January 2012 Volume 8 Number 5

CMS Launches New Demonstration Programs

By Andrew B. Wachler and Jessica C. Lange, Wachler & Associates, P.C.,Royal Oak, MI

AuthorAuthorI. Introduction

On November 15, 2011, the Centers for Medicare & Medicaid Services (“CMS”) announced three demonstration programs, directed to “…strengthen Medicare by aiming at eliminating fraud and abuse.”1 The three demonstration programs are the Part A to Part B Rebilling Demonstration Program (“AB Rebilling Demonstration”), the Recovery Audit Pre-Payment Review Demonstration Program and the Prior Authorization and Pre-Payment Review of Power Mobility Devices (“PMD”s).2 The demonstration programs stem from Executive Orders announced by President Obama. The first order was announced on November 23, 2009 with the purpose of reducing improper payments and waste in federal programs.3 President Obama announced three goals to cut improper payments by the end of 2012: (1) reducing overall payment errors by $50 billion; (2) cutting the original Medicare error rate in half; and (3) recovering $2 billion in improper payments to recipients of federal dollars.4 According to the White House’s November 15, 2011 Press Release, during 2011 the government-wide payment error rate dropped to 4.7 percent, which equates to $17.6 billion less in improper payments.5 In addition, government contractors collected over $1.2 billion in overpayments.6

Despite these improvements, the White House’s Office of Management and Budget believes that much must still be done before the government will be able to reach its three goals.7 The three demonstration programs announced on November 15 are purportedly additional efforts by the federal government to ensure that the goals are met.

This article will address the substantive issues surrounding the AB Rebilling Demonstration and the Recovery Audit Pre-Payment Review Demonstration Programs.8

II. AB Rebilling Demonstration Program

A. Why Was it Created?

The AB Rebilling Demonstration Program traces CMS’ goal to reduce improper payments from the Medicare program. However, the program also reflects an ongoing debate between the hospital industry and CMS regarding the ability for hospitals to receive Part B reimbursement for Part A inpatient short-stay claims that have been denied by a CMS contractor as not medically necessary and reasonable because the services were not provided in the appropriate care setting. Despite the fact that hospitals had been allowed to receive this form of Part B reimbursement during the Recovery Audit Demonstration Program, since the permanent Recovery Audit Program started in January 2010 hospitals have struggled to receive Part B reimbursement for denied inpatient claims. Industry leaders exerted a concerted effort to effectuate a mechanism for Part B reimbursement for the denied inpatient claims.9 Despite the state of the law, which indicates a trend that providers are entitled to Part B reimbursement, there is no simple mechanism to effectuate payment.10 It is crucial that providers appeal to the Administrative Law Judge stage to obtain an order for payment and take all necessary action to enforce the order. CMS’ announcement of the AB Rebilling Demonstration initially indicated progress towards hospitals receiving proper Part B reimbursement. Developments since the November 15 announcement, however, establish that the AB Rebilling Demonstration falls short of providing hospitals a fair avenue to obtain proper reimbursement.

According to CMS, the AB Rebilling Demonstration will achieve five goals.11 It will reduce the need for the appeals process and allow CMS to compensate providers for providing needed care to Medicare beneficiaries.12 It will also encourage providers to deliver services to patients in the appropriate care setting and, according to CMS, lower the improper payment rate because payments allowed under Part B if the patient had been treated as an outpatient instead of an inpatient will no longer be considered an error. Finally, CMS indicated that the program will address provider concerns while protecting beneficiaries from changes in financial liability or benefits.13

B. Who Can Participate?

The AB Rebilling Demonstration is a voluntary program which will involve the participation of 380 hospitals.14 The program’s participants, determined through a first-come first-served application process, will consist of 80 large hospitals (300+ beds), 120 moderate hospitals (100-299 beds) and 180 small hospitals (99 or less beds).15 After each bed-size stratification reaches its maximum number of participants, additional enrollment requests will be placed on a waiting list.16 The program will exist for three years, from January 1, 2012 to December 31, 2014, and it is not expected to be expanded or modified during this time period. Enrollment for the program opened on December 12, 2011 at 2pm EST. Hospitals accepted into the program will receive additional information regarding the mechanisms of the program.

A hospital’s eligibility to enroll in the program will be based upon its six digit identification number. During the two Special Open Door Forums CMS held to educate hospitals on the program, many hospitals expressed concern regarding the types of hospitals that are precluded from the program.17 The Program excludes the following entities: (1) hospitals receiving periodic interim payments;18 (2) psychiatric hospitals; (3) inpatient rehabilitation facilities (“IRF”s); (4) long term care hospitals (“LTCH”s); (5) cancer hospitals; (6) critical access hospitals (“CAH”s); and (7) children’s hospitals.19 CMS reiterated that hospitals receiving periodic interim payments are excluded from the program because CMS focused on including hospitals that would allow for a smooth implementation of the program and with data similar enough that would allow for an accurate evaluation of the program and its potential national expansion.20

Volunteer participants may choose to opt out of the demonstration at any time, with no penalty. However, all program-eligible claims denied during the participant’s participation will not be allowed to be appealed and will be subject to the billing requirements of the program. Finally, accepted hospitals will be required to sign an attestation at the beginning of the program agreeing to follow the requirements of participation, including: the participant 1) will not file an appeal for claims eligible for the program, 2) not bill the beneficiary more than any Part A inpatient deductible already collected from the beneficiary (i.e., hold the beneficiary harmless), 3) refund to the beneficiary the difference between any Part A deductible/coinsurance and Part B deductible/coinsurance, 4) not bill observation services (G0378) and 5) not reveal the demonstration code for rebilling the Part A claims.21

C. What Can Hospitals Rebill?

The AB Rebilling Demonstration Program involves the rebilling of only very specific claims for Part B reimbursement. Specifically, short-stay inpatient claims denied during a government contractor audit, including a Medicare Administrative Contractor, Recovery Audit Contractor (“RAC”), or Comprehensive Error Rate Testing (“CERT”) audit after January 1, 2012 that are denied because the services were provided in the incorrect setting can be resubmitted as a new claim for the outpatient services provided. In addition, short-stay inpatient claims self-identified by a provider, after the services were provided and billed, that were rendered in the incorrect setting may be resubmitted as a new claim for the outpatient services.22

Prior to the launch of the demonstration program, CMS was unable to specify exactly how participating hospitals will resubmit the claims. CMS, however, reiterated more than once during the Special Open Door Forums that participants will be given a specific code for billing that they are not allowed to share with non-participants. In fact, sharing the code will constitute fraud and such behavior will be referred to the proper authorities.

Once a hospital rebills a claim for Part B reimbursement, it will receive 90 percent of the total Part B payment, not including observation services, but still will be required to refund the difference of the beneficiary’s copay and deductible due under Part A and Part B.23 CMS expressed its rationale for the 90 percent reimbursement rate during the November 30 Special Open Door Forum.24 CMS noted that it did not want to provide 100 percent of Part B reimbursement because it feared that full payment would encourage hospitals to “game” the system and did not want to incentivize inaccurate billing.

CMS will contract with an evaluation contractor that will monitor the program’s effectiveness as well as participant and contractor activity. One of the evaluation contractor’s roles will be to implement Medicare Trust Fund protections to prevent demonstration program participants from misusing the program. For instance, if data demonstrates hospitals’ disproportionate and systematic increase in claims being re-submitted as inpatient, CMS retains the right to revoke the demonstration entirely and the privileges provided to the participants.25 Further, if CMS or the evaluation contractor discovers hospital-specific abuse, the entity will be removed from the demonstration and resubmitted claims will be denied in full. The facility will be unable to appeal or seek legal relief regarding removal from the demonstration.26

D. High Price for Participation in the AB Rebilling Demonstration Program

One of the aspects of the AB Rebilling Demonstration Program causing concern is the requirement that participants waive their right to appeal all inpatient short-stay claims denied for lack of medical necessity because they were services provided in an inappropriate setting.27 Industry leaders were originally encouraged by CMS’ announcement of the demonstration program because it indicated that CMS had listened to their concerns regarding the right to Part B reimbursement in the event an inpatient claim was denied because the services were provided in an inappropriate setting. However, after it came to light that CMS conditioned participation in the program on participants waiving their right to appeal these claims, the encouragement deflated. During the Special Open Door Forum on November 30, CMS stated that the demonstration program is an “all or nothing” program.28 Therefore, participants will not have the ability to choose which claims to rebill for Part B payment or which claim denials to challenge through the appeals process.29 This prohibition highlights the inequity of a system where a provider must choose between either appealing the denial of an inpatient claim, but being unable to rebill the claim for outpatient reimbursement or rebilling the claim for 90 percent reimbursement of the outpatient claim, but waiving all due process rights.

Further, even though the original RAC Demonstration Program allowed providers to rebill a claim at any stage of the appeals process, CMS’ purported reason for requiring providers to waive appeal rights is CMS’ concern that providers could appeal a Part A claim and rebill it as a Part B claim contemporaneously, thus illegally double-billing Medicare. This concern is unsubstantiated, however, as CMS indicated during the Special Open Door Forums that the agency had no data from the RAC Demonstration Program that this double-billing occurred.

There is also some concern that since participants will be unable to appeal claims, contractors will target those participants with denials because they are essentially immune from review. CMS reassured potential participants that contractors will not be aware of the hospitals participating in the program. However, claims from participating hospitals will include the demonstration code, denials will not be followed by appeals and RACs will receive a lower contingency fee (the difference between the outpatient and inpatient reimbursement) for the demonstration program participants’ claims. Therefore, there is a high likelihood that it will not take long for the contractors to determine the participants. In response to these concerns, CMS strongly asserted that if contractors engage in egregious behavior, i.e. targeting demonstration program participants, then providers should notify CMS. In addition, CMS stated that it and the evaluation contractor will monitor RACs’ behavior to try to prevent any improper actions. Although these safeguards may be reassuring to some demonstration program participants, the reality is that hospitals enrolling in a voluntary program may not want to engage in the risk that their inpatient short-stay claims will suddenly be the target of contractor audits merely because they are immune from the appeals process.

Although the AB Rebilling Demonstration Program reveals that CMS agrees that hospitals are entitled to Part B reimbursement in the event that Part A reimbursement is denied, the program in its entirety is not the program that the hospital industry needs because it forces hospitals to waive a fundamental right to appeal the denial of an inpatient claim in order to obtain Part B reimbursement, which they are also entitled to receive. It will be important to track the Demonstration Program’s progress during its three year existence, particularly hospitals’ satisfaction with the program and whether the amount of inpatient short-stay denials increases or decreases.

III. Recovery Audit Pre-Payment Review Demonstration Program

In addition to the AB Rebilling Demonstration Program, on November 15, 2011 CMS announced the Recovery Audit Pre-Payment Review Demonstration Program. However, on December 30, 2011 CMS announced that it will delay the start date for the program.30 CMS indicated that its decision to delay the program was based on the receipt of many comments from interested parties and its desire to evaluate the comments prior to implementing the program.31 Although CMS delayed the program, there has been no indication that the delay is indefinite. Therefore, it is still important to understand the basics of the demonstration program to prepare for its likely future implementation.

Unlike the AB Rebilling Demonstration Program, this program is mandatory. The program will have a dramatic effect on providers in 11 states because it allows RACs to conduct pre-payment reviews on providers’ Medicare claims in those states. Prior to the announcement of this demonstration program and in states outside of the demonstration program, RACs may only conduct post-payment reviews of providers’ Medicare claims.

The Recovery Audit Pre-Payment Review Demonstration Program will allow RACs to review claims before they are paid to ensure that the provider complied with all Medicare payment rules.32 At this time, CMS has selected 11 states for the three year demonstration program. According to CMS, seven of those states were chosen based on “high level of fraudulent claims and providers”-- California, Florida, Illinois, Louisiana, Michigan, New York and Texas -- and four were selected “based on having high claims volumes for short inpatient hospital stays” – Missouri, North Carolina, Ohio and Pennsylvania.33 Under the demonstration program, CMS will choose specific claim types for review, then a RAC will review selected claims and deny claims that it determines to be improper.34 According to CMS, the Recovery Audit Pre-Payment Review Demonstration Program is in addition to and not in replacement of the current RAC Program. The limits on the number of medical records reviewed by the contractors are the same; therefore, it could be expected that the limits may be doubled for hospitals in the demonstration states. Once implemented, the demonstration program will initially focus on inpatient hospital claims, especially short-stays, because CMS has found that this type of claim has a high improper payment rate.35 CMS also noted that the “pre-payment review” method eliminates the “pay and chase” recovery method used by contractors in the past and encourages the more proactive “prevent and detect” model for recovering alleged improper payments.36 Despite CMS’ focus on the positive proactive nature of the Recovery Audit Pre-Payment Review demonstration program, there are very serious implications for providers subject to it. Specifically, the program reflects the ongoing difficulty to balance Medicare program integrity and the detrimental effects a pre-payment review has on Medicare providers. Pre-payment review is an aggressive method for contractors to audit providers and proactively prevent improper payments. However, pre-payment review threatens providers because it significantly impacts cash flow and there are no substantive criteria or procedures in place to determine placement on or removal from pre-payment review. For providers in the demonstration program, they will have no choice but to experience pre-payment review and the possible impact the review may have on hospitals’ cash flow.

CMS’ Recovery Audit Pre-Payment Review Demonstration Program indicates a pronounced shift in contractors’ focus on pre-payment reviews. As discussed above, from a Medicare program integrity perspective a “prevent and detect” effort is effective to avoid improper payments, but pre-payment reviews can be unjustly devastating to providers. Specifically with regard to hospitals, pre-payment reviews may involve hospitals being forced to absorb the costs for expensive procedures and admissions while a contractor reviews and potentially denies a claim. This has immense implications on the cash flow for hospitals and could be crippling to hospitals unprepared to weather the storm.37 Once CMS implements the demonstration program, it will be important to track the program’s progress, the effects it has on providers and if CMS provides any more information regarding the program.

IV. Conclusion

The demonstration programs announced on November 15 reflect the current status of the Medicare program and the federal government’s extensive goals to curb improper payments to providers. Although these goals are popular within the political landscape, it is also necessary to evaluate the methods to reach these goals and the effects they have on Medicare providers. For instance, although the AB Rebilling Demonstration Program establishes that CMS has heard hospitals’ assertion that they should receive Part B reimbursement in the event that a Part A inpatient claim is denied for services provided in an inappropriate setting, the program fails to encompass a crucial aspect to participation in the Medicare program, access to the appeals process. It is essential that hospitals outside of the AB Rebilling Demonstration Program continue to appeal short-stay inpatient denials and seek the outpatient reimbursement that they are entitled to receive. This effort will help establish hospitals’ right to Part B reimbursement for Part A denials and their right to seek relief through the appeals process. In addition, the Recovery Audit Pre-Payment Review Demonstration Program is an aggressive action by CMS to eliminate improper payments for specific providers within the identified 11 states. Despite the likelihood that the pre-payment reviews will prevent improper payments, the adverse consequences for providers, which will initially be hospitals, should also be a consideration. As the federal government continues to reach for its goals to protect the Medicare Trust Fund, healthcare providers and their counsel must mind the delicate balance between protecting the Trust Fund and ensuring that providers’ due process rights are not sacrificed in the process.


Centers for Medicare & Medicaid Services, Comprehensive Error Rate Testing, Demonstrations, available at https://www.cms.gov/CERT/02_Demonstrations.asp (Last visited: Dec. 8, 2011).

2 On December 30, CMS announced the delay of two of the demonstration programs, the Pre-Payment Review and Prior Authorization for Power Mobility Devices and the Recovery Audit Pre-Payment Review. CMS’ reason for the delay is to provide the agency time to review comments and suggestions submitted to CMS regarding these programs. The agency will provide at least 30 days’ notice prior to the implementation of either of the programs.

Executive Order, Reducing Improper Payments and Eliminating Waste in Federal Programs, The White House, Office of the Press Secretary, November 23, 2009, available at: http://www.whitehouse.gov/the-press-office/executive-order-reducing-improper-payments (Last visited Dec. 8, 2011).


Centers for Medicare & Medicaid Services, Fact Sheet for Part A to Part B Rebilling Demonstration Program, November 15, 2011, available at: https://www.cms.gov/apps/media/press/factsheet.asp?Counter=4169 (Last visited Dec. 8, 2011).


“We Can’t Wait: Agencies Cut Nearly $18 Billion in Improper Payments, Announce New Steps for Stopping Government Waste,” The White House, Office of the Press Secretary, November 15, 2011, available at: http://www.whitehouse.gov/the-press-office/2011/11/15/we-can-t-wait-agencies-cut-nearly-18-billion-improper-payments-announce- (Last visited Dec. 8, 2011).






This article will not address the Pre-Payment Review and Prior Authorization for Power Mobility Devices Demonstration Program because the article is tailored to outpatient and inpatient reimbursement issues and the adverse consequences of pre-payment review on hospitals. In addition, on December 30, 2011 CMS delayed the implementation of the Prior Authorization for Power Mobility Devices Demonstration Program.


The American Hospital Association, three large health systems, and legal counsel met with CMS on three occasions to urge payment for full Part B reimbursement for Part A denials.


In the Case of O’Connor Hospital, Medicare Appeals Council, February 1, 2010. In the Case of UMDNJ – University Hospital, Medicare Appeals Council, March 14, 2005.


Supra, Note 4.




Id. The amount of the Part B payment will be set-off from the Part A payment; it is unclear how this will no longer be deemed an improper payment.


Part A to Part B Rebilling Demonstration Program, Provider Outreach and Education PowerPoint presentation, November 28, 2011, available at: https://www.cms.gov/CERT/downloads/Rebilling_Demo_Outreach_1129.pdf (Last visited Dec. 9, 2011).






The transcripts of the Special Open Door Forums are available at: November 30, 2011 Special Open Door Forum: http://www.cms.gov/OpenDoorForums/Downloads/113011TranscriptAudioFileABRebilling.pdf; December 8, 2011 Special Open Door Forum: http://www.cms.gov/OpenDoorForums/Downloads/TransAudioABRebillingDemo120811.pdf. The transcripts will be available for 30 days from the date of posting.


According to CMS during the December 8 Special Open Door Forum, hospitals that receive periodic interim payments (“PIP”) are excluded from the program so that CMS could “…have an accurate evaluation of the program” and because they needed similar data for the facilities. CMS’ position is that PIP hospitals, which are hospitals that receive biweekly payments based on the hospital’s estimate of applicable Medicare reimbursement for the current cost report period ( 42 C.F.R. §413.64(h)), do not have similar types of data compared to those that receive normal payment.


Supra, Note 14.


Part A to Part B Rebilling Demonstration Program, Q & A, available at: https://www.cms.gov/CERT/Downloads/AB_QA_12811.pdf (Last visited: Dec. 9, 2011).


Supra, Note 14.


Id. During the Special Open Door Forums, CMS clearly stated that conditional Code 44 still applies, where a hospital is precluded from changing the service from inpatient to outpatient once the patient has been discharged but the services have not been billed. This places hospitals in the Demonstration Program in a difficult position because in order to rebill the short-stay inpatient services as outpatient they must first submit a bill for the inpatient services.


Supra, Note 14.


Supra, Note 17.

25 Supra, Note 14.
26 Id.
27 Supra, Note 14.
28 Supra, Note 17.
29 Supra, Note 14.

Centers for Medicare & Medicaid Services, Demonstrations, available at: https://www.cms.gov/CERT/02_Demonstrations.asp (Last visited: Jan. 5, 2012).

31 Id.
32 Centers for Medicare & Medicaid Services, Fact Sheet for the Recovery Audit Pre-Payment Review Demonstration Program, November 15, 2011, available at: https://www.cms.gov/apps/media/press/factsheet.asp?Counter=4170 (Last visited Dec. 11, 2011).
33 Id.
34 Id.
35 Id.
36 Id.
37 A preliminary calculation shows that if a hospital undergoing a pre-payment review receives a denial and appeals within 30 days at every level of the appeals process, it would take over a year before an ALJ decision is reached. This will have immense impacts on cash flow and may drive hospitals to bill the services as outpatient.

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