urban Hospitals, Statement...............   190
    Nathan Marra, Statement..........................................   193
    MRC, Statement...................................................   194
    Missouri Hospital Association, Letter............................   201
    Meridian Health, Letter..........................................   202
    Medicare Advocacy Project, Statement.............................   204
    Marion P. Cunningham, Statement..................................   209
    Knollwood Retirement Community, Statement........................   211
    Kirkland Senior Council, Statement...............................   213
    Karen L. Buckley, Letter.........................................   215
    Gundersen Health System, Letter..................................   218
    George L. Marra, Statement.......................................   222
    Doreen Grossman, Letter..........................................   224
    Diane Walter, Letter.............................................   226
    Denise Broccoli, Letter..........................................   229
    Connecticut's Legislative Commission on Aging, Statement.........   231
    APTA, Letter.....................................................   233
    AOPA, Statement..................................................   236
    American Coalition for Healthcare Claims Integrity, Letter.......   240
    America's Essential Hospitals, Statement.........................   244
    AMA, Statement...................................................   250
    Alliance for Retired Americans, Statement........................   255
    AHCA, Statement..................................................   257
    Advocate Physician Partners, Statement...........................   259
    ACMA, Letter.....................................................   266
    AARP, Letter.....................................................   269
    AAMC, Letter.....................................................   273

                CURRENT HOSPITAL ISSUES IN THE MEDICARE PROGRAM

                                  ----------

                             TUESDAY, MAY 20, 2014

                 U.S. House of Representatives,
                           Committee on Ways and Means,
                                        Subcommittee on Health,
                                                        Washington, DC.
        The subcommittee met, pursuant to call, at 9:39 a.m., in
    Room 1100, Longworth House Office Building, the Honorable Kevin
    Brady [chairman of the subcommittee] presiding.
        [The advisory announcing the hearing follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Chairman BRADY. Good morning. The subcommittee will come to
    order. Thank you all for joining us this morning.
        In every dollar hospitals spend on inaccurate Medicare
    audits and appeals, are dollars lost that should have been used
    to care for seniors. We are here to discuss the problems facing
    the hospitals today but also to find solutions to bring sense
    to our Medicare program and improved care for America's
    seniors. Today's hearing will examine hospital issues including
    those related to CMS's Two Midnight Policy, as well as audits
    and appeals. This is a bipartisan concern shared by many
    different stakeholders, the Medicare program itself, and
    lawmakers on this committee.
        In order to understand why CMS chose to pursue a Two
    Midnight Policy, we have to first explore the events leading up
    to the policy. After we review those events in today's hearing,
    Congress will be able to make an informed judgment about the
    merits of the policy and potentially pursue alternative
    solutions.
        Our first panel will educate us on the different aspects of
    inpatient and outpatient payments and services for hospitals.
    If we want behavior to change and improve outcomes, we need to
    change the incentives.
        Our second panel will feature national experts commenting
    on how Federal laws affect everyday medical practice. We will
    be hearing perspectives from across the spectrum of providers,
    auditors, researchers, and beneficiary advocates. As I have
    talked to stakeholders about current issues in the Medicare
    program, the Two Midnight Policy comes up over and over again.
        In listening to a variety of different perspectives, I have
    come to understand the following. There are misaligned
    incentives in CMS's inpatient and outpatient payment systems,
    but hospitals are not doing anything wrong. They are simply
    responding to the incentives. No matter if the service is
    inpatient or outpatient, hospital still uses the same equipment
    and the same medical staff to deliver care. Yet there are two
    vastly different payment systems, and the systems don't relate
    to each other in any way. They are based on different coding
    rubrics, and they pay for different things. And often all this
    is decided after doctors have provided care.
        Take for example, reimbursement for medical education. If
    the service is billed inpatient, the hospital qualifies for an
    extra medical education payment. However if the same service is
    billed to outpatient, the hospital doesn't receive any medical
    education money. So if you are a large teaching hospital and
    you could bill under either payment system, why would you ever
    submit the bill for anything other than inpatient
    reimbursement. It is all about the underlying incentives.
        Now let's examine the next piece of the puzzle, audits. I
    have heard from hospitals that audits are causing undue
    burdens. I have here from recovery audit contractors, or RACs
    as they are known, that they are simply responding to what CMS
    has defined as improper payments. Their emphasis on short
    hospital stays is due to, well, you guessed it, the underlying
    incentives. RACs are able to keep a percentage of any improper
    overpayments they recoup. Prior to the Two Midnight standard,
    there were no definitive rules governing which payment system
    was correct for short stays. I think we can all agree that RACs
    are an important program integrity tool. They are focusing on a
    legitimate discrepancy of Medicare payment. They, too, are
    responding to the incentives.
        Although an important tool, auditing also causes unintended
    behavior changes. We will hear from several of our witnesses
    today that around the same time the RAC short- stay audits were
    in full swing, there was also an unprecedented spike in
    outpatient observation services. Observation is meant to be a
    temporary tool allowing clinicians to closely monitor patients
    without using full-blown inpatient hospital resources. However,
    observation services are now being used as a tool to avoid
    certain adverse effects, including RAC audits, in some cases
    avoiding readmission penalties.
        The saga continues when we turn to the appeals process.
    Hospitals disagree with RAC audit denials for short stays. As a
    result, they appeal the decision. Hospitals have found a high
    level of success at overturning RAC denials at the
    Administrative Law Judge, or ALJ level. Same thing, responding
    to incentives, ALJ equals more likely to have an appeal
    overturned, so appeal every time. So much activity at the ALJ
    level has led to an extensive backlog of appeals.
        Earlier this year the Obama administration suspended the
    assignment of new appeals at the ALJ level. Again we see
    unintended consequences, denying providers their basic due
    process rights occurring as a result of poor incentives. We
    intended to have a witness from the Department of Health and
    Human Services here today to testify on behalf of the Medicare
    appeals process. Unfortunate Chief L.J. Nancy Griswold was
    unable to join us, but HHS is committed to briefing the Ways
    and Means member bipartisan manner on this important topic.
        At the conclusion of today's story, lies the heart of the
    issue, the Two Midnight Policy. In response to the inpatient-
    outpatient payment predicament, RAC audits, increase in
    observation stays, and backlog of appeals, CMS took its best
    shot at a solution, Two Midnight. Today we will hear from all
    of our witnesses on whether the Two Midnight solution is
    solving all or any of various problems identified in this tale.
        I commend my colleagues on this committee, members on both
    sides of the aisle who have introduced bills to pursue
    different alternatives to the Two Midnight Policy. My
    colleague, Mr. Gerlach, along with original co-sponsors, Mr.
    Crowley, Mr. Reed, Mr. Roskam, Mr. Kind, have offered a sound
    proposal for our committee to work from.
        Before I recognize Ranking Member Dr. McDermott for the
    purposes of an opening statement, I ask as always unanimous
    consent that all members' written statements be included in the
    record. Without objection, so ordered.
        Chairman BRADY. I now recognize ranking member Dr.
    McDermott for his opening statement.
        Mr. MCDERMOTT. Thank you, Mr. Chairman.
        This hearing today is really about serving the greater
    good. When this rule was proposed, the Two Midnight Rule, I
    submitted on the 22nd of July last year my comments about it,
    and much of what I thought was going to happen is now here, and
    we are going to hear about it today; and I am pleased that you
    are having this hearing.
        I would like to enter into the record that letter so that
    it gets in the record.
        Chairman BRADY. Without objection.
        [Document not provided]

     STATEMENT OF THE HONORABLE JIM MCDERMOTT, A REPRESENTATIVE IN
                 CONGRESS FROM THE STATE OF WASHINGTON

        Mr. MCDERMOTT. In recent years hospitals have been asked to
    do more with less. We have slowed the rate of growth of their
    payments and asked them to work harder to improve quality and
    decrease unnecessary readmissions. Furthermore although
    Congress just delayed yet again the transition to the ICD-10
    classification system, hospitals have had to take steps to move
    to the new system while continuing to implement the meaningful
    use requirements and participate in delivery system reform
    efforts.
        Many of these activities support the noble goal of
    improving care for patients that they serve, such as the
    accountable care organizations and the patient-centered medical
    home, while reducing long-term costs, but they require up-front
    capital investments. Hospitals are employing people and
    providing good and stable benefits for their employees,
    something other sectors should emulate. Hospitals are doing all
    of this in the face of a number of regulations and justifiable
    scrutiny.
        The Administration recognizes the sacrifice this sector has
    put forward. As an example, the Administration has made efforts
    to reduce the unnecessary regulatory burden. Just this month
    the Administration released Part 2 of the final rule to reduce
    unnecessary, obsolete, or excessively burdensome regulation on
    health care providers and suppliers.
        I commend CMS for walking a fine line between regulating
    provider conduct and attempting to make these things easier
    from a burden standpoint. This is the agency's second foray
    into the ensuring that regulations make sense and they serve a
    purpose.
        Unlike some of my Republican counterparts, I believe some
    level of regulation is necessary to ensure that we protect
    Medicare's finite resources for future generations. I think
    everyone in this room would agree that protecting Medicare as a
    bedrock institution of American life, thereby serving the
    greater good, does require some sacrifice. This necessary
    sacrifice must be shared and proportional. To that end I am
    among the first to call for reforms to the Medicare recovery
    audit contractor audit program, and I mentioned the letter that
    I put in.
        As a result I suggest CMS reconsider the policy in this
    regard. Now, of course, several stakeholders have raised
    concerns that the recovery auditor contractors will be
    overzealous in pursuing recoveries related to this policy.
    People knew it when it was put in. It is not that I believe
    that the RAC should disappear. They perform a critical role in
    protecting taxpayer dollars, but I do believe that the program
    needs reform from a fairness and equity standpoint, and I am
    pleased CMS has taken some affirmative steps in this regard.
        I have also been among the loudest voices calling for
    reform of some of the fraud and abuse laws to allow broad
    participation among providers and suppliers to participate in
    innovative partnerships that promote care coordination such as
    gain sharing and other shared saving programs while ensuring
    programmatic protections under the fraud and abuse laws remain
    in place.
        I have also introduced H.R. 4658, which would make a
    modification to the civil monetary penalty law to allow
    providers to more easily participate in care coordination
    programs. I have also introduced H.R. 3144, the Fairness For
    Beneficiaries Act, which recognizes that the three-day stay
    often has negative ramifications for the Medicare beneficiaries
    and would eliminate that requirement.
        Finally, as the author of the self-referral disclosure
    protocol provision included in the Affordable Care Act, I have
    been deeply involved with urging CMS to make certain changes to
    ensure overpayment disclosures made pursuant to the protocol
    can be settled in a timely and efficient manner.
        All in all, hospitals are making shared sacrifices. They
    are going through a period of unprecedented change. They have
    demonstrated a willingness to work with us as we move to new
    delivery system models, and they have taken some financial
    hits. I appreciate the work that hospitals do but also
    recognize that giving the improper payment rate on the Medicare
    fee for service program and the Medicaid programs, they must be
    subject to some scrutiny by various contractors including the
    recovery auditors.
        I think we would like to ensure that going forward, we will
    alleviate the regulatory burden where appropriate and ensure
    that Medicare dollars are being used in a way that sustains the
    Medicare program for future generations. Hospitals have
    demonstrated a willingness to work with us as a pursuit of
    these goals, and I think that we will hopefully from this
    hearing today be able to evolve some legislation.
        I yield back.
        Chairman BRADY. Today, we will hear from witnesses on two
    panels. Sean Cavanaugh, Deputy Administrator and Director of
    the Center for Medicare at the Centers for Medicare and
    Medicaid Services.
        Jodie Nudelman, the Deputy Inspector General for Audit
    Services at the Offices Inspector General of the Department of
    Health and Human Services.
        And on the second panel we will have Amy Deutschendorf,
    Senior Director of Clinical Resource Management at Johns
    Hopkins Hospital Health System.
        Dr. Ellen Evans, Medical Director of HealthDataInsights.
    Dr. Ann Sheehy, faculty on behalf of the Society of Hospital
    Medicine, and Toby Edelman, Senior Policy Attorney, Center for
    Medicare Advocacy.
        Mr. Cavanaugh, congratulations on your new position at the
    CMS. The Ways and Means Committee is happy to welcome your
    first congressional testimony in your new role, and Mr.
    McDermott promises to take it easy on you.
        You are now recognized for five minutes.
        And I should say both to those testifying and the members
    today, we have two panels. We are going to be tight on time. We
    are going to hold real fast to the five-minute rule.
        So, Mr. Cavanaugh, welcome.

    STATEMENT OF SEAN CAVANAUGH, DEPUTY ADMINISTRATOR AND DIRECTOR,
     CENTER OF MEDICARE, CENTERS FOR MEDICARE AND MEDICAID SERVICES

        Mr. CAVANAUGH. Thank you, Chairman Brady. As you point out,
    I just became Deputy Administrator at CMS a few weeks ago.
    However, I point out that I started my career in health care in
    this committee room working for a member of the Health
    Subcommittee. I have great memories of working in this room
    with colleagues from both sides of the aisle to improve the
    Medicare program, and I have deep respect for the role Congress
    plays and this subcommittee play in setting Medicare policy and
    doing appropriate oversight of the operations of the program.
    So it is an honor to return here today to this committee room
    representing the agency that administers Medicare.
        When a patient arrives at a hospital needing care, one of
    the critical decisions that physicians or other qualified
    professionals must make is whether to admit the patient for
    inpatient care. This decision is often a complex medical
    judgment taking into account the patient's medical history,
    comorbidities and other factors. However, as Chairman Brady
    pointed out, because of statutory requirements, Medicare pays
    hospitals different rates for inpatient and outpatient
    services. So the decision about whether to admit a patient has
    implications for provider reimbursement, for beneficiary cost
    sharing, and also for post acute care benefits the beneficiary
    may qualify for.
        Two years ago hospitals and other stakeholders were
    requesting that CMS provide additional clarity regarding the
    definition of inpatient care. Hospitals were growing frustrated
    with the administrative and financial burden incurred when
    recovery auditors denied a claim for services after care had
    already been provided. At the same time, CMS was hearing from
    its contractors that Medicare was reimbursing hospitals for
    inpatient care that should have been provided in a less costly
    outpatient setting.
        Some hospitals reacted to the scrutiny of auditors by
    treating more patients on an outpatient basis, often in an
    observation status. Some observation stays lasted three, four
    or even more days. This caused problems for beneficiaries
    because it subjected them sometimes to higher cost sharing
    under the Medicare Part B benefit, and it also disqualified
    them from the post acute skilled nursing facility benefit since
    they weren't accruing the three inpatient days they need for
    that benefit.
        In 2012, we solicited public feedback on possible criteria
    that could be used to determine when an inpatient admission is
    reasonable and necessary. We received a large number of
    responses, but there was not a consensus around any single
    approach. Last year CMS finalized a proposal that has become
    known as the Two Midnight Rule. The rule sets a physician
    expectation based benchmark for when CMS and its contractors
    will consider inpatient hospital admission and payment
    appropriate.
        CMS, as we crafted that policy, we were seeking to balance
    several principles that I think many of us share. We wanted
    criteria that were clear to providers. We wanted criteria that
    were consistent with good, sound clinical practice and
    respected physician judgment. We wanted criteria that reflected
    the beneficiaries' medical needs, and finally, we wanted
    criteria that were consistent with the efficient delivery of
    care to protect the trust funds.
        In November of last year, CMS announced a probe and educate
    strategy around the new standard in which the MACs are now
    conducting prepayment reviews on a sample of short stay
    inpatient claims from each hospital to determine compliance
    with the Two Midnight Rule. Claims for inpatient admissions
    that are not reasonable and necessary are denied, and the MACs
    work with the hospitals to educate them on this criteria.
        As part of this strategy, we also prohibited the recovery
    auditors from conducting any post-payment reviews of claims for
    the medical necessity of the inpatient status through March of
    2014. We used this opportunity to engage in a dialogue with
    stakeholders on the Two Midnight Rule. As we began hearing from
    stakeholders that more time was needed to understand the
    policy, we extended the probe and educate strategy through
    September, and Congress subsequently extended it through March
    31, 2015. We believe these extensions are allowing hospitals
    time to fully understand the benchmark and for CMS to learn
    more about how this policy is being implemented and understood
    by hospitals.
        In fact, preliminary data suggests that as a result of the
    Two Midnight Rule, the proportion of long outpatient stays is
    beginning to decline. However, in recognition of the continued
    calls from stakeholders for additional clarity around short
    stays, this year CMS is soliciting public input on two related
    issues.
        First, we solicited comment on the advisability of creating
    a Medicare payment policy for short stay inpatient cases.
    Specifically we requested public comment on how to define short
    stays and how an appropriate payment might be designed. These
    comments are due to the agency at the end of June.
        Second, we reminded the public that we are inviting
    feedback on creating additional exceptions to the Two Midnight
    Rule. We look forward to reviewing stakeholders' suggestions on
    these two subjects. Mr. Chairman, Ranking Member, I look
    forward to hearing this subcommittee's ideas regarding the Two
    Midnight Rule and the Recovery Audit Program. CMS is always
    looking to improve our policies and procedures, so we welcome
    this opportunity to hear from Congress and stakeholders.
        With that I would be happy to take questions.
        [The prepared statement of Mr. Cavanaugh follows:]

     [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Chairman BRADY. Thank you.
        Ms. Nudelman, you are recognized for five minutes.

      STATEMENT OF JUDI NUDELMAN, REGIONAL INSPECTOR GENERAL FOR
     EVALUATION AND INSPECTIONS, NY REGION OFFICE OF THE INSPECTOR
       GENERAL, DEPARTMENT OF HEALTH AND HUMAN SERVICES (OIG-HHS)

        Ms. NUDELMAN. Good morning, Chairman Brady, Ranking Member
    McDermott and other distinguished Members of the Subcommittee.
    Thank you for the opportunity to discuss the Office of
    Inspector General's work to improve the Medicare program.
        My testimony today has three key takeaways. One, the Two
    Midnight hospital policy must be carefully evaluated.
        Two, CMS should enhance its oversight of the recovery audit
    contractors; and, three, fundamental changes are needed in the
    Medicare appeals system.
        I will begin with the Two Midnight Rule. The new policy
    provides guidelines for when hospitals bill for inpatient stays
    and outpatient services such as observation. These decisions
    have significant impact. They affect how much Medicare pays the
    hospital, how much beneficiaries must pay, and beneficiaries'
    eligibility for skilled nursing facility services.
        Prior to the policy, OIG evaluated the hospital's use of
    observation stays and inpatient stays. Our findings continue to
    be relevant. We found that beneficiaries were in observation
    and short inpatient stays for similar reasons, but short
    inpatient stays were more costly. On average Medicare paid
    nearly three times more for short inpatient stays than
    observation stays. Beneficiaries paid almost two times more.
        We also found that hospitals vary. Some hospitals use short
    inpatient stays for less than 10 percent of their stays. Others
    use them for more than 70 percent. Lastly, we found that some
    beneficiaries spent three nights or more in the hospital but
    did not qualify for the skilled nursing facilities under
    Medicare. That is because their stays did not include three
    inpatient nights.
        Switching to our work on recovery audit contractors, or
    RACs, we found that these contractors play a critical role in
    protecting the fiscal integrity of Medicare. In fact, in fiscal
    years 2010 and 2011, RACs identified improper payments
    totalling $1.3 billion. Most of the recovered improper payments
    came from hospital inpatient claims. However, we also found
    that CMS needs to enhance its oversight of RACs.
        Finally, OIG has found that the Medicare appeals system
    needs fundamental changes. We reviewed the third level of
    appeals which is handled by administrative law judges, or ALJs.
    Although this work predated the recent surge in appeals, our
    findings and recommendations are relevant to the current
    challenges. We found that ALJs decided fully in favor of
    appellants in over half of the cases and Part A hospital stays
    were most likely to receive favorable decisions.
        Several factors led to ALJs reaching different decisions
    than the prior level. One is that some Medicare policies are
    unclear. This leads to more favorable decisions for appellants
    and to more variation among adjudicators. In fact, there is
    wide variation among ALJs. Their rate of favorable decisions
    range from 18 to 85 percent. We also found that improvements
    were needed such as ALJs moving to electronic files and CMS
    increasing its participation at hearings.
        In closing, clear payment policies, strong oversight, and
    an effective appeals system are critical for Medicare to work
    well. CMS policy, the RACs, and the appeals system must each
    fulfill their important purposes. If they do not,
    beneficiaries, taxpayers and the Medicare program suffer. OIG
    is committed to continuing our efforts to improve Medicare.
        Thank you for your interest and for the opportunity to
    discuss some of our work. I will be happy to answer any
    questions.
        [The prepared statement of Ms. Nudelman follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Chairman BRADY. Thank you, Ms. Nudelman.
        I think both witnesses have made the point that Two
    Midnight Policy, the inpatient, outpatient, the audits and the
    appeals all really work together, which is why we are doing
    this hearing all together.
        So, starting with Mr. Cavanaugh, I am interested to hear
    your thoughts on the barriers to compare inpatient and
    outpatient services. Obviously we should be trying to find the
    best quality of care at the right site with the most cost
    effective payment.
        So can you give me an example of a reimbursement
    difference, for a service that can be billed both inpatient and
    outpatient by a teaching hospital in a major city; what would
    be an example?
        Mr. CAVANAUGH. Well Chairman, as you pointed out in your
    opening statement, the outpatient payment system and the
    inpatient payment system are fundamentally different, and they
    start with different coding; so it is often hard to compare
    payments because we can't put the same claim through the
    outpatient system and the inpatient system. They are coded
    differently.
        But on the inpatient system, we tend to pay a fixed amount,
    meaning a DRG-based payment. That DRG-based payment will
    include adjustments for possibly IME, for DSH. It could include
    a readmissions penalty or a hospital-acquired condition
    penalty, but it tends to be a fixed payment for the types of
    patient and the types of service being delivered.
        On the outpatient side, it is more disaggregated, where we
    tend to pay per service. I think you heard from the OIG, and I
    think it is similar to data we have, that the magnitude of the
    difference in payment is quite substantial. The OIG mentioned
    that the short stay inpatient payments tended to be three times
    as costly to Medicare as the outpatient observation stays. That
    is consistent with data we have seen at the CMS. So that gives
    you a sense, that the systems for deriving the payment are
    different, and the magnitudes are quite different.
        Chairman BRADY. How do you address that?
        Mr. CAVANAUGH. I am not entirely sure how we address it.
    One idea that we received from stakeholders, and I know that it
    had some support in Congress, is to create a payment system
    that splits that difference, a short stay inpatient payment
    system and as I mentioned in my opening statement, we are
    soliciting comments on how to create such a payment system. I
    would say there are challenges.
        Some of the cases that come in as short stay inpatient
    payments already have very low lengths of stay. Chest pain DRG,
    for example, has a two-day average length of stay. So the
    question is how would you create a short-stay payment around a
    type of case that is already fairly short. Those are the sorts
    of technical questions that we are asking for public input in
    the proposed rule this year.
        Chairman BRADY. Thank you.
        Ms. Nudelman, you know, in your analysis do you think the
    Two Midnight standard will reduce observation stays or increase
    them, the length of them?
        Ms. NUDELMAN. Again, our analysis is prior to the Two
    Midnight stay, and it is difficult to predict how things will
    look. What we did find is that hospitals extremely vary and,
    therefore, it is important to look at all of the data because
    their starting point is very different, and so it may impact
    hospitals very differently.
        Chairman BRADY. Mr. Cavanaugh, thanks for your emphasis
    describing the different cost-sharing implications affecting
    our Medicare beneficiaries. It often gets lost in this
    discussion and the difference between inpatient and outpatient.
    It is unfortunate the Medicare program has such vastly
    different cost-sharing rules for our seniors or Medicare
    beneficiaries between the two benefits.
        This committee has focused earlier on the advantages of
    combining Medicare Parts A and B with the out-of-pocket costs
    to make sure we protect seniors in part because we are
    concerned about what seniors pay for cost sharing.
        So, can you give us your thoughts on combining Parts A and
    B and how that might be helpful in trying to contain those cost
    sharing challenges for seniors?
        Mr. CAVANAUGH. I recognize that one of the goals is to
    speak to one of the problems that we have here, which is that
    inpatient versus outpatient generates very different
    liabilities for the patient. I would want to hear more about
    the proposal that the subcommittee is considering, and we have
    technical staff at CMS who can come provide assistance to you
    in the drafting of the bill if required and if that would be
    beneficial to you.
        Chairman BRADY. So you have not taken a look at the
    proposed combining Part A and B in the President's budget or in
    earlier health care proposals?
        Mr. CAVANAUGH. We don't have a proposal on that at this
    time, but like I said, if the committee has a proposal, we
    would love to see it and learn more about it.
        Chairman BRADY. Okay. Okay, final question. Mr. Cavanaugh,
    even though CMS doesn't have a direct role in the ALJ level
    Medicare appeals that Ms. Nudelman talked about, CMS must still
    be part of the solution to solve the backlog.
        Does HHS have a working group to address Medicare appeals,
    and if so has HHS crafted recommendations to solve the backlog
    issues going forward?
        Mr. CAVANAUGH. Yes, Mr. Chairman. As you point out, there
    is an HHS-wide work group to address the backlog. CMS is part
    of that. I would be glad--we are in the process of coming up
    with recommendations. I don't believe they are finalized yet.
        Chairman BRADY. What is the timetable on that?
        Mr. CAVANAUGH. I think we could brief the committee on them
    fairly shortly.
        Chairman BRADY. Right. Thank you Mr. Cavanaugh and Ms.
    Nudelman.
        I now recognize Ranking Member Dr. McDermott for five
    minutes.
        Mr. MCDERMOTT. Thank you, Mr. Chairman.
        From a patient's standpoint you walk into the emergency
    room or whatever, and you get put in one of these statuses or
    the other. Does it make any difference to the patient, to the
    beneficiary, which status they are put in, as to how they are
    treated?
        Mr. CAVANAUGH. As to how they are treated, not from a
    benefit perspective; Is that the question?
        Mr. MCDERMOTT. Yes, I am talking about how they are treated
    as a patient.
        Mr. CAVANAUGH. I would hope not. I would hope that the
    patient is receiving all the services they need medically, that
    are medically indicated.
        Mr. MCDERMOTT. So then the difference is in the payment
    that is received by the hospital or that the patient has to
    make depending on which category they are in; is that correct?
        Mr. CAVANAUGH. Certainly the statute creates a stark
    difference between inpatient and outpatient care, yes, sir.
        Mr. MCDERMOTT. Give us the amount of difference for a
    hospital, what they receive and what the patient has to pay, so
    we get some idea of who is bearing the weight here.
        Mr. CAVANAUGH. The amounts both that the hospital will
    receive and that the beneficiary would be liable for would vary
    tremendously on individual circumstances, so I can't give you a
    precise answer. I would say that when we did a rebilling
    initiative where we had hospitals take short inpatient cases
    and rebill them as outpatient, which involves some work, we did
    find that the outpatient payment to the hospital was about 30
    percent of what the inpatient payment would have been.
        Mr. MCDERMOTT. So they are getting 70 percent more if they
    bill them as an inpatient. Is that in Medicare payment for the
    DRG, the diagnosed-related group, or is it the indirect medical
    education payment and the DSH payment on top.
        Mr. CAVANAUGH. It includes everything.
        Mr. MCDERMOTT. Okay. So you are saying you are including
    everything?
        Mr. CAVANAUGH. Yes, sir.
        Mr. MCDERMOTT. So it is to the hospital's best interest to
    bring them in as an inpatient?
        Mr. CAVANAUGH. Certainly it generates more revenue.
        Mr. MCDERMOTT. From a revenue standpoint. Because we said
    it doesn't make any difference how they are treated as people
    and as patients, so the only difference is how much money the
    hospital makes off of it; is that correct?
        Mr. CAVANAUGH. Again, it certainly makes a significant
    financial difference.
        Mr. MCDERMOTT. Now, I have heard, and I think almost every
    member on this committee has heard from their hospitals, the
    usual assumption is that the RACs are overzealous and that
    somehow when we take them up to appeal, when we finally get to
    the appeal process, almost always it comes down in our favor.
    Could you give us the numbers of how many are overturned on
    appeal?
        Mr. CAVANAUGH. Certainly, Congressman. We had a report to
    Congress on the RAC program in the year of 2012, and in that
    report we showed that when the RAC denies a claim, when a RAC
    denies a claim, only 7 percent of those are ultimately
    overturned at some level of review all the way up through the
    ALJs.
        Mr. MCDERMOTT. Only 7 percent are overturned.
        Mr. CAVANAUGH. That is correct.
        Mr. MCDERMOTT. Where do the hospitals get the figure that
    they say, well, they are all overturned. When we finally go
    through this long, arduous process that is backlogged and
    everything else, it is always overturned. Where do they come up
    with that.
        Mr. CAVANAUGH. There could be two sources of the difference
    in these numbers. The first is any individual hospital's
    experience may vary tremendously. Some may have a better
    success rate. The other is, some of the numbers that I have
    seen quoted by the industry, they are using as the denominator
    only those that they choose to appeal, not all those that were
    denied, which a lower denominator would generate a higher rate
    of success.
        Mr. MCDERMOTT. Does it get to more than a half?
        Mr. CAVANAUGH. In the numbers that we have seen that CMS
    has generated, I haven't seen anything that would get that
    high, no sir.
        Mr. MCDERMOTT. The number I saw, I mean, you are holding
    back on the numbers you got. The ones that I have seen say 27
    percent are the number that are overturned.
        Mr. CAVANAUGH. So, again, I don't mean to hold back the
    numbers. These are numbers that are in our public report to
    Congress, ultimately, and I will just state it as clearly as I
    can, of all the ones the RACs deny, only 7 percent are
    ultimately overturned.
        If you took a low number of the ones the RACs denied and
    the ones the hospitals chose to appeal, it would generate a
    higher overturn number. I just don't happen to know that
    number. 14 percent.
        Mr. MCDERMOTT. Fourteen percent?
        Mr. CAVANAUGH. I am being helped, yes.
        So it essentially doubles the rate, but it doesn't get as
    high as some of the numbers you may have heard from others and,
    again, an individual hospital's experience may vary.
        Mr. MCDERMOTT. Can you give us an explanation for why this
    problem? I mean, generally Congress doesn't run in and pass
    laws, and you don't make rules and regulations without there
    having been something to generate that. What is it that drove
    this in the first place?
        Mr. CAVANAUGH. I think it was a confluence of a number of
    factors. We were hearing from hospitals and beneficiaries who
    were really concerned about these long observation stays. That
    was causing confusion for beneficiaries including they didn't
    understand their status, and they also thought they were
    qualifying for the skilled nursing facility benefit.
        We were hearing from hospitals who thought just dealing
    with the RACs, with what the hospitals would characterize as an
    unclear standard for inpatient care was a difficult situation
    to put them in and all these forces came together, and that is
    why CMS solicited input and tried to make a clearer policy.
    Because our goal is not to have a successful RAC program or to
    drive down the number of overturned appeals. Our goal is to
    have hospitals understand the rules, agree with the rules, and
    bill correctly at the outset.
        Chairman BRADY. Time is expired.
        Mr. Johnson.
        Mr. JOHNSON. Thank you, Mr. Chairman.
        Mr. Cavanaugh, the value-based purchasing program which was
    enacted as part of ObamaCare is the Federal Government's most
    extensive effort yet to hold hospitals financially accountable
    for patient outcomes. Medicare compared hospitals on how
    faithfully they followed basic standards of care and how
    patients rated their experiences. In the first year of CMS
    value-based purchasing program, physician-owned hospitals
    demonstrated they thrive in delivering high-quality, low-cost
    care. Amazingly 9 of the top 10 and 53 of the top 100 hospitals
    were physician-owned hospitals.
        CMS also recently released data that summarizes the
    utilization and payments for procedures and services provided
    to Medicare. Based on this release of information, we have now
    confirmed what many of us have known for some time, and that is
    that, physician-owned hospitals are costing Medicare less than
    hospitals without physician ownership.
        And that doesn't consider all the cost savings associated
    with the higher quality of care they provide. The irony of all
    this is that the very law that created the hospital value-based
    purchasing program, ObamaCare, bans the same hospitals. This
    new accountability measure says they are some of the very best
    in the country. ObamaCare prohibits any new physician-owned
    hospitals from treating Medicare and Medicaid patients. This
    clearly discriminates against some of the most vulnerable
    patients in our health system.
        While the law permitted those physician-owned hospitals
    that received Medicare certification to be grandfathered under
    the law, it prevents these same hospitals from being able to
    expand to meet the access and quality demands in their
    community. This makes no sense, and it flies in the face of the
    Administration's own benchmarks for quality of care and cost
    savings.
        Mr. Cavanaugh, do you stand by the results of the value-
    based purchasing program which validates the quality of
    physician-owned hospitals?
        Mr. CAVANAUGH. Yes, the agency stands by the results of the
    value-based purchasing program.
        Mr. JOHNSON. Do you stand by the data released by CMS
    showing the cost differential between treating patients at
    physician-owned hospitals versus hospitals without any
    ownership by physicians?
        Mr. CAVANAUGH. I apologize, Congressman. I am not familiar
    with those data, but I am happy to look at them and review
    them.
        Mr. JOHNSON. I appreciate it if you would. I hope you all
    can support a bill that I have out there, H.R. 2027, which
    would establish a level playing field for physician-owned
    hospitals and ensure that patients will continue to have a
    choice in where they receive their health care.
        Mr. CAVANAUGH. Certainly we look forward to reviewing that
    legislation.
        Mr. JOHNSON. Thank you, sir.
        Thank you, Mr. Chairman.
        Chairman BRADY. Thank you.
        Mr. Thompson is recognized.
        Mr. THOMPSON. Thank you, Mr. Chairman, and thank you for
    holding this hearing today. I think this is something, as Mr.
    McDermott said, we are all hearing a lot about in our district.
        Mr. Cavanaugh, I would like to just revisit the issue of
    the reversed audits, and you had mentioned 7 percent. Mr.
    McDermott said that he hears from his constituents that every
    one of them are overturned. I am hearing that it is in the 40
    percent from my hospitals, 40 percent and change and is there
    any way to qualify how these missed billing are done? Are they
    intentional? Are they mistakes? What is your experience?
        Mr. CAVANAUGH. Certainly my experience, which actually
    predates my time at CMS, as I mentioned in my opening statement
    I have only been the Director of Center for Medicare for a few
    weeks, but I do have experience working in the hospital
    industry. My experience has been most of them are not
    fraudulent. It is misinterpretation----
        Mr. THOMPSON. So they are honest mistakes, or they find the
    process is confusing, have trouble getting to where they need
    to be?
        Mr. CAVANAUGH. Certainly that is what I have heard from
    much of the industry. I would also say by monitoring these very
    closely, the agency has at times found suggestions of fraud in
    some areas; but I don't think that is generally what is driving
    this.
        Mr. THOMPSON. And is it pretty easy to recognize the
    mistakes vis-a-vis the fraud?
        Mr. CAVANAUGH. I would have to defer that question to my
    colleague who runs the program integrity side of CMI, CMS
    excuse me.
        Mr. THOMPSON. I would like to know that if you could.
        Mr. CAVANAUGH. We would be happy to circle back with you
    after the hearing.
        Mr. THOMPSON. Whichever it is, when a hospital has to go
    through the process of defending their claim, there is a lot of
    expense associated with that.
        Mr. CAVANAUGH. That is true.
        Mr. THOMPSON. Are you able to qualify that?
        Mr. CAVANAUGH. Well, we don't collect data on what the
    hospital's expense is, but certainly my experience----
        Mr. THOMPSON. They hire, what, lawyers?
        Mr. CAVANAUGH. At times.
        Mr. THOMPSON. And they hire consultants----
        Mr. CAVANAUGH. Or consultants. There is also just the time
    and----
        Mr. THOMPSON. And all the opportunity cost. They are
    defending their billing practices rather than providing health
    care to patients?
        Mr. CAVANAUGH. Yes, Congressman. And, again, that is why we
    feel perfecting the appeals process is important, but what is
    more important is having very clear guidelines at the outset of
    how these cases should be billed.
        Mr. THOMPSON. And is there any way to minimize the cost to
    hospitals if their claim is reversed? They have to pay one way
    or the other, I guess.
        Mr. CAVANAUGH. Yes, if it is reversed. There are some
    things that we are doing. The recovery auditor contracts are
    being recompeted as we speak, and we hope to award new
    contracts this summer. In that process, as we set new terms
    with the appropriate auditors, we are trying to take steps to
    make things less burdensome for the hospitals. We are trying to
    revise the requests the auditors do for documents from the
    hospitals to try to limit that burden somewhat.
        We are trying to ensure that there is an exchange of
    information between the auditors and the hospitals so the
    hospitals can make their case before they have to file a formal
    appeal, that they can work with the auditor to explain why they
    think it was appropriate as an inpatient case. So we are always
    looking for ways to improve this. And I think there is----
        Mr. THOMPSON. Does the process incentivize the auditors to
    go after more than they should?
        Mr. CAVANAUGH. I don't think there is an incentive for them
    to go after more than they should, and I think the very low
    overturn rate that I quoted suggests that they are largely
    going after the right types of cases, but again I would rather
    they have----
        Mr. THOMPSON. That's its overturn rate that you quoted, the
    7 percent.
        Mr. CAVANAUGH. Correct.
        Mr. THOMPSON. But if it is closer to what Mr. McDermott
    said, where they are all overturned, or even if they are what
    my hospitals are experiencing at about 40-some-odd percent, it
    is not quite as low.
        Mr. CAVANAUGH. If I believed that----
        Mr. THOMPSON. They say there is lies; there is damn lies,
    and there is statistics.
        Mr. CAVANAUGH. I just wanted to agree with you, though,
    that if there were overturn rates of 40 to 50 percent, I think
    that would be indicative of a larger problem than just the
    guidelines.
        Mr. THOMPSON. What would that problem be?
        Mr. CAVANAUGH. I think it would indicate that the recovery
    auditors were not going after cases that were----
        Mr. THOMPSON. Auditors are what?
        Mr. CAVANAUGH. That the recovery auditors, if they were
    getting over turned 40 or 50 percent of the time, it would
    indicate they were probably going after cases that were
    appropriately billed to start with but, again, that is not what
    we see in our data.
        Mr. THOMPSON. So Mr. Chairman, can we further examine that,
    because if that's the case, they are being incentivized or for
    some reason they are going after cases they shouldn't.
        Chairman BRADY. At some point today, I am going to
    recognize Mr. Roskam, but at some point today I would like Ms.
    Nudelman to weigh in. I want to reconcile the differences in
    the numbers. I may be missing something here. And at some
    point--I don't want to take Mr. Roskam's time.
        Mr. Roskam.
        Mr. ROSKAM. Thank you, Mr. Chairman.
        Mr. Cavanaugh, I just want to pick up on one of the themes
    that Mr. McDermott articulated in his opening statement where
    he said that he wanted to protect Medicare's finite resources,
    and I agree with that and you agree with that. I think one of
    the challenges is that there is a zero-sum game element to
    Medicare reimbursement right now, and so I want to draw your
    attention to an issue that I am sure is familiar with you.
        That is Nantucket Cottage Hospital. As you know, that was
    part of the process by which the Affordable Care Act was
    passed. There is I don't think any celebration in this in that
    it is a zero-sum game proposition. I come from Illinois, and my
    home state is losing under this equation. Massachusetts, based
    on this manipulation, will essentially get $3.5 billion over 10
    years. You recognize that that is a problem, don't you?
        Mr. CAVANAUGH. I am familiar with the provision you are
    talking about, and I would just simply say CMS is faithfully
    executing the law as written.
        Mr. ROSKAM. You don't think that is a good allocation of
    resources, do you?
        Mr. CAVANAUGH. Again, I would just say that we are
    implementing the laws as required.
        Mr. ROSKAM. Well, if it takes from my state and gives to
    another state, and what it does is it manipulates the
    definition of a rural hospital so that now Nantucket is now
    defined as rural, which boosts everybody up, because you know
    these rules better than I do, the entire state of Massachusetts
    is the beneficiary of one hospital in a particularly luxurious
    area, is now redefined as rural and therefore poor. That is a
    manipulation, isn't it?
        Mr. CAVANAUGH. Congressman, I think you have accurately
    described the mechanism of what is happening; and, again, we
    are bound to implement the law.
        Mr. ROSKAM. But it is not a good idea, is it?
        Mr. CAVANAUGH. We are faithfully executing the law in this
    regard, sir.
        Mr. ROSKAM. Well, you recognize there is bipartisan support
    to repeal this, don't you? This is one of these areas where
    there is a tremendous amount of bipartisan interest in trying
    to get back to this.
        Senators McCaskill and Coburn have come alongside with one
    another. There is dozens of members of the House of
    Representatives, who have recognized this, and this is a
    situation where one state based on one statute is getting a
    disproportionate benefit, and it is not getting a
    disproportionate esoteric benefit. In other words, this isn't
    just simply borrowing from a future generation. This is saying,
    well, we are going to take from Illinois, and we are going to
    give to Massachusetts. That's a breakdown, isn't it? Isn't that
    a failure?
        Mr. CAVANAUGH. So, Congressman, the provision does involve
    some of the technical aspects of Medicare rate setting, and we
    have a lot of experts at CMS who we would be happy to bring
    down and provide you technical assistance if you have a
    legislative proposal in this request.
        Mr. ROSKAM. Well, is a technicality when a luxurious
    vacation area is categorized as rural, thereby boosting every
    other hospital in the state and having an adverse impact on
    many other states?
        I mean, so Massachusetts according to our staff that put
    this together in 2013 and 2014, is going to be receiving a
    benefit of $425 million. My home state of Illinois is down $62
    million. Congressman Price's home state of Georgia is down $30
    million. You just go on and on through the list. Congressman
    McDermott's home state is down $12 million. This is beyond just
    a technicality, wouldn't you say?
        Mr. CAVANAUGH. What I was suggesting is that it is a
    function of very technical parts of the rate setting within
    Medicare, and we are happy to look further into it and look at
    your bill and provide----
        Mr. ROSKAM. Isn't that an over characterization to say it
    is a technicality? It is not just technically taking millions
    of dollars from my home state and these other states across the
    country to benefit one state through the boosting of this sort
    of hospital definition.
        And if that is a technicality, then I shudder to think what
    is a big deal. It is more than a technicality. Wouldn't you
    acknowledge that?
        Mr. CAVANAUGH. I didn't mean to suggest it was a
    technicality. What I was trying to say is that it was a
    function of technical aspects of the rate setting system. As
    you said, the provision has a meaningful impact on Medicare
    rates.
        Mr. ROSKAM. And wouldn't you technically think it is a bad
    idea?
        Mr. CAVANAUGH. Congressman, we are faithfully executing the
    law. If you have a provision to change it, we are happy to
    provide any technical assistance you might need.
        Mr. ROSKAM. Thank you.
        I yield back.
        Chairman BRADY. Thank you.
        Mr. Pascrell.
        Mr. PASCRELL. Thank you, Mr. Chairman. I think we can work
    together, I really do, to find solutions that work for
    hospitals and for patients.
        I have been hearing from hospitals in my state, Mr.
    Cavanaugh, about the various reporting requirements in programs
    that impact the work that those hospitals do. I don't think
    anyone here will disagree that there is much room for
    improvement in the RAC program, in policies related to short-
    term, as well as observation stays. However, we need to strike
    the right balance between ensuring that hospitals can comply
    and that Medicare has the ability to ensure program integrity.
    It sounds easy, but it is not.
        One area of particular interest to me is the increased use
    of observation stays and how it impacts the beneficiary. So I
    cosponsored along with Joe Courtney and Tom Latham, it is
    bipartisan, the Improving Access to Medicare Coverage Act which
    would allow observation stays to be counted toward the three-
    day mandatory inpatient stay for Medicare coverage of skilled
    nursing facility services.
        So here's my question then, Mr. Cavanaugh. A number of
    independent reports from Medpac, the HHS Inspector General,
    Brown University, very interesting study, indicated that there
    has been a substantial increase in the number of observation
    stay claims and a decrease in the number of inpatient stays.
        According to Medpac, outpatient observation claims grew by
    88 percent from 2006 to 2012. A Brown University study found
    that the average length of stay in observation increased by
    more than 7 percent. Could you tell me what is contributing to
    this trend and the rise in observation stays?
        Mr. CAVANAUGH. Certainly. CMS is aware of the growth in
    observation stays as well. One of the things we believe is
    contributing to it is the behavior of some hospitals that want
    to avoid auditors reviewing whether an inpatient stay was
    appropriate.
        Mr. PASCRELL. Do you want to write that on the record
    please?
        Mr. CAVANAUGH. Excuse me?
        Mr. PASCRELL. What do you mean; what are the hospitals
    doing?
        Mr. CAVANAUGH. And again, this is anecdotal having talked
    to some hospital associations and some individual hospitals
    that some hospitals have decided they would rather take the
    patient in observation status as an excess of caution rather
    than risk having an inpatient admission subsequently denied.
        Mr. PASCRELL. And what does that lead to?
        Mr. CAVANAUGH. Well, first of all, what I think is
    unfortunate, as you point out, is if the patient should have
    been receiving inpatient care, they are not accruing the days
    they need to qualify for the post-acute skill nursing facility
    benefit.
        Mr. PASCRELL. And that is pretty troubling. Under the
    current law, under what exists right now, Medicare requires
    that a patient be classified as an inpatient during a hospital
    stay for three days in order to qualify for coverage in a
    skilled nursing facility after they leave the hospital.
        So, a number of Medicare beneficiaries have been cared for
    in the hospital on outpatient observation status rather than
    admitting them as inpatients, which has caused problems for
    Medicare coverage. That is serious.
        Mr. Cavanaugh, do you believe that the three-day inpatient
    stay requirement for Medicare coverage of skilled nursing
    facility services is appropriate?
        Mr. CAVANAUGH. Congressman, I think CMS shares your
    interest in trying to find ways to improve the use of skilled
    nursing facility benefit. I am pleased to tell you there is two
    examples of where we are exploring very specific alternatives
    to this.
        In the Affordable Care Act, the Secretary and CMS were
    given the authority to waive certain provisions of Medicare in
    order to test new payment and service delivery models. In the
    pioneer ACOs, which is run by the Innovation Center, and the
    bundled payments for care improvement also run by the
    Innovation Center, were running tests where participants in
    those models have waivers from the three-day prior
    hospitalization rule. We chose those environments in which to
    test this because we feel in those environments the providers
    have both a clinical and a financial, heightened clinical and
    financial responsibility, so we feel that it is the best
    possible environment to waive the rule without having excess
    utilization.
        Those tests are fairly new, and we are going to evaluate
    them very closely, and when we have data to share, we would be
    happy to share them with this committee.
        Mr. PASCRELL. Thank you.
        Thank you, Mr. Chairman.
        Chairman BRADY. Thank you.
        Mr. Gerlach is recognized. We will move to two-to-one
    questions so we can balance questions from now on.
        Mr. GERLACH. Thank you, Mr. Chairman.
        Thank you for testifying this morning to both of you.
        On this Two Midnight Rule issue, in staying with the
    questions that my predecessors here have just posed, I think a
    lot of this can be boiled down to some of the information that
    we get from our subcommittee staff that summarizes the issues
    for the hearing today, and let me read if I can from that
    because, again, I think it crystallizes on the Two Midnight
    Rule where we are, and ``For fiscal year 2014, CMS maintains
    751 diagnostic-related group bundling codes for inpatient
    hospital payment. The outpatient payment system is focused on
    current procedural terminology, or CPT codes, that are
    maintained by the American Medical Association. The CPT codes
    map to ambulatory payment classifications, or APCs, for
    outpatient service reimbursement. For calendar year 2014, CMS
    maintains 813 APCs. There is no one-to-one matching of DRGs to
    APCs nor international classification of disease codes to CPT
    codes. Hospitals are responsible for knowing two different
    coding systems and two different payment systems for Medicare
    reimbursement.'' Seems to me that's the problem, isn't it? A
    patient comes into a hospital, presents with certain symptoms
    and certain complaints, but there is two different coding
    systems that a hospital is then required to utilize in terms of
    the reimbursement it will ultimately receive for whatever
    service is provided to the patient.
        So does not the answer lie obviously to a new methodology
    that somehow blends these codes or smoothens these two
    different payment systems, one outpatient, one inpatient, so
    there is a fair way to reimburse for the service provided, not
    the length of stay on an arbitrary basis. Mr. Cavanaugh?
        Mr. CAVANAUGH. Thank you for that question, Congressman. I
    do think in this year's rule in which we requested input on a
    short-stay inpatient payment system, we were suggesting that we
    are open to the kind of thing you are talking about, which is
    trying to see if the solution here is to minimize the payment
    differences. I don't want to prejudge the result of that. We
    are waiting to receive public comment on how that might look,
    but I think it is an openness to a step in the direction you
    are discussing.
        Mr. GERLACH. Is that openness towards getting to a system
    where again the reimbursement to the hospital is based upon a
    more simplified methodology, and the methodology that is tied
    to the nature of the service that is provided, not an arbitrary
    time period for which that patient is in the hospital?
        And I would also, Mrs. Nudelman, if you would also reply to
    that as well.
        Ms. NUDELMAN. I mean I defer to CMS and to Congress to make
    the policy, but I think the overall objective is going back to,
    you know, not paying vastly different amounts for beneficiaries
    that receive similar care. At the very least, a standardized
    crosswalk that crosswalks the outpatient and the inpatient
    procedures would be a useful tool.
        Mr. GERLACH. Well, typically an inpatient reimbursement
    would be about three times what an outpatient reimbursement
    would be, so there would be a fundamentally unfair situation
    where somebody is discharged from the hospital at 10 p.m.
    before the second midnight and therefore the hospital receives
    a third of the reimbursement for the services that were
    otherwise provided or could have been provided if you just kept
    the person three more hours and discharged him or her at 1 a.m.
    after the two midnights had passed by and get three times the
    reimbursement.
        So isn't there a fundamental flaw in just arbitrarily
    setting up a Two Midnight or any particular time period for
    determining reimbursement versus just the nature of the service
    that is needed to treat the patient, as Mr. Cavanaugh you
    alluded to some moments ago, that is the goal here, getting the
    patient properly cared for in the hospital setting, based upon
    the symptoms and problems and then the diagnosis that is made
    to deal with that.
        Mr. CAVANAUGH. I think, Congressman, it is fair to say CMS
    shares your goal. What I would caution you is anytime we create
    a new payment, there is a lot that goes into creating payment
    systems, and what you are articulating, I think, is a very
    worthy goal of a seamless payment system. It presents many
    technical challenges. However, again, we have expressed
    openness in our proposed rule to exploring payment solutions to
    this, so we look forward to hearing any ideas this subcommittee
    has, and we look forward to working with you on this.
        Mr. GERLACH. Thank you both.
        Chairman BRADY. Thank you.
        Mr. Smith.
        Mr. SMITH. Thank you, Mr. Chairman, and thank you to our
    panelists here today.
        It would seem the more regulations we have, the more
    difficult it becomes, at least to medical providers that tell
    me that it is more difficult to do their job and especially
    to--it becomes more difficult to do the right thing.
        And Mr. Cavanaugh, similar to concerns raised about the Two
    Midnight Rule, there is another regulation CMS announced it
    will begin enforcing this year pertaining to the 96-hour rule
    at critical access hospitals. This regulation requires, as you
    know, physicians to certify at the time of admission they do
    not believe a patient will be there more than 96 hours or must
    transfer the patient or face non-reimbursement. I understand
    CMS has walked back this rule, allowing more time to file the
    certification. Is that true?
        Mr. CAVANAUGH. That is true. We have provided guidance to
    some of the hospitals that we will allow the certification to
    occur anytime up to 24 hours before the bill is submitted, and
    I think that will be coming out more formally sometime soon.
        Mr. SMITH. Okay. I assume that you have received a good bit
    of feedback, as have I, from hospitals and physicians. Can you
    reflect a little bit briefly, if you might, on the kind of
    feedback you received that would have prompted walking the rule
    back a bit?
        Mr. CAVANAUGH. Certainly we got a lot of input about the
    timing and the burden and whether the trade-off between what we
    were seeking and what the hospitals were requesting, whether
    there was any loss in the assurances we needed that the patient
    was seeing the appropriate level professional, and I think
    hospitals made a convincing case that there was room for some
    adjustment in the policy.
        Mr. SMITH. It would seem that the rule is unnecessary and
    even arbitrary. How did you arrive at the actual number of 96
    hours?
        Mr. CAVANAUGH. Sir, that part is in the statute. The
    statute requires that the physician make a certification that
    the expectation, when the patient arrived, was that they would
    need no more than 96 hours.
        Mr. SMITH. What is the background on that 96 number?
        Mr. CAVANAUGH. I apologize. I don't know the story there. I
    just know it is statutory based.
        Mr. SMITH. And CMS has not enforced it up until they
    finally decided to start enforcing that, is that accurate? They
    had not been previously?
        Mr. CAVANAUGH. Again, I apologize. I have been in the job
    for just a couple of weeks. I do know that the requirement does
    trace back to the statute.
        Mr. SMITH. Okay. I have introduced a bill, H.R. 3993, the
    Critical Access Hospital Relief Act of 2014, which would repeal
    the regulation, and I would certainly encourage the agency's
    support of that. I think it might even make a lot of folks'
    jobs more easy to carry out, and I know that we have got other
    burdens on the critical access hospitals such as the physician
    supervision, again arbitrary, hard to determine how that ever
    even came about in terms of a rule or regulation, and it is
    very discouraging for medical providers to be facing all of
    these regulations that, like I said earlier, make it difficult
    for the good actor to do the right thing.
        I know we have seen advertising on television about
    addressing fraud in Medicare/Medicaid and other areas, and yet
    I still think that all of these regulations are making it more
    difficult for the provider to do the right thing. I am not
    convinced that it is actually preventing fraud. I can
    appreciate the fact that there are limited resources, that you
    acknowledge that and that we are all trying to operate in a
    world of limited resources, and yet I think that many of these
    regulations are accomplishing the exact opposite of what they
    were intending to accomplish, and it is a huge burden and I
    would hope that the agency would really reflect on that fact as
    we do move forward.
        I thank you, Mr. Chairman.
        Chairman BRADY. Thank you.
        Mr. Kind.
        Mr. KIND. Thank you, Mr. Chairman. Thank you for holding
    this hearing. I want to thank our panelists for your testimony
    here today.
        Just to maintain the momentum of some of my colleagues,
    especially my friend from Pennsylvania. As I have been talking
    to a lot of our providers back home in Wisconsin over the Two
    Midnight Rule, their sense is that it is awfully arbitrary, and
    they are having some definitional problems too, as far as what
    constitutes inpatient care versus observational status,
    outpatient care.
        Has CMS, Mr. Cavanaugh, been working with the provider
    community to provide better definition or clarity in regards to
    those type of services, and what is the difference? I f they
    are in there under on observational status versus inpatient
    care, is there things you can point to that clearly
    distinguishes between the two types?
        Mr. CAVANAUGH. So, first on the first half of your question
    about whether we are working with providers. I would say we
    certainly are. I think it was a big part of our attitude, going
    into this year, as you recall, we suspended the recovery
    auditors looking at these cases for these purposes because we
    wanted to work with providers and we wanted to do it. So we
    have, as I said, the MACs going into each hospital and taking a
    small sample of cases and seeing whether they are complying
    with the rule.
        And in instances where hospitals are, they are left alone
    for the rest of this year. In instances where hospitals are
    having trouble understanding or in implementing the new rule,
    the MACs are working with them to educate them.
        So, I do feel like we have taken this pause in the recovery
    audit program, looking at these types cases, for the very
    reason you say which is to work with the hospitals and again,
    the origin of the rule was to respond to the request from the
    NG4 clarity. One of the things we may be look learning is that
    additional clarity is needed, or as we discussed, perhaps
    additional payment solutions are needed. We will wait to see
    how these discussions go. But I do think you raise an important
    point, that this is dialogue between us and the industry, and
    we do hope to learn quite a bit during this time.
        Mr. KIND. Well, are there clear distinctions that can be
    made between inpatient and outpatient status, observational
    status within the hospital setting?
        Mr. CAVANAUGH. Certainly observation status is supposed to
    be used for a short period for the purposes of determining
    whether a patient needs an inpatient level of care, and during
    that time, there ought to be diagnostic and other monitoring
    being conducted. I would hesitate to go any further into
    distinctions because I am not a clinician, but I think your
    point is well taken, which oftentimes these are based on
    complex medical judgments that are difficult to translate into
    payment policy.
        Mr. KIND. You mention that CMS is moving forward on a short
    stay payment rule right now, and you are starting to get some
    feedback, some comments on that. What are the various factors,
    just for the committee's benefit, what are the various factors
    that you are taking under consideration in putting that rule
    together?
        Mr. CAVANAUGH. The two questions we posed specifically in
    the proposed rule were, one, how would you define short stay
    cases, and there are examples of this. There are other payment
    systems out there that do use short stay payments, so it is not
    unprecedented, but it is a bit challenging here, as I mentioned
    earlier, in that some of the cases that are inpatient that are
    subject to RAC review are often already very short stay, even
    when they are legitimately inpatient, meaning they have an
    average length of stay of 2 days, so how do you--cases are
    typically 1, 2, or 3 days already, how do you carve out a short
    stay.
        And the second, and this has been the subject of several
    questions. The second question we posed to public was, how
    would you construct this new payment? I think questions have
    arisen, would it include the IME and DSH adjustments, and
    learnings like that, and I think these are real important
    issues where we need some pubic feedback before we move
    forward.
        Mr. KIND. Is uncompensated care or underinsured
    individuals, is that going to be a factor, too, in the short
    rule?
        Mr. CAVANAUGH. Well, the way that currently gets into
    Medicare payment is typically through the DSH adjustment, and I
    think that is the fair question of whether it should be part of
    this as well.
        Mr. KIND. Let me take you in a different direction.
    Obviously, recently, CMS did their physician reimbursement data
    dump that received a lot of attention, a lot of articles, a lot
    of focus, especially on some reimbursements that seemed outside
    the norm or other parameters than that.
        We hear from the doctors in the follow-up questions that it
    wasn't just them. There were multiple docs or whatever using
    the same code in order to submit the billing information. Does
    that sound plausible to you that, that is what, in fact, what
    is taking place and why some doctors are being reimbursed 12 or
    $14 million in a single year?
        Mr. CAVANAUGH. It is true that in certain instances
    multiple providers can bill under the same identification
    number.
        Mr. KIND. Why are we allowing that?
        Mr. CAVANAUGH. I will have to look into at that and get
    back to you, but I think there are legitimate reasons for that.
        Mr. KIND. I would like to follow up. It just seems if we
    are trying to bring greater transparency, allowing multiple
    providers to use the same code seems to work against that
    issue. It is something that I think we are going to have to
    address.
        Thank you, Mr. Chairman.
        Mr. CAVANAUGH. Be happy to look into that.
        Chairman BRADY. Thank you.
        Dr. Price.
        Mr. PRICE. Thank you, Mr. Chairman.
        I want to thank the panelists as well. I think this is an
    incredibly important topic, and as a physician for over 20
    years, know that we often times don't put the patient at the
    center of these discussions, and it is sometimes hard to do,
    especially when we are talking about money.
        Mr. Cavanaugh, I was struck by the difference in the
    numbers that we hear recounted on the number of appeals that
    are either overturned or not, and your number of 7 percent
    astounds me because it is one that I have never heard before,
    so I suspect that includes all RAC audits that are done
    throughout the entire country. I don't want the answer to that,
    but I would like it in writing later.
        But I think the question that we really need to ask is, of
    those cases that hospitals have appealed, that are inpatient
    stays denied due to medical necessity, what percent of those
    are overturned at the QIC level and then at the ALJ level. Do
    you have those numbers?
        Mr. CAVANAUGH. I don't believe I have them handy, but they
    are, we can get them, and we will get them to you soon.
        Mr. PRICE. I would appreciate that. One, there is a
    hospital system in my area where 72 percent are overturned. 72
    percent. So I would urge you to look at your testimony that
    says when you are however 40 percent or thereabouts, something
    is wrong, something is wrong with the system.
        I want to revisit that in a minute, but I want to touch on
    the Two Midnight Rule. When does--when a patient presents to
    the emergency room and is being admitted, when does the
    physician--when is there a physician that has to sign that says
    that this admission is medically necessary?
        Mr. CAVANAUGH. That says the admission is medically
    necessary?
        Mr. PRICE. And would qualify for the inpatient, for the Two
    Midnight?
        Mr. CAVANAUGH. The physician can give the order--or other
    qualified professional can give the order verbally but has to
    countersign it at some point. It doesn't----
        Mr. PRICE. But the order has to be given at the time of the
    admission?
        Mr. CAVANAUGH. Yes. For a patient to become officially an
    inpatient, a physician or other qualified personnel has to give
    an order.
        Mr. PRICE. So we are asking our doctors to predict what is
    going to happen to that patient over the next two midnights; is
    that right?
        Mr. CAVANAUGH. It is based on a physician, the Two Midnight
    Rule is based on a physician's expectation, which this is
    expectation based on what they know at that time, and if a
    physician's expectation isn't fulfilled, meaning if the patient
    recovers or something else intervenes, the rule is not what
    happened but what the physician reasonably expected.
        Mr. PRICE. Wouldn't we be better off if we said that
    doctors and patients and families ought to be making these
    decisions and not CMS?
        Mr. CAVANAUGH. Well, again, CMS, we are trying to leave it
    largely at to a doctor's discretion, but we are also, as I said
    in my opening statement, we are trying to balance many goals
    here.
        Mr. PRICE. No, I got you. I got you. But many physicians
    out there will tell you that they don't feel that you are
    trying to allow them to practice medicine. Are there clinical
    studies or reports that back up the Two Midnight Rule?
        Mr. CAVANAUGH. I am not sure I understand the question,
    sir.
        Mr. PRICE. Are there any clinical studies, scientists that
    have done studies, and say, yeah, this Two Midnight Rule makes
    sense from the patient's perspective and being treated?
        Mr. CAVANAUGH. Again, we crafted the rule----
        Mr. PRICE. Is there any clinical studies?
        Mr. CAVANAUGH. The Two Midnight Rule is relatively new. I
    am not aware of any studies of it at this time.
        Mr. PRICE. If you are, I would love to hear about it
    because I am not aware of any either. CMS contracts with these
    recovery audit groups to go get that money, right?
        Mr. CAVANAUGH. CMS contracts with recovery auditors to
    review improper----
        Mr. PRICE. And you pay them a percent.
        Mr. CAVANAUGH. A contingency fee, yes.
        Mr. PRICE. And when they--when an appeal is overturned, do
    you go get that money back?
        Mr. CAVANAUGH. Yes, we do.
        Mr. PRICE. From the RAC. How much is that?
        Mr. CAVANAUGH. I am sorry?
        Mr. PRICE. How much money is that?
        Mr. CAVANAUGH. In total or any individual case?
        Mr. PRICE. Total.
        Mr. CAVANAUGH. I would be happy to go back and find that
    number. I don't know it off the top of my head.
        Mr. PRICE. Good. Okay, can different RACs have different
    criteria for what's medically necessary?
        Mr. CAVANAUGH. They are all supposed to tie to Medicare
    policy.
        Mr. PRICE. And what is the clinical input that RACs are
    required to have to define what is medically necessary?
        Mr. CAVANAUGH. If you mean, the RACs are required to have a
    medical director who is supervising all of their medical
    policies.
        Mr. PRICE. And do medical specialty societies have an
    opportunity to review all of that?
        Mr. CAVANAUGH. Of the work of the RACs?
        Mr. PRICE. Yes.
        Mr. CAVANAUGH. Not directly, sir.
        Mr. PRICE. All of this money that is used to comply with
    all of these rules and regulations cost money, doesn't it? The
    hospitals, it costs money?
        Mr. CAVANAUGH. Yes, sir.
        Mr. PRICE. Millions of dollars, maybe more. Where does that
    money come from?
        Mr. CAVANAUGH. Well, Congressman, I think you are getting
    at a point that I would concede right away, which is our goal
    is not to have a lot of these cases reviewed, not to have a lot
    of cases overturned. Our goal is to have clear policies that
    hospitals agree with and can comply with.
        Mr. PRICE. Comes from patient care though, right? Doesn't
    it? If the hospital has to put that money into complying with
    the rules from CMS that get more and more laborious, then that
    money is not going into caring for that patient, so when we
    hear one of our colleagues here say this really isn't affecting
    the patient, that is really not true, is it?
        Mr. CAVANAUGH. It is not a productive use of money, and it
    is why we are trying to reduce the need for this type of
    review.
        Mr. PRICE. Thank you very much.
        Chairman BRADY. Thank you.
        Mr. Renacci.
        Mr. RENACCI. Thank you, Mr. Chairman. I want to thank the
    panel.
        Mr. Cavanaugh, Mr. McDermott asked you a question about--
    talked a little about three people entering the hospital, and I
    just was interested in a response. You said, ``I would hope
    that the patient receives all the benefits they are entitled
    to.'' I want you to keep that in mind when we go through a
    couple of questions I have for you.
        Due to the increase in the length of observation days, more
    and more Medicare beneficiaries are losing out on skilled
    nursing coverage. The OIG found beneficiaries had over 600,000
    hospital stays that lasted three nights or more but did not
    qualify them for SNF services, skilled nursing facility
    services.
        I have spent the majority of my career, almost 25 years in
    the long-term care industry. I recognized the barrier to access
    that the current 3-day inpatient requirement has created for
    our seniors. For this reason, I have actually introduced
    legislation, H.R. 3531, the CARES Act that not only removes
    this barrier but also encourages hospitals and nursing
    facilities to communicate with each other before discharge.
        Mr. Cavanaugh, the seniors in my district are often unaware
    of the 3-day inpatient requirement, and furthermore, seniors
    and their caregivers are unaware whether or not their hospital
    stays was billed as inpatient or observation. So I want you to
    think about that patient that enters the hospital, and they are
    entitled to long-term care under Medicare, and they end up in
    this quagmire of in observation day, not an inpatient day, and
    quite frankly, they probably could go directly to a nursing
    home in many cases because the doctor is only sending them to
    the hospital because that is a requirement, and it is actually
    costing the Medicare system dollars to send them through to
    that hospital just to get them the path to that nursing home.
        So, if you think about that patient, and again, going back
    to your comment, ``I would hope the patient receives all the
    benefits they are entitled to,'' you send the, we send this
    patient into a hospital because it is a requirement, they go
    through 3 days, they have to, you know, to get to the nursing
    home. The doctor already says they belong in a nursing home.
    Again, I was in the industry for 25 years. I can tell you these
    patients belong in that nursing home, and they get caught up in
    this observation day, but here is the problem. Then they are
    sent to the nursing home, and when they are sent to the nursing
    home, for 2,000 of the hospital stays, Medicare did not pay for
    NSF services, and the beneficiary was charged an average of
    $11,000.
        So now we have this patient who started in the hospital,
    ended up in observation day, probably should have never went in
    the hospital if we had a different system that actually my bill
    would allow, lets them go directly into the nursing home
    because the doctor says that is the care that is needed.
        So, has CMS implemented any policies that would really
    decrease the instances in which seniors, and again, that is
    what I am talking about, that person you talked about, the
    benefits that they are entitled, where there were seniors who
    were caught off guard and left off on the hook for thousands of
    dollars in medical bills.
        Mr. CAVANAUGH. Congressman, I think you raise a very
    important issue and one that was one of the driving factors to
    us looking at the Two Midnight Rule. I tell you two things.
    One, one of the impacts we are seeing, at least preliminarily
    of the effect of the Two Midnight Rule, is we are seeing a
    decrease in these long observation stays, and I believe those
    are probably shifts to inpatient status so potentially helping
    the beneficiaries you are talking about, but you are also
    talking about a larger issue of whether these patients need to
    go through the hospital in order to--or should need to go
    through the hospital in order to access the skilled nursing
    facility benefit and as I mentioned to an earlier question, we
    are interested in exploring alternatives to that, too.
        We currently have a subset of the pioneer ACOs, several of
    whom have had the 3-day hospitalization rule waived so they can
    test whether there are safe and effective ways for patients to
    be admitted to the SNF without the prior hospitalization, and
    we are, this year, also allowing some of the participants, both
    hospitals and post-acute care providers to do that as well in
    our bundled payment initiative. So we are hoping we will gain
    clinical and financial evaluation results from that, that we
    can share with this committee and maybe apply to broader
    Medicare policy.
        Mr. RENACCI. You would then agree--it sounds like these
    studies will give us some of those answers, but you would agree
    sending somebody to the hospital and having the cost, the
    burden of that person in that hospital when it really could go
    to a nursing home might be a way of saving some dollars if we
    sent them directly to the nursing home?
        Mr. CAVANAUGH. We do feel there is potential there, but
    again, we are testing it, and I don't want to prejudge the
    results of these tests.
        Mr. RENACCI. All right. Thank you.
        I yield back.
        Chairman BRADY. Thank you.
        Mr. Crowley.
        Mr. CROWLEY. Thank you, Mr. Chairman.
        Thank you, Chairman Brady and Ranking Member McDermott for
    allowing me to join with you all at this hearing today.
        And welcome, Mr. Cavanaugh. Good to have you here. I know I
    speak for all my colleagues when I say we look forward to
    working with you in your new capacity, new role at CMS.
        Mr. CAVANAUGH. Thank you.
        Mr. CROWLEY. So, I represent parts of New York City, Queens
    and the Bronx. I know you are familiar with those areas quite
    well. We are fortunate to have a number of highly regarded
    hospitals and medical institutions, many of which are also
    academic medical centers, and I know you are familiar with all
    those as well.
        These hospitals and others across the country are
    struggling with the implementation of the Two Midnight Rule,
    and while I appreciate CMS' efforts to try and clarify when the
    patient should be admitted as an inpatient, I have serious
    concerns about the overall policy. Our New York hospitals
    focused primarily on providing the best medical treatment with
    great efficiency rather than on what time the patient is
    admitted. The Two Midnight Policy sets an arbitrary standard
    that does not always reflect the clinical judgment of the
    treating physician.
        Several months ago, Representative Gerlach and I introduced
    legislation to delay the enforcement of the Two Midnight
    Policy. I am glad that this delay was included in the most
    recent doctor's payment fix, and I thank the committee for all
    of its work in achieving that delay. But the problems with the
    underlying rule remain, and they need to be addressed. That is
    why our bill also orders the CMS to implement a new payment
    methodology for short inpatient stays that don't fit neatly
    into the divides of the Two Midnight Policy.
        I was very pleased to see that CMS' proposed Medicare
    inpatient rule for next fiscal year includes requests for
    feedback on establishing a short stay inpatient methodology,
    which could help both providers and beneficiaries. I hope that
    CMS will continue to work closely with hospitals and patients
    in establishing this process and in taking into account the
    costs associated with operating, teaching, and safety in our
    hospitals. It is important a new payment system protect
    graduate medical education and disproportionate share hospital
    payments.
        Now, I know the rulemaking process is under way, but can
    you comment at all on how you see this issue being addressed as
    you move forward, if there are any possible methods you have
    considered and are willing to consider?
        Mr. CAVANAUGH. Thank you, Congressman, and thank you for
    your kind words. I do know New York and the hospital industry
    there quite well, having worked there, and in one hospital and
    closely with many of the others.
        You are correct. First of all, you are correct that
    Congress extended, and based on your legislation, the pause in
    the RAC review of medical necessity of inpatient stays until
    March of next year. I think that does give us all, both
    Congress and the administration, some time to think about how
    the policy is working and whether there are additional steps
    that are needed to make a clearer payment policy that we can
    all agree on.
        One of those areas that we are going to spend a significant
    amount of time and resources on is exploring the possibility of
    a short stay outlier. I don't want to prejudge how we would do
    this because we are soliciting public input, but as I have said
    in response to several other questions, it is an intriguing
    idea, but it also poses, you know, real conceptual challenges.
    We are up to those challenges, but I don't want to under
    estimate them.
        One of the things I would point out is, if it is going to
    be an inpatient short stay thing, we are still going to need a
    definition of when inpatient care is necessary because you will
    still have a distinction between inpatient and outpatient. We
    are going to have the challenge of how do you create short stay
    payment when certain DRGs are already very short stay. But I
    know, as I said, there is some very great minds up in the New
    York hospital industry that I know are working on this, and
    they have been in touch with us, we have been in touch with the
    other association, so we eagerly await their input.
        Mr. CROWLEY. Thank you, Mr. Cavanaugh. I look forward to
    continuing to work with you in your new capacity, and I hope
    that you have that same open mind approach when you are dealing
    with the committee and the chairman and the ranking member as
    well, so thank you for being here today.
        Mr. CAVANAUGH. Thank you, sir.
        Chairman BRADY. Thanks. Mrs. Black.
        Mrs. BLACK. Thank you, Mr. Chairman. I want to thank you
    for allowing a non-committee member to be here to listen to the
    testimony and have an opportunity to be able to ask a question.
        Ms. Nudelman, in your written testimony, you talk about
    some hospitals use a short stay inpatient for less than 10
    percent, excuse me, of their stays and others use it over 70
    percent. Did you find any tends when you were looking at these
    vast differences between how hospitals use these and whether
    there is any type of hospital, in particular, that uses them
    differently?
        Ms. NUDELMAN. Thank you for your question. As you know, we
    did see a lot of variation, but we did not look at whether
    there are certain types of hospitals that are more likely to
    use short inpatient stays. If the trend continues under the new
    policy, you know, this is a really important question to look
    into further.
        Mrs. BLACK. I certainly think that, that is one that would
    give us a lot of information because if you are using it for
    certain types of hospitals is it cardiac hospitals, were they
    looking at orthopedic, I think it would be very interesting to
    take a look at the wide variance that is there between 10 and
    70 percent.
        And let me go to another area that seems to be a lot of
    variance, and that is, in your testimony on page number 5
    underneath of the appeals, you note that about 72 percent of
    those who appeal are successful and yet we keep on hearing this
    number of 7 percent. There is a real disparity there. Can you
    break that down? There is something else there that we are not
    exactly understanding.
        Ms. NUDELMAN. Sure. Let me try to do that. I think what we
    are seeing is there is about six, most of the appeals from RACs
    are not appeals. Most of the RAC decisions are not appealed, so
    according to our statistics, about 6 percent of the RAC
    decisions are appealed. Now, once those are reached higher
    levels, about half of those are overturned, so that maybe can
    help reconcile some of those issues.
        Where the 72 percent comes into play is when we looked at
    the third level of appeals, the ALJ level, they overturn about
    72 percent of hospital claims. That would include both RACs,
    that would include other issues than just the inpatient.
        Mrs. BLACK. So, just to be clear.
        Ms. NUDELMAN. Sure.
        Mrs. BLACK. About 7 percent, 6 or 7 percent, depending upon
    who is talking about that number, but somewhere in that range
    of those decisions that are made by RACs are appealed, and of
    those that are appealed, in this case of Part A hospitals, 72
    percent of those prevail, correct?
        Ms. NUDELMAN. Overturn.
        Mrs. BLACK. Overturn.
        Ms. NUDELMAN. At the ALJ level.
        Mrs. BLACK. ALJ level. Okay. Well, that makes a lot more
    sense because there is a lot of disparity between 6 percent and
    70 percent, and so that helps me to understand a little bit
    better about where those numbers are coming from. Thank you
    very much.
        Thank you, Mr. Chairman.
        Chairman BRADY. Thank you, Mrs. Black.
        I am now confused about the appeal process. Can I, I don't
    mean to intervene here for a minute before I go to Ms. Jenkins.
    But, so 94 percent of the claims identified as overpayments on
    appeal, 6 percent left half, almost half are decided in favor
    of the appeal, is that right? So the over payments, 97 percent
    of them, at the end of the day, are considered accurate.
        Ms. NUDELMAN. Just repeat that last part of your sentence.
    I just didn't hear that.
        Chairman BRADY. Of the RAC decisions on claims identified
    as overpayments, 94 percent aren't appealed. Of the 6 percent
    that are left, half are overturned, so----
        Ms. NUDELMAN. That is according to our numbers.
        Chairman BRADY [continuing]. You are saying 97 percent of
    those overpayments are upheld?
        Ms. NUDELMAN. Yes.
        Chairman BRADY. Half of 6, 3, 94.
        Ms. NUDELMAN. Yeah. And that is prior to the surge, and
    that is in fiscal years 2010 and 2011, so that could also be
    part of the issue.
        Chairman BRADY. Is there a dollar figure attached to that?
    For example, you may not appeal a $10 overpayment but you would
    a $10,000 one. Does your analysis show of those that were
    appealed a higher dollar value of those?
        Again, Mrs. Black, I don't mean to jump, but you were
    leading down the right road. What do you know about that?
        Ms. NUDELMAN. I don't have the dollar values in terms of
    what is appealed in terms of dollar amounts.
        Chairman BRADY. Can you try to figure that out?
        Ms. NUDELMAN. We can.
        Chairman BRADY. Give us a little more texture about----
        Ms. NUDELMAN. Absolutely.
        Chairman BRADY. Of that 6 percent, what do they look like,
    you know, and are the higher dollar values, are they in a
    certain area. And then 72 percent, tell me about that?
        Mrs. BLACK. That is of the hospitals, the Part A hospitals
    are 72 percent. So, according to what I am reading here, at the
    ALJ level, appellants were most likely to receive favorable
    decisions for Part A hospital appeals at 72 percent.
        And if I may, Mr. Chairman, just interject one other thing
    that I thought about that I keep hearing from these hospitals.
    Is the length of time it takes them to go from the original
    decision that is made by the RACs, to the time that they reach
    the ALJ level, can you give us an idea about how much time
    period there is in that typically?
        Ms. NUDELMAN. Sure. I mean, particularly now with the
    postponement of assigning appeals, which the--Omaha just put
    into place, and they are projecting just from what is publicly
    available that cases will not be assigned for at least 2 years,
    so that is pretty significant.
        Mrs. BLACK. So there is a cost to the facility in that time
    period where they are trying to appeal it and the payments,
    they have been taken back, so thank you very much.
        Chairman BRADY. No agreements, so Mrs. Black, thank you.
        And Ms. Jenkins, you probably never thought we would get to
    you. You are recognized for 5 minutes.
        Ms. JENKINS. Well, Mr. Chairman, I just thank you for
    allowing me to join you at today's subcommittee hearing, and I
    appreciate this panel for being here.
        These issues affect hospitals all over the country, and I
    have heard countless stories from Kansas hospitals, about the
    difficulties they face surrounding the Medicare program.
    Lawrence Memorial Hospital in Lawrence, Kansas has asked that I
    share their perspective on recovery audit contractors.
        The hospital currently has $4.7 million being withheld
    because of RAC audits. It has appealed nearly all RAC audits,
    and so far has demonstrated a 96 percent success rate in the
    appeals process. So, Lawrence Memorial has brought to my
    attention what is a valid concern that I am hoping you will
    take into consideration. The hospitals are forced to disallow
    Medicare days and discharges that are currently held up in the
    RAC audit process because of the massive backlog at the ALJ
    level of appeal, and the hospital is concerned that these
    audits, which are likely to be resolved in their favor, will
    not be completed within the 3-year window during which it can
    reopen a cost report window and count towards their meaningful
    use requirements. This is just one of countless hospitals in
    Kansas that is experiencing the immediate and similarly effects
    of the current flawed system.
        As we continue to discuss a way forward on this topic,
    please take this problem into account. Secondly, I would like
    to highlight a program with the 83 critical access hospitals in
    Kansas and others around the country and what they are
    experiencing. I received a letter from the Anderson County
    Hospital in Garnett, Kansas, and I would ask that chairman's
    consent to insert the letter into the record.
        Chairman BRADY. Without objection.
        [The information follows: The Honorable Diane Black]

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        Ms. JENKINS. This letter details the hospital's problem
    with CMS' final OPPS rule for 2014 regarding outpatient
    therapeutic services at critical access hospitals and supports
    legislation that I have introduced to delay enforcement of the
    rule until the end of 2014. This rule, while well intentioned,
    is creating a regulatory hardship in rule setting. So the
    letter notes that CMS has disallowed physicians at a hospital
    based rural health clinic from meeting the direct supervision
    requirements, which makes it very difficult for Anderson County
    Hospital to be reimbursed by Medicare for services rendered.
        The most troubling part of the letter is that the hospital
    notes, that the physician supervision requirements have no
    impact on the quality of care and that the hospital will
    administer the outpatient therapy even without the Medicare
    reimbursement. This is a tale-tell sign of a misguided rule
    that has missed the point.
        So, Mr. Cavanaugh, is it your opinion that requirements on
    physician's supervision of outpatient therapy services at
    critical access hospitals are feasible and would CMS benefit
    from a delay in enforcement in order to revisit this rule?
        Mr. CAVANAUGH. First of all, thank you for telling us about
    the experience of these two hospitals.
        I don't have an opinion on the delay, but I am interested
    in the issue, and I am happy to look into it further outside of
    this hearing if you are willing to share that experience with
    me.
        Ms. JENKINS. Okay. We will follow up with you and would
    like to work with you to give these folks some relief and
    better care for Kansans.
        Mr. CAVANAUGH. I am more than happy to look further into
    it.
        Ms. JENKINS. Okay.
        Thank you, Mr. Chairman. I yield back.
        Chairman BRADY. Thank you, Ms. Jenkins.
        And before we dismiss the witnesses, Dr. McDermott and I
    would love to have both of you give us more perspective by
    letter of the 6 percent that are appealed for overpayments, the
    value of them relative to the other base of them, which are
    related to the two payment, Two Midnights Rule, any other
    insight you can give us on those. The numbers seem very low
    compared to what we have heard anecdotally, and we really would
    like to have more light shined on those areas if you don't
    mind. We'll follow up with you by letter, but we would love to
    have, I think the members would love to have that perspective.
        Mr. CAVANAUGH. We would be happy to do that.
        [The information follows: The Honorable Lynn Jenkins]

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        Chairman BRADY. With that, thank you very much, both of
    you, for testifying, and let's line up for a second panel.
        Thank you very much. I made the introductions earlier, so
    we will, for the sake of time, go right into testimony.
        Ms. Deutschendorf, you are recognized for 5 minutes, and
    welcome to all the second panel.

      STATEMENT OF AMY DEUTSCHENDORF, SENIOR DIRECTOR OF CLINICAL
     RESOURCE MANAGEMENT, JOHNS HOPKINS HOSPITAL AND HEALTH SYSTEM

        Ms. DEUTSCHENDORF. Chairman Brady, Ranking Member
    McDermott, and distinguished Members of the Subcommittee, thank
    you so much for this opportunity to testify today and share the
    Johns Hopkins experience on these important issues affecting
    hospitals in the Medicare program.
        I am Amy Deutschendorf. I am a nurse. I am responsible for
    assuring the appropriate utilization of clinical resources for
    our patients in the right care setting, and that includes care
    coordination in the readmissions reductions initiative. My
    remarks today focus on two major changes, the CMS definition of
    an inpatient the Two Midnight Rule, and also the agency's
    recovery audit contractor program, both of which are draining
    precious hospital resources which need to be redirected to
    quality patient care delivery.
        We know that the Two Midnight Rule was spawned out of an
    attempt to limit lengthy observation stays and add clarity to
    the definition of an inpatient, but unfortunately, the rule
    adds a new layer of complexity that not only does not meet that
    CMS objective but has created confusion and stress for our
    providers and our patients and has been operationally extremely
    difficult to implement.
        Our observation rate has increased by 33 percent as a
    result of the Two Midnight Rule. It has taken away physician
    judgment in the determination of hospitalization as an
    inpatient and has instead required our physicians to become
    soothsayers as they try to project whether or not a patient who
    presents to the emergency department with a myriad of symptoms
    and comorbidities and determine if they are going to require a
    greater than a Two Midnight stay.
        More importantly, under the Two Midnight Rule, we have
    patients who require the services that only a hospital can
    provide, sometimes in the intensive care setting, yet we are
    calling them outpatients in this new world. This concept belies
    any rationality and has created safety and quality of care
    concerns.
        Medicare patients are being billed differently than other
    patients for equivalent services. They are subject to paying
    deductibles and copays associated with Part A benefits which
    could be up to 20 percent of their hospitalization. They think
    they are coming in for hospital care and their Part A benefit
    covers that. We have had patients who have actually left and
    refused important diagnostic studies and medications as a
    result of increased financial risk.
        The Two Midnight Rule is especially devastating for
    academic and safety net hospitals. There has been a reduction
    in inpatient volumes as a result of the Two Midnight Policy
    which has redirected dollars for necessary hospital care to the
    outpatient system, causing a loss of payments for critical
    community programs, indirect medical education, general medical
    education, and disproportionate share payments at a time we
    need them the most.
        Since its inception, RAC has created enormous financial and
    administrative burden on hospitals as we struggle to respond to
    the plethora of medical record requests and to the denials and
    mount appeal processes. RAC has targeted short stays, again,
    the assumption that these stays are medically unnecessary. In
    truth, short hospital stays are good and reflect the efficient
    and appropriate management of care, some of which can be very
    intensive.
        Even though Hopkins has a rigorous compliance process for
    which we review every day of every single Medicare patient stay
    for medical necessity, RAC denied 50 percent of the medical
    records that were requested. We took 239 of these to discussion
    and immediately 135, almost 60 percent, were overturned at
    discussion even before the first level of appeal. The rest of
    our 92 percent are in the appeal process.
        The RAC program is costing American hospital millions of
    dollars in the administrative burden to manage the RAC
    requests, denials, and appeals processes, as well as the
    financial hit for revenue losses for care that was provided to
    patients.
        There are a lot of smart and committed legislators and
    policymakers who have put their heads around these issues to
    come up with solutions that are workable. Unfortunately, with
    each iteration and layer of new ideas come complexities and
    unintended consequences that seem to yield the opposite result.
    In the case of the Two Midnight Rule, Congress and CMS should
    consider reverting to an earlier time, that before October 1st,
    2013, and should reinstate the determination of inpatient
    hospitalization based on physician judgment with one caveat,
    the patients who are hospitalized for greater than two
    midnights for medical necessity and medically necessary
    hospital services should be presumed to be inpatients. If we
    are thoughtful about RAC reform, the short stay problem goes
    away and alternative short stay payment policies become
    unnecessary.
        Congress should consider the formation of a multi-
    stakeholder collaborative working group to develop a sound
    alternative to the current Medicare audit program. We
    appreciate Congressman Gerlach's and Congressman Crowley's
    leadership as the lead sponsors of H.R. 3698 and Chairman
    Brady, thank you for your attention to this issue and holding a
    hearing on it. Having nearly half the members of this committee
    support this needed reform sends an important message to your
    hospitals and to CMS that this issue must be addressed.
        The Two Midnight Rule and the RAC program are draining
    precious time, resources, and attention that need to be more
    effectively focused on patient care. Johns Hopkins and
    hospitals around the country stand ready to work with Congress
    and CMS to support these efforts.
        Thank you so much for allowing me to testify.
        [The prepared statement of Ms. Deutschendorf follows:]

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        Chairman BRADY. Thank you.
        Dr. Evans.

       STATEMENT OF ELLEN EVANS, MD, CORPORATE MEDICAL DIRECTOR,
                           HEALTHDATAINSIGHTS

        Dr. EVANS. Chairman Brady, Ranking Member Dr. McDermott,
    Members of the Committee, thank you very much for this
    opportunity to testify before you today.
        I am Dr. Ellen Evans, lead physician with
    HealthDataInsights, the Region D CMS recovery auditor. I am a
    proud graduate of the University of Texas Medical School,
    residency trained, board certified licensed family physician,
    with a certificate of added qualifications in geriatric
    medicine. I joined HDI during the RAC demonstration program. At
    HDI, I oversee all of our medical and clinical recovery audit
    activities.
        The recovery audit program is not focused on fraudulent
    payments. We review claims to ensure compliance with Medicare
    practices and also identify underpayments that are returned to
    the providers. This program is a critical component of Medicare
    operations because over $30 billion are improperly paid by
    Medicare every year. Since the recovery audit program was
    passed and implemented in a bipartisan fashion in 2006, over 8
    billion improperly paid Medicare dollars have been recovered,
    as well as over $700 million in underpayments returned to
    providers.
        Recovery auditors identify the types of claims that are
    most at risk of improper payment by employing vast auditor
    experience and using Federal publications such as HHS, OIG,
    GAO, and CERT reports. Every issue a recovery auditor seeks to
    review is submitted first to CMS for a rigorous evaluation and
    approval process. Issues that are approved are posted to the
    recovery auditor's provider portal in advance of any activity.
        CMS has limited the recovery audit medical record request
    to 2 percent of Medicare claims for any given provider. All
    medical reviews are conducted by licensed and experienced
    clinicians who undergo extensive screening and comprehensive
    training. When a provider disagrees with an audit finding, the
    provider can initiate a discussion period before formally
    appealing the denial. This is in addition to the usual CMS
    appeals process.
        Though the program has proven to be cost effective, recent
    constraints have caused a significant decrease in recovery
    audit reviews. First, as part of the implementation of the Two
    Midnight Rule, a moratorium was placed on recovery auditors
    preventing auditing of short stay hospitals for 18 months.
    Second, CMS announced the program would be suspended until new
    contracts are in place. The award date is currently unknown.
    These two changes will result in over $5 billion of improper
    payments not being restored to the Medicare trust fund.
        Now, let me provide you some facts about the program.
    First, a recovery auditor is required to return all of its fee
    when a refinding is reversed upon any level of provider appeal.
    This means recovery auditors are incentivized to work
    accurately and precisely. Second, according to the most recent
    CMS report to Congress, only 7 percent of all recovery audit
    determinations have been overturned on appeal. Third, recovery
    auditors are accurate. An independent CMS validation contractor
    gave recovery auditors a cumulative accuracy score of over 95
    percent. Finally, recovery auditors target improperly paid
    claims of all types, yet Medicare data has noted consistent
    high dollar errors for inpatient short stays.
        Based on this data, it is imperative to the longevity of
    the Medicare trust fund to correct inpatient short stays. That
    being said, we understand the frustration expressed by the
    hospital community surrounding the Two Midnight Rule. We want
    to work with CMS and the providers to bring clarity to the
    rules. As the committee moves forward on this important issue,
    I offer the following recommendations for the program.
        First, we support the ALJ appeal reforms outlined in the
    November 2012 HHS Office of the Inspector General report.
    Second, we support continued effort by CMS to offer providers
    front end education to increase provider knowledge of Medicare
    policies, and lastly, we support increased dialogue among
    recovery auditors, providers, policymakers, to improve the
    direction of the program. We are pleased to be a part of the
    dialogue today.
        The recovery audit program must continue to play a role in
    the Medicare program, especially in light of the recent
    increases in an improper payment rate. I appreciate the
    opportunity to appear before you all today and would be pleased
    to answer any questions that you may have.
        Chairman BRADY. Thank you.
        [The prepared statement of Dr. Evans follows:]

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        Chairman BRADY. Dr. Sheehy.

     STATEMENT OF ANN SHEEHY, MD, MEMBER, PUBLIC POLICY COMMITTEE,
                      SOCIETY OF HOSPITAL MEDICINE

        Dr. SHEEHY. Chairman Brady, Ranking Member McDermott, and
    Members of the Committee, thank you for the opportunity to
    testify today on observation status, the Two Midnight Rule, and
    related issues.
        My name is Ann Sheehy. I am a physician at the University
    of Wisconsin Hospital in Madison, Wisconsin. I am a
    hospitalist, which is a physician who cares for patients
    primarily in an acute care hospital setting. I am also a member
    of the public policy committee of the Society of Hospital
    Medicine, an association that represents the Nation's more than
    44,000 hospitalists.
        Observation care is often provided in the same hospital
    beds as inpatient care, and to a physician and a patient, the
    care provider is indistinguishable but is considered outpatient
    not covered by Medicare Part A. Many Medicare beneficiaries ask
    how they could be outpatients when they are staying overnight
    in a hospital. Many ask me to change them to inpatient, which
    is something I cannot do under current policy. The centers for
    Medicare and Medicaid services describes observation as a well
    defined set of services that should last less than 24 hours,
    and in only rare and exceptional cases, spend more than 48
    hours.
        We published our University of Wisconsin Hospital data in
    JAMA Internal Medicine last summer. The average observation
    length of stay at our hospital was 33 hours, and almost 1 in 6
    of our observation patients lasted longer than 48 hours. We
    also had 1,141 distinct observation codes. We concluded that
    observation status for hospitalized patients was markedly
    different from the CMS definition I just stated as mean length
    of stay was longer than 24 hours, observation stays beyond 48
    hours were common, and the number of diagnoses codes showed
    that this was not well defined.
        These numbers demonstrate that observation care in real
    clinical practice is vastly different than how CMS intended
    observation to be. Any attempt to reform observation policy
    must recognize how far observation status has strayed from what
    observation should truly mean, and this problem is getting
    worse with more beneficiaries disadvantaged by observation. The
    most recent MedPAC report documented 28.5 percent increase in
    outpatient services from 2006 to 2012 with a 12.6 decrease in
    inpatient discharges over the same time period.
        As the committee is aware, CMS recently established a new
    policy to determine observation and inpatient status. As of
    October 1, patients staying less than two midnights with some
    exceptions were to be observation, and those two or more
    midnights would be inpatient, although full enforcement has
    been delayed through March 31st of 2015.
        The Two Midnight Rule has presented new challenges in
    observation care. For example, a Medicare beneficiary may be
    hospitalized with pneumonia and is improved enough to leave the
    hospital after 40 hours of care. If that patient happens to get
    sick and present to our hospital Tuesday at 1:00 a.m., this
    means I would discharge them at 5:00 p.m. on Wednesday, a one
    midnight stay, but if the same patient becomes ill at 10:00
    p.m. on Tuesday and needs the exact same 40 hours of care, I
    would discharge him at 2:00 p.m. on Thursday, a two midnight
    stay. Thus the time a patient gets sick, not different clinical
    needs, may determine the patient's hospital status and
    insurance benefits.
        This is not just a theoretical finding. In a second JAMA
    Internal Medicine publication last year, we found that almost
    half of our University of Wisconsin Hospital less than two
    midnight encounters would have been assigned observation status
    instead of inpatient by virtue of time of day of presentation.
        Clinically, the Two Midnight Rule hurts the new population
    of patients, those staying less than two midnights. As an
    example, a patient with diabetic ketoacidosis may be sick
    enough to require intensive care unit admission and an
    extraordinary amount of services that can be lifesaving,
    certainly a level of care that cannot be delivered safely as an
    outpatient. Yet these patients can improve quickly, sometimes
    in 24 to 48 hours. Now a short stay, even in the intensive care
    unit, can be considered outpatient.
        The RAC program was well-intentioned, and Medicare fraud
    and abuse cannot be tolerated, yet we need more transparency
    and oversight of Medicare's current auditing programs. The
    reality is the RAC program costs all of us. In a recent 1-year
    period at the University of Wisconsin Hospital from October of
    2012 to September of 2013, we appealed 92 percent of RAC audits
    for medical necessity, and we have won every single appeal that
    has been cited as of May 14 of 2014, which is already two-
    thirds of these cases.
        Essentially, our hospital pays to repair these cases in
    order to prove we were right the first time, but the RAC pays
    no penalty for generating this work. These are Medicare dollars
    that hospitals spend not on direct Medicare beneficiary care,
    but on a process of defending themselves against RAC auditors.
        In addition, the Federal Government ultimately pays for
    unchecked RAC activity in the appeals process as evidenced by
    the current OMHA case backlog. The RAC system generates a large
    number of these payment denials at no consequence to the RACs
    but at a direct cost to the Federal Government.
        To again consider the patient with diabetic ketoacidosis
    needing intensive care for less than two midnights, why would I
    not just claim inpatient status? Because this case is counter
    to the current observation rule of two midnights and is highly
    vulnerable to audit. This means an auditor who never met the
    patient in question, a year or more after the patient
    discharges home, may decide to question my judgment as a
    physician and audit. Provider autonomy and ability to do what
    is right can be trumped by the RAC system.
        In conclusion, observation status certainly merits reform
    and the Two Midnight Rule is not the answer. The Two Midnight
    Rule and observation status in general negatively impacts the
    delivery of good patient care. We need common sense solutions
    that most importantly consider the original intent of
    observation policy. I would caution, however, that observation
    reform will not be successful unless there is concrete reform
    of the Federal auditing programs that enforce observation
    rules. The Society of Hospital Medicine looks forward to
    working with the committee on identifying workable solutions to
    problems associated with observation care and the Two Midnight
    Rule.
        [The prepared statement of Dr. Sheehy follows:]

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        Chairman BRADY. Thank you.
        Ms. Edelman.

     STATEMENT OF TOBY S. EDELMAN, SENIOR POLICY ATTORNEY, CENTER
                      FOR MEDICARE ADVOCACY, INC.

        Ms. EDELMAN. Mr. Chairman and Members of the Committee, my
    name is Toby Edelman. I am a senior policy attorney with the
    Washington, D.C. office of the Center for Medicare Advocacy.
    The center is a not-for-profit, nonpartisan public interest law
    firm based in Connecticut that provides education advocacy and
    legal assistance to Medicare beneficiaries.
        We are very pleased to be invited to testify today about
    the impact on Medicare patients of outpatient status and
    observation status. Six years ago, a woman called our office
    with a Medicare problem. She had spent some time in the skilled
    nursing facility, but the facility told her that Medicare Part
    A would not pay for her stay because she had not been an
    inpatient in an acute care hospital for 3 days. She asked how
    that could possibly be true, after all she had been in the
    hospital for 13 days. It turned out that the hospital had
    called her an outpatient for all 13 days.
        The Wisconsin woman had no way of knowing she was an
    outpatient in observation status. She was in a bed in the
    hospital for 13 nights, she had diagnostics tests, received
    physician and nursing care, medications, treatment, food, a
    wristband. Her care was indistinguishable from the medically
    necessary care she would have received if she had been formally
    admitted as an inpatient.
        As in most hospitals, she was intermingled with inpatient,
    so even the physicians and nurses providing care to her didn't
    know whether she was an inpatient or an outpatient, and the
    hospital was not required by CMS rules to inform her that she
    was an outpatient or the consequences of that status. But
    solely because she was called an outpatient in observation
    status, Medicare Part A did not pay for her post-hospital care.
    Medicare limits payments to SNFs who are hospital patients, who
    are called inpatients for 3 consecutive days, not counting the
    day of discharge, what we call the Three Midnight Rule.
        In the past 6 years, the center has spoken with literally
    hundreds of families from all over the country with similar
    experiences. It is a very rare day that goes by that we don't
    hear from at least one person and usually more. I would like to
    describe the more recent case and the consequences. A 90-year
    old man living at home with his wife had a fall. He went to the
    urgent care center and the physician there advised him to
    immediately go to the hospital because of a hematoma on his
    leg, was growing rapidly. The daughter who called me told me
    that as her father was being wheeled into the operating room,
    the hematoma burst. He had emergency surgery to evacuate the
    hematoma and remained in the hospital for four midnights, all
    outpatient. From the hospital, he went to the skilled nursing
    facility for rehabilitation, stayed for 18 days, and went home.
        If the man had been formally admitted to the hospital as an
    inpatient, Medicare Part A would have paid the entire bill for
    his 18-day stay. Medicare Part A payment is comprehensive and
    pays for room and board, nursing care therapy, drugs,
    everything that the patient needs during that stay. Medicare
    pays 100 percent of the cost for the first 20 days in the SNF,
    and beginning on Day 21, the resident pays the copayment, up to
    100-day maximum number of days in the benefit period, but
    because her father that been called an outpatient during his
    entire four day stay, Medicare did not pay, Medicare Part A did
    not pay. The man had to pay out of pocket the SNF charges. For
    room and board, the charges were 4,573 days, $73 for the 18-day
    stay. In addition, he had to pay Medicare Part B copayments for
    all of the therapy he received daily, and he had to pay for his
    prescription drugs.
        An administrative law judge found that the man's primary
    care physician supported an inpatient admission, and she also
    found that he had not been informed of his outpatient status;
    nevertheless, she upheld denial of Part A payment for his SNF
    stay solely because he was, as she described him, hospitalized
    as an outpatient. Obviously, from the perspective of patients
    and their families, what is happening makes no sense. When
    patients need to be in the hospital for the diagnosis and
    treatment of acute care conditions and when they are getting
    medically necessary care they need in the hospital for multiple
    days and nights, they do not understand why they are called
    outpatients and why their care in the SNF will not be covered.
        You have heard from physicians and hospitals this morning
    about why calling hospitalized patients outpatients is causing
    hardship for them, and some of the issues that we have been
    discussing this morning are very complex, but the solution for
    Medicare patients is simple and straightforward. H.R. 1179
    counts all the time in the hospital for purposes of satisfying
    the Three Midnight Rule. As of last week, there were 144
    cosponsors. There is a companion bill in the Senate, and the
    bills are bipartisan.
        The legislation is supported by a broad ad hoc coalition of
    30 organizations, and I have attached our comment fact sheet to
    the end of my testimony with all of our logos on top.
        We urge the committee to quickly move on this legislation
    as you consider these other far more complicated issues.
        Thank you.
        Chairman BRADY. Thanks, Ms. Edelman.
        [The prepared statement of Ms. Edelman follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Chairman BRADY. Thank you all for your testimony.
        Ms. Deutschendorf and Dr. Sheehy, do you think RACs
    disproportionately target high value inpatient claims?
        Ms. DEUTSCHENDORF. Yes.
        Dr. SHEEHY. Yes.
        Chairman BRADY. In the appeals of those, could you give us
    what you think is the true cost of appeal. My assumption is,
    high value claims are more complex, there is more of the files
    reviewed. You are obviously bringing in medical professionals
    as well as appeals processing. In a case like that for a
    hospital, what is the true cost of that appeal roughly? I am
    sure it varies, but----
        Ms. DEUTSCHENDORF. So we actually when RAC was proposed
    several years ago as a permanent part of the program, we
    actually went through a process to estimate the cost of an
    individual appeal. You have to add into that, all of the costs
    associated with the medical record requests, the issues in
    terms of loading this into software because of the mountain,
    and for a hospital like Hopkins it could be 600.
        And then you have got 50 percent of those that may be
    denied, so then the tracking and everything that goes along
    with that. So there is all of that prior work, then there is
    the estimation of time it is for our nurses to review the
    cases, our physicians to review the cases.
        Chairman BRADY. What do you think that cost is overall?
        Ms. DEUTSCHENDORF. So we estimated it was about $2,000 an
    appeal at the first and second level, but then when you get up
    to the ALJ level that requires another add on because you need
    attorney support with that as well as physician advisor support
    during that time.
        Chairman BRADY. What do you think that cost is?
        Ms. DEUTSCHENDORF. I could probably get back to you, but I
    would say it is a couple of thousand dollars per, at the ALJ
    level.
        Chairman BRADY. In addition?
        Ms. DEUTSCHENDORF. In addition.
        Chairman BRADY. After the first two steps; and the third
    step?
        Ms. DEUTSCHENDORF. We as a health system spent about $4
    million just gearing up for the RAC process to add on the
    additional personnel it would take to manage that process.
        Chairman BRADY. Is that compliance and appeal?
        Ms. DEUTSCHENDORF. Compliance, appeals and medical records
    and just managing and tracking the whole process as well as
    software.
        Chairman BRADY. Thank you.
        Dr. Sheehy, do you have an estimate on the cost of an
    appeal on a high value claim.
        Dr. SHEEHY. Yeah. I don't have an estimate on a single
    appeal, but I can say the resources our hospital puts forth in
    the whole auditing process, we have multiple nurse case
    managers that their entire job is to determine status and
    assist physicians in helping to determine the proper status.
        Once an appeal is made, we have a team of lawyers, our CMO,
    two utilization review physicians, and multiple other nurse
    case managers staff, whose job is to fight the appeals process,
    so anyone looking at those numbers of staff can calculate that
    this is a costly endeavor to our hospital.
        Chairman BRADY. Okay. Did both of you hear Mr. Cavanaugh
    describe one solution as short stay outlier approach? Do you
    have a view on whether that helps, hurts, doesn't solve the
    problem?
        Dr. SHEEHY. I think you know, we have been talking about
    different solutions, and obviously I think CMS did intend the
    Two Midnight Rule to fix a problem in observation status. They
    recognized there were issues with the current observation
    policy. I think now we have seen the Two Midnight Rule also has
    issues, and we would hope that the there would be more
    consideration of policies going forward, thinking about the
    true definition of what observation truly means, a very short
    stay, a patient, a very well-defined subset of clinical needs
    prior to going forward and coming up with a new plan.
        We would also strongly advocate for a pilot. I think with
    the Two Midnight Rule is evidence of rolling out a policy
    across the country with unintended consequences. I think a
    pilot would be of great benefit.
        Ms. DEUTSCHENDORF. I would agree with that, with everything
    Dr. Sheehy said. One of the statements that was made earlier
    was there was disparity between the cost of observation stays,
    and I would submit that one of the reasons for that is the true
    definition of what observation used to be, and that was a
    period of time to help determine whether or not the patient
    needed hospitalization as an inpatient or could be sent home.
        Those short stays in observation would be very less costly.
    By the time they need to be admitted, those are patients that
    require extensive diagnostic studies and extensive treatment,
    and sometimes those patients turn around in less than two days,
    and so we should not be penalized for being efficient in our
    ability to manage those patients as an inpatient.
        Chairman BRADY. Thank you.
        Ms. Edelman, you made a point that drew my attention. You
    were making the case that if outpatients return to the
    hospitals within 30 days their return isn't a readmission
    because they were originally labeled as outpatient, and some
    portion of the report at the client hospital readmissions
    reflects the fact that many patients are called outpatients.
    Any idea how frequent that is, what percentage of the reported
    decline that might represent?
        Ms. EDELMAN. We don't have data that would indicate what
    portion of the readmitted patients are not called readmitted
    because of observation, but actually the only reason that we
    have ever heard from families told by the hospitals that they
    are using observation status is the Recovery Audit Program.
        Nobody has ever actually brought up the hospital
    readmissions issue, but we know that is now in effect, so it
    obviously has some impact because if somebody returns to the
    hospital as an outpatient, that does not count as an inpatient,
    and a penalty would not be applied.
        Chairman BRADY. Dr. Evans, when there are costs associated
    with the hospital appealing, especially in high value inpatient
    claims and they are overturned, the RAC returns the commission.
    Is that correct?
        Dr. EVANS. That is correct.
        Chairman BRADY. Do they share in the cost of that appeal at
    all?
        Dr. EVANS. Well, the cost of our work doing that appeal and
    the work doing the review initially.
        Chairman BRADY. But having lost that claim, does the RAC
    reimburse some portion of the cost?
        Dr. EVANS. Well, we are paying back all of the funds that
    were used on our part to do the work.
        Chairman BRADY. Right. That was because it was an improper
    determination up front, but do you share in the cost? So you
    don't receive your commission.
        Dr. EVANS. There is a financial penalty that occurs. There
    is not a payment for any of the costs of the hospital, so I am
    not aware of the----
        Chairman BRADY. So, the impact is you return the
    commission, but you don't share in the cost of the lost appeal?
        Dr. EVANS. We pay our portion of attending the appeal, and
    the provider pays their portion.
        Chairman BRADY. Say that again.
        Dr. EVANS. We pay our portion of attending the appeal, and
    the provider pays their portion of attending the appeal.
        Chairman BRADY. Okay. Win or lose, that is how it is
    divided?
        Dr. EVANS. That is correct. So when we win there is not any
    difference either.
        Chairman BRADY. Okay, I will finish with this. Listening to
    testimony today, there are an isolated number of short stay
    DRGs that may be problematic that was discussed earlier. In the
    oversight of the RAC program, did CMS ever intervene to stop
    audits so they could insert a targeted payment approach to
    quickly and easily solve the problem of the short stay DRGs?
        Dr. EVANS. And you said a targeted DRG approach?
        Chairman BRADY. Yeah.
        Dr. EVANS. They haven't intervened. The intervention has
    been to stop the short-stay reviews with the Two Midnight Rule,
    but there has not been an intervention and I think what we have
    heard said today is there is a lot of variety, a lot of
    difference across providers in the rate of improper payment,
    for outpatient versus inpatient care, and I think we have also
    seen discussion that we need to look at where we go forward.
        So for instance, CMS is proposing in the new contract, that
    we have a variation in the amount of medical records that are
    reviewed based on the providers' outcomes. So if we have a
    provider who has a very low rate of improper payment, we would
    expect to decrease as we go forward their number of records
    looked at. If we have a provider who has a higher rate, we
    would expect to increase that going forward. So CMS is looking
    at that, and so I think what I would say is we want to
    collaborate with you, and I think this opportunity to share
    information is very good; and I look forward to be involved in
    continuing this sort of information exchange.
        Chairman BRADY. Okay, thank you.
        Dr. McDermott.
        Mr. MCDERMOTT. Thank you, Mr. Chairman.
        There was a Senator by the name of Daniel Patrick Moynihan
    who said there are a lot of simple answers around but we need a
    great complexifier and the fact is that we have a very complex
    question here, and the next level is going to be, it seems to
    me, even more complex because you have all agreed that the
    patients get treated the same whether they are observation or
    inpatient. The patient gets what they are supposed to get. So
    what we are discussing here is who pays how much to whom, and
    it is a question of whether the beneficiaries get charged more
    or the hospitals get less money. That seems to be where we are.
        And one of the issues that has come up here, Ms. Edelman,
    is one that I would like to hear your thoughts about. There has
    been a talk about the different cost sharing between Part A and
    Part B, and people are suggesting that we roll Part A and Part
    B together, and that, that somehow will eliminate or alleviate
    or something in this whole process. I would like to hear from
    you as a patient advocate what you think will happen to
    beneficiaries if we roll the A and B together generally but
    also specifically in this outpatient observation status,
    because I think we don't want to make another step that makes
    it even worse. I mean, we were trying to fix a problem with
    what we did, so give me your ideas.
        Ms. EDELMAN. Thank you for that question.
        Simplifying the program, a complex Medicare program would
    be helpful. The problem with the Medicare redesign proposals
    that we have seen that combine Part A cost-sharing obligations,
    is that they also prohibit other insurance like Medigap
    policies that provide first dollar coverage and so the
    consequence is that these combined Part A-Part B cost-sharing
    obligations would shift costs to the patients. The idea of that
    is, in fact, to make people pay more out of pocket on the
    assumption that they will be more careful healthcare consumers,
    but what we know will happen is that people will avoid
    medically necessary care because they won't be able to afford
    it.
        Medicare beneficiaries already spend a much higher
    proportion of their income on healthcare than younger people,
    and half of the Medicare beneficiaries have incomes of $23,500
    a year. They really cannot afford to pay more out of pocket,
    which would happen as a result of a number of these redesign
    proposals that we have seen.
        Our program with a couple of other programs, Medicare
    Rights Center and California Health Advocate submitted a
    statement to this committee a year ago about concerns, about
    the Medicare redesign proposals. I would be happy to submit
    that for the record.
        Mr. MCDERMOTT. How would the rolling of the two together
    affect this whole question of observation versus--or would it
    just be there would be no question anymore. It would just be a
    patient in the system?
        Ms. EDELMAN. Well, it would depend upon how the specifics
    of the redesign worked and how people would have to pay. Right
    now if people are in-patient, they pay the inpatient
    deductible. If they are outpatients, they pay the full cost out
    of pocket for the nursing home care and Part B copayments and
    medications and it is not clear what would happen with a
    combination of those two.
        Mr. MCDERMOTT. Does the three day stay that has to be there
    to go into the nursing home, what happens to that?
        Ms. EDELMAN. That is still in the statute unless that gets
    repealed. That has been in the Medicare statute from the
    beginning.
        Mr. MCDERMOTT. So if they are in the hospital and the
    hospital calls it an observation, they do not get the credit
    for going into the nursing home?
        Ms. EDELMAN. They do not get, the three midnights do not
    stay, so the woman in Wisconsin who was in the hospital for 13
    days, consecutive days, as an outpatient did not have a three
    day qualifying inpatient stay.
        Mr. MCDERMOTT. And rolling the Part A and Part B together
    would not change that?
        Ms. EDELMAN. Wouldn't change the three midnight rule. That
    is still there.
        Mr. MCDERMOTT. You know what we are trying to do. How would
    you design what we should do at this point?
        Everybody's saying we should call a committee together or
    something, but I would like somebody to put something on the
    table and say, if anybody has an idea what we should do in this
    situation, I would like to hear it.
        Ms. EDELMAN. Well, for the simple issue of qualifying for
    skilled nursing facility care, the H.R. 1179 does it by just
    counting all the time. It doesn't deal with whether observation
    makes sense or doesn't make sense. It doesn't deal with
    recovery auditors. It doesn't deal with all of these much more
    complicated issues. It just says if you have been in the
    hospital for three nights, the time should count.
        And I would just say when Medicare was enacted in 1965; the
    average length of stay in an acute-care hospital for people age
    65 and over was 12 plus days. The average length of stay now in
    the acute care hospitals for people 65 and over is 5 plus days.
    The three midnight rule is a problem considering how medicine
    is practiced today.
        Mr. MCDERMOTT. Thank you.
        Chairman BRADY. Thank you.
        Mr. Gerlach.
        Mr. GERLACH. Thank you, Mr. Chairman.
        Ms. Deutschendorf, in your testimony you basically say that
    the Two Midnight Policy now requires physicians to abandon the
    medical assessment component of the medical necessity test when
    determining the appropriate setting of care and instead imposes
    a rigid time-based approach. Can you elaborate or expand on
    that a bit?
        Ms. DEUTSCHENDORF. So for our providers what happens now is
    the patient presents to the emergency department, and now they
    are faced with this question, do you expect that the time this
    patient will require hospital services will be greater than two
    midnights, which to Dr. Sheehy's point, could be depending on
    whether that patient arrives one minute before midnight on the
    first midnight and then stays 24 hours and one minute in the
    second midnight, or whether they would need to be hospitalized
    for up to 48 hours.
        A lot can happen in 48 hours, and what we have found since
    October 1, is that we have tripled the amount of patients who
    have started out as an outpatient and has been converted to an
    inpatient after or just before the second midnight because, in
    fact, we got it wrong. Because we really don't know. Patients
    present to the emergency department with a myriad of problems,
    some of which are going to respond rapidly, some of which will
    not respond rapidly, and there is no way of knowing that, and
    we are doing the right things.
        We do have an army of case managers and utilization
    management nurses who now have to run around the hospital
    looking for patients who have crossed the first midnight to see
    if these patients will require medically necessary services
    beyond the second midnight so that we can get than converted.
    We have been instructed by CMS that if the patient is going to
    cross the second midnight, they want them to be converted, even
    if they are going to go home in the next twelve hours. It is
    logistically a very difficult policy to implement and has
    required a lot of financial increases as a result of that.
        Mr. GERLACH. H.R. 3698 would require the Secretary of HHS
    to establish a new methodology for utilization in situations
    involving the shorter stays in hospitals. We got some idea from
    Ms. Edelman about what she'd like to see relative to that kind
    of new methodology.
        Could I have quickly the other three of you, please give us
    your thoughts as a follow-up to Mr. McDermott's question, what
    specifically change-wise and what kind of new methodology ought
    to be employed so that there is a fairness, an equity in terms
    of how hospitals are reimbursed for those that come in in a
    very short-stay kind of situation. Dr. Sheehy, can we start
    with you?
        Dr. SHEEHY. Thank you for that question.
        I think it is a very complicated topic, and I think a
    simple answer is probably difficult to give. I think getting
    back to the principles of observation being a triaging
    definition, it was always meant to be a definition where
    someone needed a few additional hours to determine whether they
    should be fully admitted as an inpatient or discharged home.
        I think we need to get back to the principles of that
    definition and come up with a methodology that respects that
    definition. I think we also need to think about the difficulty
    as a provider I have telling a patient who is staying overnight
    in a hospital, getting inpatient nursing care, getting
    intravenous medications and tests in a hospital setting, how I
    could explain that to that patient that they are an outpatient.
    I think getting back to the heart of what observation really
    means, I think is what we need to focus on coming up with a new
    policy.
        Mr. GERLACH. And then you added that you thought that
    should be done on a pilot basis first to really test the idea
    to see if it really in a practical way is working before you
    expand it to the entire system?
        Dr. SHEEHY. That is correct. I think we will see the
    unintended consequences in any policy. I think we will
    understand better how a policy should be audited and do it on a
    smaller scale so hospitals across the country are not investing
    a lot of money on a whole new plan that has a lot of issues. We
    can figure out those issues and tweak the plan before it is
    implemented nationwide.
        Mr. GERLACH. Dr. Evans, do you have a quick answer to that
    even though you look at it from the RAC perspective?
        Dr. EVANS. Well, first from the RAC perspective, again, I
    have said I think the collaboration and discussion is very
    good, and I think that the idea that there is some changes that
    can be made are good. If there were a pilot we would be willing
    to be involved in that. I would say I am here for the recovery
    audit work, but I am very interested in this personally. If
    after the meeting or something you wanted to talk to me as a
    taxpayer, I am a physician----
        Mr. GERLACH. You are not having heart palpitations right
    now or anything?
        Dr. EVANS. No, I am not. I love this. I think it is really
    excellent to have this discussion. It is what I am doing my
    work for so that this would sort of happen. I am running over,
    okay.
        I just wanted to say I have been medical director of
    skilled nursing facilities and worked at the MAC and now at the
    HDI, and I have got a lot of ideas, but I think we would
    support this type of reform, and we could offer discussion and
    support afterwards.
        Thank you.
        Mr. GERLACH. Thank you.
        Chairman BRADY. Thank you.
        Mr. Kind.
        Mr. KIND. Thank you, Mr. Chairman.
        And I want to thank our panelists for an excellent
    presentation today and Dr. Sheehy, a special welcome to you. I
    have had the opportunity back home to visit UW Hospital System
    and the clinics, and I have always been very impressed with the
    quality of care, the outcome, the measurements that are being
    established back home. But you are probably sensing a source of
    frustration coming from this dais. This is some tough,
    complicated stuff, and we are trying to wrap our head around it
    and we are listening to you try to thread the needle on
    different statuses on observation, inpatient, outpatient.
        As policymakers, we are going to have a hard time being
    able to provide direction at this level of expertise or
    knowledge that is required of it. It is really kind of a source
    of frustration that we have with the overall healthcare payment
    system that we have in our country today. This is fee for
    service. It is this coding. It is this payment based on how
    much is done, not how well it is being done, and there are
    tools in place right now; and many of us have been pushing hard
    and been very inpatient to move to a more value, quality
    outcome-based reimbursement system. If we can get those
    financial systems I think aligned right, we are going to
    unleash a heck of a lot of innovation in the health care
    system. Knowing what those benchmarks need to be, where those
    measurements are, and then figuring out how to meet them.
        Because the truth is we don't have so much a budget deficit
    problem here in Washington as we have a healthcare spending
    problem, and that is what we are wrestling with. There are only
    a few options that we can go down the road with. One is greater
    cost shifting, you know, having patients bear more of the risk
    of higher costs. We see that with voucher proposals or what
    have you, or you are going to have some indiscriminate provider
    cuts being made, and the provider community obviously isn't
    going to be very happy with that. We see this with
    sequestration and pushing those hospital cuts out for infinity
    it seems at this point.
        Or we need to be working with the provider community to
    establish those quality measurements and then align the
    financial incentives so it is value based and no longer
    observational status or all these technical definitions that
    just weigh us down, and it is just exhausting having these
    conversations and getting the feedback from patients and
    providers alike.
        So, I guess it is just a general question. Dr. Sheehy, I
    can start with you. If anyone else wants to chime in. Ideally
    where do we need to be going with the healthcare payment system
    of this country right now so that we are not having hearings
    like this talking about inpatient or outpatient or
    observational status and trying to figure out what the best
    policy is in addressing it?
        Dr. SHEEHY. Well, thank you for the question, and thank you
    for all the work you do for the State of Wisconsin on
    healthcare.
        I would be more than happy to work with you in the future
    on these issues going forward. I think it is very complicated,
    I think there is certainly a role for quality measures in
    physician payment, and I think as hospitalists we are trying to
    figure out exactly how we fit into that payment model.
        Going forward, though, I think, you know, I am from a small
    town in Wisconsin as well, I grew up near Madison where I work,
    and what I do on a daily basis is take care of patients in the
    hospital. Some of these patients might have been my neighbors
    or maybe a middle school teacher, and I think if we can get
    back to thinking about these are Medicare patients, they have
    worked their whole lives, and what is the right thing to do for
    them, I think we are going to find those solutions.
        Mr. KIND. Ms. Edelman, I am concerned about the impact on
    the beneficiaries, the patients out there. It seems like they
    are getting caught and often not to their knowledge and just
    based on definitions that are applied to them and then the
    increased out-of-pocket expenses which they experience which
    creates a tremendous hardship and yet within the Medicare
    system itself, we have seen beneficiary payments come down
    dramatically in recent years, and hopefully that is
    sustainable, and hopefully that is due to some of the reforms
    that are taking place in the delivery system but also some of
    the new payment models out there.
        How much concern do you have right now in regards to the
    cost shift that you are seeing with the beneficiary community?
        Ms. EDELMAN. The cost shifting in the observation status is
    considerable, and we know that some people really do not have
    the money to pay for the nursing home care out of pocket when
    they are told what the cost is, and they go home and then what
    we hear is a couple of days later they have another fall, they
    break a hip, they are back in the hospital. So the costs to the
    system are very intense.
        We know families are contributing huge amounts of money to
    pay for out-of-pocket costs because Medicare is not paying for
    the nursing home. So we have heard of a nephew being asked to
    bring a check to the nursing home today for $7,000 for his aunt
    to get care. People are doing that, families are kicking in
    money that they may not really have. We have heard of families
    cashing in life insurance policies that were intended for
    burials because they need to get the nursing home care. So it
    is having a tremendous impact on Medicare beneficiaries and
    their families trying to pay these high costs.
        The average private rates are like $250 a day, but I was in
    the nursing home in Boston last month, and the private rates
    were 450 to 480 a day. Most people can't pay that.
        Mr. KIND. Thank you.
        Thank you, Mr. Chairman.
        Chairman BRADY. Thank you.
        Mr. Smith.
        Mr. SMITH. Thank you, Mr. Chairman.
        Ms. Deutschendorf, in your written testimony you referenced
    the Medicare Audit Improvement Act, H.R. 1250, obviously
    supported by numerous members of the House. I am wondering if
    you could reflect a bit on an alternative that I happened to
    introduce, H.R. 2329, the Administrative Relief and Accurate
    Medicare Payments Act. Have you reviewed that bill, and could
    you reflect on that at all?
        Ms. DEUTSCHENDORF. I have not, but I would be happy to
    respond in writing.
        Mr. SMITH. All right. You bet. Thank you very much.
        Mr. SMITH. Ms. Edelman, what do you believe is the cost--
    well, first of all, do you believe that Medicare beneficiaries
    are very familiar with the financing or the various--I mean, we
    have heard a lot of technical things. I started to keep a list
    here, and I lost it amidst the paperwork here of just
    terminology and funding strategies and schedules of payments
    and so forth. How familiar are seniors with that type of thing?
        Ms. EDELMAN. I think most people have no idea of what the
    terminology is or what it means.
        Mr. SMITH. And do you believe that there is a cost to that,
    given the existence of that disconnect with patients and, I
    mean, I don't believe we could really expect them to be
    familiar with all of these intricate details of a funding
    system. Is there any possible way just to have a system to
    where seniors are more familiar with what is going on with the
    funding, so not that it has to be out of pocket, but so that
    they can perhaps know more what their options are?
        As you pointed out in your testimony, that they were
    considered an outpatient, but yet they were in the hospital for
    so long and certainly thought that they were an inpatient; what
    do you think the alternatives should be?
        Ms. EDELMAN. Well, there are some bills that would suggest
    giving information to people to tell them, at least give them
    information that they are outpatients and a couple of states
    have passed laws, Maryland and New York, requiring that people
    should be informed that they are outpatients and what the
    consequence is.
        But unlike other Medicare systems, they don't have an
    opportunity to contest their outpatient status. Generally if
    somebody goes into the hospital as an inpatient, the person
    immediately gets a form Your Rights As a Medicare Patient and
    if the hospital wants to discharge the person, and the person
    thinks I am really not ready to go, there is an immediate
    appeal to a representative of the Medicare program to make a
    decision.
        In observation status there is no due process right for the
    Medicare patients. There is nothing they can do, so giving them
    information is helpful, but we also need to give them an
    opportunity to say I should be called an inpatient, not an
    outpatient.
        Mr. SMITH. Would you agree that the more the government has
    gotten involved, that the more expensive healthcare has become?
        Ms. EDELMAN. Well, I don't know if the cost of the
    Government has been the cause of health care becoming
    expensive. Certainly before the Government was involved a lot
    of people didn't get health care, so it has been critically
    important. Medicare is a very important program for older
    people, and most older people love their Medicare program.
    Without it they wouldn't get the health care they need.
        Mr. SMITH. Okay, thank you, Mr. Chairman. I yield back.
        Chairman BRADY. Mr. Pascrell.
        Mr. PASCRELL. Mr. Chairman, I would just like to make a
    couple of points in response to my friend, Mr. Roskam's
    comments in the last panel about state budget neutrality, which
    is interesting to define, and how it affects what we are
    talking about.
        New Jersey is in a unique position because my state is an
    all-urban state with no rural or critical access hospitals. I
    would like to point out that the permanent adjustments have
    always been based on the national budget neutrality, always. So
    this includes adjustments for critical access hospitals and
    there ironically are 53 critical access hospitals in Mr.
    Roskam's state of Illinois. I think we need to make that clear.
        Now, Ms. Edelman, your organization has done a significant
    amount of work in the area of observation stays, and you worked
    directly with a number of beneficiaries who have run into
    problems with the way they were classified. I think you have
    defined that. In your experience, do beneficiaries generally
    know whether they are classified as inpatients or under
    observation status, in your experience?
        Ms. EDELMAN. Most patients do not know that they are in
    observation, and the Medicare program does not require
    hospitals to tell them. The only time----
        Mr. PASCRELL. Do they have a right to know that?
        Ms. EDELMAN. Well, they should have a right to know it.
    Yes, they should. They should know and the consequence.
        Mr. PASCRELL. When do patients generally find out what
    their status is?
        Ms. EDELMAN. Usually at the time of discharge.
        Mr. PASCRELL. When they pay their bills?
        Ms. EDELMAN. Bring the checkbook to the nursing home
    because Medicare----
        Mr. PASCRELL. That's what I figured.
        Ms. EDELMAN [continuing]. Will not be paying.
        Mr. PASCRELL. You mentioned earlier observation status is
    particularly problematic when Medicare beneficiaries need care
    in a skilled nursing facility after leaving the hospital.
    Because Medicare won't cover these services unless, unless, a
    patient has been classified as an inpatient for at least three
    days. Am I right so far?
        Ms. EDELMAN. Yes.
        Mr. PASCRELL. Ms. Edelman, in the cases your organization
    has handled, what is happening to observation status patients
    in need of care at a skilled nursing facility after leaving the
    hospital?
        Ms. EDELMAN. Some are not going because they can't afford
    it. Some are going and paying out of pocket and trying to
    appeal later through the Medicare summary notice form that they
    get, trying to appeal through the administrative process. But
    many of the people that I have spoken to do not pursue the
    appeals. They give up. It is just too complicated and too time
    consuming, and they give up.
        Mr. PASCRELL. Are many of these seniors paying out of
    pocket?
        Ms. EDELMAN. Yes, they are paying out of pocket, and their
    families are as well.
        Mr. PASCRELL. So, Mr. Chairman, in conclusion if we don't
    identify and respect the right to know, and we had a Patients
    Bill of Rights, which is part of the reform process that we are
    now going through, then we defeat the purpose of what we are
    doing.
        Seniors, anybody, has a right to know what status they are
    in, what that implies, and how much it is going to cost them
    eventually if they don't get out of that status or if they
    don't cross over. I think that this is serious business, I ask
    you to bring us to attend to it, and there is legislation here
    which is bipartisan, and I hope that you will do that, and
    thank you for the hearing.
        Chairman BRADY. Thank you.
        Mr. Renacci.
        Mr. RENACCI. Thank you, Mr. Chairman, and I thank the panel
    for being here.
        It is interesting because I think we are really talking
    about the problem, and then there's the symptoms of the
    problem. The problem is the hospital readmission reduction
    program, and quite frankly the policy that was written was
    probably, the thought was good, the outcomes are becoming bad
    because when a patient enters the hospital, they are either
    classified as observation. They are not admitted. There's all
    kind of things. They are outpatients. We are putting them in
    classifications. Why? Because we don't want to be penalized for
    the reduction program if you are in the hospital.
        And again, I am not blaming the hospitals in that sense.
    They are trying to survive, too. But, quite frankly, who is
    getting hurt here but the patient? So let's look at the
    unintended consequences. We have patients that go into a
    hospital. They are the sickest of sick, we know they are coming
    back, and we have an issue there. It is one of the reasons why
    I introduced H.R. 4188, a bill that requires the Secretary of
    HHS to adjust the payment methodology to account for certain
    disparities really in patient population. This adjustment will
    really make a huge difference to hospitals across the country
    and the 9 million duly eligible beneficiaries that rely on
    these hospitals for critical care needs. We need to make sure.
    There are patients that are going to come into a hospital that
    are going to go back to the hospital, and those hospitals are
    being penalized. This bill would at least help that issue.
        Now, on the other side, I still have a problem when you
    take a patient who quite frankly doesn't need to go to a
    hospital, should be going directly to the nursing home, but we
    have another policy that says you have to go to the hospital
    first, and you have to spend three days in that hospital and
    then that patient goes to that hospital and, of course, they
    spend three days. They don't know whether they are observation,
    they don't know whether they are inpatient.
        Then they come out, they go to a nursing home, and then
    they are penalized because in many cases they ended up as an
    observation status. That is a problem, too. That is why we
    talked earlier about the bill I introduced to eliminate the
    three-day stay. Let's face it, there are some patients that
    have to go in the hospital, but there are some that could go
    directly to the nursing home, and I question why we would ever
    be paying you know, up to $11,000 to have someone stay in a
    hospital for three days versus going into a nursing home where
    my statistics show the average stay is around 27 days. Quite
    frankly it doesn't make sense. We are spending money that is
    not necessary.
        Ms. Edelman, I would ask you, you know, do you think the
    elimination of the three-day hospital stay is good policy?
        Ms. EDELMAN. Well, I think it ultimately is what makes
    sense because as I said, the length of stay in hospitals has
    gone down so much that the three days is a very large portion
    of what time people actually do spend in the hospital.
        The long-term care commission endorsed elimination of the
    three-day stay and so this is where I think as Congress is
    considering post-acute care reforms, which is a topic of
    discussion now, this should certainly be part of the
    discussion. We want to make sure that people are, that there is
    not a lot of gaming in nursing homes, so we want to be careful
    of that possibility; but this is where it needs to go to
    eliminate it. It doesn't make sense with the way medicine is
    practiced today.
        Mr. RENACCI. And I don't know if there is anyone else on
    the panel that when we talk about H.R. 4188, which is a bill
    that really takes a look at these hospitals where there are
    readmissions for the sickest of sick, the poorest of poor, if
    we shouldn't have an adjustment for those. Is there anyone?
        Ms. DEUTSCHENDORF. So, as I stated in my opening comments,
    and thank you for asking, I am responsible for the readmission
    reduction program for the Johns Hopkins Health system and our
    hospital. We have been at this for 4 years, and we are working
    really, really hard to implement all of the strategies that
    were suggested in the demonstration projects and at an academic
    center such as ours where we take care of some of the sickest
    patients in the country who are transplants, who are duly
    eligible, et cetera, we have not been able to move that ball.
        And, in fact, it is all about numerators and denominators,
    but as you take out the short stays out of the denominator, and
    your patients are sicker, your readmission rates go up. Despite
    what we are doing, and we do have some successes, but we have
    not been able to move that. So having that bill with taking out
    transplants, end stage renal disease, substance abuse, and
    psychoses and some of the other things, would certainly help
    us. The other thing that we have really learned about this has
    to do with patient's values, beliefs and preferences, so it is
    very important that we share this responsibility not just with
    the providers but also the patients.
        Mr. RENACCI. Thank you.
        Mr. Chairman, I yield back.
        Chairman BRADY. Thank you.
        Mr. Reed.
        Mr. REED. Thank you, Mr. Chairman.
        I am way over here, so I appreciate, I will give you a
    different angle here to look at. I wanted to come today, and
    thank you Mr. Chairman, for holding this hearing, and thank you
    to the panelists.
        This is something I am very concerned about coming from a
    rural section of the State of New York. My rural hospitals in
    particular are struggling to deal with these issues as well as
    many others, and I wanted to just read for the record a letter
    I received from one of our hospital directors at Jones Memorial
    Hospital in Wellsville, New York. She wrote, Dear Tom, Jones
    Memorial is a sole community hospital in rural upstate Western
    New York. Jones has an average daily census of 20 patients. As
    many rural New York state hospitals, Jones has limited
    resources and actively trying to keep costs down to the overall
    healthcare system. Then she goes on. She writes in 2012 Jones
    began receiving draft program audit notices. The cases dated
    back to 2009, they received a total of 240 inpatient claim
    denials. To date Jones have appealed and won approximately 197
    of those claims. Of the 240 claims, 18 were not successful on
    appeal.
        The rest of the cases are still pending, so pretty good
    outcome in regards to challenging these requests. But this is
    what she said that really stuck out to me in the letter. Jones
    Memorial with an average daily census of 20 has to employ three
    full-time RN case managers to make sure that someone is here
    the majority of the time to ensure compliance with the Two
    Midnight Rule. These same case managers spend a lot of their
    time working on appeals for the RAC audits. We also have three
    billing and medical records staff that spend 30 percent of
    their time on RAC audits and appeals. The dollars being
    expended for a small hospital are unsustainable.
        Now when I hear Eva write me that letter, and I know Eva
    very well, Eva Benedict, does a great job there at Jones
    Memorial, my concern is this. How are these rural hospitals
    going to sustain themselves if they have to take on those
    administrative cost burdens that we just articulated there and
    keep the doors open and comply with this complexity coming out
    of Washington, D.C.? Does anyone on the panel disagree with me
    that in particular our rural hospitals are at a distinct threat
    as a result of the burdens that are coming out of this
    ambiguity? Dr. Sheehy.
        Dr. SHEEHY. I can answer that question. My primary practice
    location is a University of Wisconsin Hospital which is a
    tertiary care referral hospital, but I also am privileged at
    one of our community hospitals and practice there. It is a
    small hospital and I agree with you. I think that the burden on
    smaller hospitals is enormous. I also think a lot of these
    smaller hospitals have contracted with, there are private
    companies now who will actually do what your hospital has
    described. Instead of hiring their own nurse case managers to
    do this, they will hire a private company now and pay them a
    lot of money to look at these claims for them and I think the
    cost is enormous. The cost to fight this process and to kind of
    learn how to do these audits and appeals, it is staggering.
        Mr. REED. Anyone else share that sentiment or oppose that
    sentiment? Because I agree with you, those are dollars that
    otherwise could be going to the community in regards to
    servicing their healthcare needs as opposed to complying with
    the administrative burdens. Do you have any idea, here's a
    hospital with 20 average daily census, and they have got
    essentially five full-time workers focused on filling out
    paperwork. How can we do better? Yeah, ma'am.
        Ms. EDELMAN. I just want to say one thing about that. That
    hospitals are spending an enormous amount of time and money
    trying to make these inpatient-outpatient decisions.
        The first thing they do is buy InterQual, which is a
    proprietary computer program. Then they are hiring staff just
    to make these decisions, and the American Case Management
    Association, which is part of our ad hoc coalition supporting
    H.R. 1179, did a survey of their members. These are the
    hospital discharge planners. Three quarters of the hospitals
    reported hiring staff just to be making inpatient-outpatient
    medical necessity decisions. A third of them had spent more
    than $150,000 and this is a couple of years ago, on that staff.
        Then they are also using an outside secondary reviewer. The
    company that we know of used to report on its Web site how many
    medical necessity cases they had done. Since 1997, they had
    done 4 million. If they are charging we think maybe $200, $250
    a case, that is a lot of money to go out of the Medicare system
    which should be designed for providing care to people, but it
    is only to make the decision whether people should be admitted
    as inpatients or called outpatients, and the care is identical.
    It really makes no sense.
        Mr. REED. Thank you.
        My balance has expired, and I thank you for that input.
        Chairman BRADY. Thank you.
        Ms. Black.
        Mrs. BLACK. Thank you, Mr. Chairman.
        Again thank you for allowing me to sit here with the
    committee and ask questions.
        I want to go back to the issue of the ALJs and the amount
    of overturned cases and we just hear--I know this is a complex
    situation, and we hear these numbers that keep floating around,
    and there is a report that I want to submit for the record, and
    it is from the Inspector General. The improvements are needed
    at the Administrative Law Judge level of Medicare appeals.
        Chairman BRADY. Without objection.
        Mrs. BLACK. Because there are some good pieces in here as
    well. But, Dr. Evans, I want to start with you on this question
    because our members are hearing at least 70 percent number that
    the providers win these appeals at the ALJ level. I understand
    that there are two different ways that the ALJ adjudicates
    cases, and can you please explain how the RAC's view of the
    overturn rate and how these numbers can deceive when looked at
    out of context?
        Dr. EVANS. Yes. The report you refer to, the data that is
    in there is from 2010, and that was early on in the Recovery
    Audit Program. Now, I haven't done the analysis, and I would
    say that I think it is good that this has been brought up here,
    and I think there is some further investigation of the data
    that can be done among the different experts like OIG, et
    cetera.
        But that data is from 2010, and at that time we were
    getting no information about any kind of ALJ hearings. We have
    attended a few in the demonstration, but we weren't hearing,
    and we were asking about those. What we found out was that they
    were 89, 90 percent. You know, the add quick has that
    information, but they were huge numbers. They were on the
    record. The on the record in general is a high overturn rate.
    It is pretty much they are all overturned. All of the
    contractors across CMS have data that shows that, and in fact
    CMS had done a study with one of the contractors, where the
    attendance of CMS at the hearing makes a difference in the
    outcome of those hearings where the Medicare rules and
    regulations and the medical record compared to the claim is
    reviewed.
        So I think it is an area that can be looked at, but I think
    that is part of the difficulty. If you look at the last study,
    the 7 percent overturn across the board is the most current
    data that we have.
        Mrs. BLACK. Could those who are providers weigh in on this
    from your perspective as well, of your cases that get to the
    ALJ level? Dr. Sheehy, let me go with you first.
        Dr. SHEEHY. Thank you for that question. We have little
    data on our ALJ Level 3 appeals at this time. The majority of
    our appeals are turned over in Level 1 or Level 2. I will just
    comment that I think the 2010 data, I think the RAC process and
    observation care has evolved so enormously in the last four
    years that I think it is worth looking at a new set of data and
    a new set of numbers.
        We know that the RAC recovery rate, the recovery rate for
    back to the Government has increased. We know that the number
    of RAC audits have increased. This is why the OMHA has now put
    a hold on further audits and appeals. We know this is a lot due
    to RAC denials and so I think we really do need to look at a
    fresh set of numbers before we start thinking about a 7 percent
    number.
        I can speak on behalf of our hospital. We appeal almost
    everything, and we win almost everything. The number that I
    cited in my testimony we appealed in our last one year, we
    appealed 92 percent of the audits that the RACs made, and we
    have already won two-thirds of them. The rest are in Level 1 or
    Level 2 of appeals, so our history is that we will win almost
    100 percent of our appeals. I think there are a lot of
    hospitals out there that are similar.
        Mrs. BLACK. That is a good piece of information. Thank you
    so much.
        Others want to weigh in on that? Yes?
        Ms. DEUTSCHENDORF. We just have 10 cases at the ALJ level
    that have just made it there, and part of that has to do with
    the delay in the actual recoupment, so we were able to take 239
    cases of our 430-some denials directly for discussion, and we
    spent a lot of time preparing with legal and also with our
    physician advisors and went straight to the medical directors
    of our RAC, and 135 of those cases were overturned just at the
    discussion; and the remainder of those are in the appeal
    process now. So that is a 50 percent, or a 55 percent overturn
    rate just at the discussion level.
        I just want to say one other thing. We had 108 cases denied
    for intensity modified radiation therapy. All 108 of those
    cases were overturned at the discussion level, again because
    these were medically necessary services that the RAC really was
    not able to really understand why these cases were brought
    forward.
        Mrs. BLACK. Thank you.
        And, Mr. Chairman, thank you so much for this hearing. It
    just seems to me that one of the things that I have learned
    from this hearing is that this certainly needs to have more
    oversight, more investigation to find out just how the program
    is working, because I am so concerned as being a nurse for over
    40 years, that the care that we are giving and, Dr. Sheehy,
    please every time you give a testimony, use that example of a
    diabetic ketoacidosis because it is so compelling to make the
    case for how you just don't know what that patient is going to
    need when you receive them into the hospital.
        Thank you so much, Mr. Chairman. I will look forward to
    more hearings.
        Chairman BRADY. Thank you, Ms. Black.
        I just have an inquiry, again, thank for all the witnesses,
    in the first panel again from Dr. Evans we heard repeatedly
    that RAC audits aren't a problem. 94 percent are not appealed.
    Of those who are only about half are returned. Percentage-wise
    this is a very small amount. Not a big problem. That is at odds
    with what we hear from our local hospitals in a major way.
        And what I think I just heard from Dr. Sheehy and Ms.
    Deutschendorf is that is old data, that current appeals are
    much greater than that, and the overturn rate is substantial as
    well; and, while they may be a small percentage, these are more
    of the high-value claims, so proportionately more important,
    probably more expensive to appeal. Is that correct, in a
    nutshell? Well, what other perspective should we bring to this?
        Dr. SHEEHY. I think that is a correct assessment. Just
    another data point, in the OMHA letter to hospitals, one of the
    numbers they cited, which I think this is why I think this is
    old data, they said in January of 2012, the OMHA was hearing
    about 1,250 appeals a week and at the end of 2013, they were
    getting 15,000, so I think the rate has just accelerated over
    two years; and I think that number tells you how audits have
    changed, how our practice has changed.
        Chairman BRADY. Because the Inspector General's report was
    from 2010 and 2011, you are saying. Ms. Deutschendorf.
        Ms. DEUTSCHENDORF. So I would agree with that, that the
    appeals have mounted as hospitals have been able to change
    their processes and also that they have rigorous utilization
    processes that they are also ensuring that they are meeting the
    compliance and meeting the regulatory requirements for Medicare
    review of inpatient stays.
        We in our compliance program, we self deny almost $4
    million a year in Medicare days that we feel we cannot justify
    for medical necessity. So we feel that anything that we appeal
    is justifiable. So anything that is denied by RAC, we will
    appeal.
        Chairman BRADY. Got it.
        Dr. McDermott.
        Mr. MCDERMOTT. I am like you, a little by confused by what
    I am hearing here, but it seems like what you are saying is
    that the RACs operate like the fishermen in my district. They
    go out and throw a great big net, and that is where the 12,000,
    you jump from 1,500 at the end of one year to 12,000 in the
    next. You will say, you have got a lot of stuff in there, most
    of which turns out to be not justified because they are going
    on volume. You are saying that the RACs are going on volume,
    and they got a lot of by-catch, and they have to throw it back
    because it doesn't work.
        Ms. DEUTSCHENDORF. That is exactly right. They cast a very
    broad net, and then what is really considered improper, we
    would respectfully disagree that those are not improper
    payments, and we are appealing all of them. So, we are
    appealing 92 percent. It is almost exactly the same as what Dr.
    Sheehy has said.
        Mr. MCDERMOTT. Thank you.
        Ms. EDELMAN. If I could just say one thing, if it is so
    complicated for hospitals to do these appeals, you can imagine
    what it is like for beneficiaries doing it on their own. There
    is one gentleman from Chicago that I talk to every couple of
    months, and he is in his 80s. He is homebound. The last
    conversation we had he was describing his cancer and the
    therapy he is having, and he is trying to do this appeal for
    his wife. It is very difficult for beneficiaries if they even
    get to that stage to appeal their outpatient status.
        Chairman BRADY. Yeah. Thank you.
        On behalf of Dr. McDermott, I would like to thank our
    witnesses for their testimony today, and I appreciate the
    continued assistance getting answers to the questions that were
    asked by the committee. These are challenging issues,
    interrelated, facing CMS, this committee, and our hospital
    providers.
        My view is we have to address them head on in order to
    ensure seniors are treated fairly and do not face unnecessary
    charges, and it is equally important for providers and
    taxpayers to get these issues straightened out, so I look
    forward to working with all the witnesses and Members of the
    Committee to do just this.
        As a reminder, any member wishing to submit a question to
    the record will have 14 days to do so; and if any questions are
    submitted to the witnesses, I ask that the witnesses respond in
    a timely manner. With that, the subcommittee is adjourned.
        [Whereupon, at 12:32 p.m., the subcommittee was adjourned.]
        [Submissions for the record follow:]
                   Wisconsin Hospital Association, Statement

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                       Watertown Regional Medical, Letter

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                           Walter F. O'Keefe, Letter

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                                     <
                      Thomas M. Horiagon, MD MOccH, Letter

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          Texas Organization of Rural & Community Hospitals, Statement

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                           Sherry Smith, LCSW, Letter

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                        Pocono Medical Center, Statement

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                            Patricia Windle, Letter

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                            Patricia Klaiber, Letter

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              New York StateWide Senior Action Council, Statement

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                 National Senior Citizens Law Center, Statement
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                     National Kidney Foundation, Statement
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               National Association of Urban Hospitals, Statement
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                            Nathan Marra, Statement
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                                 MRC, Statement
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                     Missouri Hospital Association, Letter
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                            Meridian Health, Letter
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                      Medicare Advocacy Project, Statement
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                        Marion P. Cunningham, Statement
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                   Knollwood Retirement Community, Statement
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                       Kirkland Senior Council, Statement
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                            Karen L. Buckley, Letter
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                        Gundersen Health System, Letter
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                           George L. Marra, Statement
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                            Doreen Grossman, Letter
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                              Diane Walter, Letter
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                            Denise Broccoli, Letter
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            Connecticut's Legislative Commission on Aging, Statement
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                                  APTA, Letter
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                                AOPA, Statement
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           American Coalition for Healthcare Claims Integrity, Letter
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                    America's Essential Hospitals, Statement
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                                 AMA, Statement
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                   Alliance for Retired Americans, Statement
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                                AHCA, Statement
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                     Advocate Physician Partners, Statement
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                                  ACMA, Letter
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                                  AARP, Letter
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                                  AAMC, Letter
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