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[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
                  
 20-998                    WASHINGTON : 2016       
____________________________________________________________________
 For sale by the Superintendent of Documents, U.S. Government Publishing Office,
Internet:bookstore.gpo.gov. Phone:toll free (866)512-1800;DC area (202)512-1800
  Fax:(202) 512-2104 Mail:Stop IDCC,Washington,DC 20402-001                 


         


                      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:]
  
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    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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