Costs of expanded audits aimed at Medicare fraud hit health-care firms

In a bid to cut Medicare spending and help pay for health-care changes, the Obama administration has significantly expanded audits designed to recover improper payments from health-care providers.

"We are taking, I would say, a brutal spanking, those that are fully compliant and within regulation," said Tim Fox, founder and chief executive of Fox Rehabilitation, a Cherry Hill company that provides physical therapy and other services to the elderly.

"It's dead easy to commit fraud under Medicare, and that's why there's so much fraud and abuse out there," Fox said. He said the government was "cracking down" to help pay for the expansion of health coverage under the Affordable Care Act.

The government has to "recoup those dollars from somewhere, so what they're going to do is fight and recoup dollars in fraud and abuse," said Fox, whose firm employs 905, including 709 clinicians who visit patients in their homes in eight states.

The experience at Fox Rehab, founded in 1998, is just one example of how the Affordable Care Act is roiling the industry, forcing providers to find new ways to do things with less.

At a significant cost, Fox said, his company is fighting back against payment denials and winning 85 percent of its cases at the third level of appeal, but the increase in audits in 2012 was followed last year by a 15 percent cut in Medicare reimbursements for outpatient physical therapy.

The combination resulted in tight cash flow at Fox Rehab, where 62 office workers were laid off and therapists took a 5 percent pay cut. The company expects to have about $90 million in revenue this year.

Fox said he considered bringing in private equity to shore up the company, but rejected what he called low-ball offers. Instead he got additional financing from TD Bank.

"TD Bank continued to support us, and worked very well with us," he said.

The bulk of Fox Rehab's patients are heavy utilizers of medical services, which puts the company in the crosshairs of officials bent on eliminating wasteful spending.

The Centers for Medicare and Medicaid Services, the division of the U.S. Department of Health and Human Services that administers Medicare, employs an alphabet soup of auditors to make sure that hospitals and other health-care providers don't overcharge Medicare.

The stakes are high. Medicare covered 51 million seniors and disabled Americans in 2013 at a cost of $604 billion. In fee-for-service Medicare, which allows health-care providers to bill for individual services and is the program under which outpatient therapy is provided, improper payments were estimated at $36 billion, or 10.1 percent of total expenditures in that category.

One group of auditors, known as recovery audit contractors, have the authority to issue payment denials for bills that are up to three years old. Those contractors get to keep a cut - typically 12.5 percent - of what they recover for Medicare.

A recent report by the staff of the Senate Special Committee on Aging criticized the incentives for recovery audit contractors, which are known as RACs. The committee would like to see more emphasis on improving billing practices.

"The RAC incentive structure is not based on reducing future improper payments, but on recovering past improper payments. This could be viewed as providing an incentive to keep improper payment rates high," the report said, rather than eliminating improper billing in the first place.

At a July 9 Senate Special Committee on Aging hearing, an official from one of the RACs defended the program, which started in 2009.

"Mirrored after successes realized in the private sector, recovery auditors have together returned more than $8 billion in overpayments to the Medicare Trust Fund," said Chad Janak, a vice president at Connolly L.L.C., based in Wilton, Conn.

Medicare officials have proposed changing the recovery audit contractor program to delay auditor payments to as long as 400 days. Under current contracts, the auditors are paid no longer than 120 days from when they uncover what they consider an improper payment.

In a twist, Medicare started in April 2013 to require RACs to conduct prepayment audits on bills filed by outpatient-therapy companies, a move away from the traditional "pay-and-chase" mentality. That means auditors constantly ask for additional documentation, prior to issuing payments to therapists.

"The requests come in daily in a large volume," said Kim Baker, practice compliance officer and director of program integrity at Fox Rehabilitation.

That puts further financial pressure on providers - because they now must wait longer for payment. That delay means the company has to have more money on hand to pay for day-to-day operations, one of many difficult changes for Fox Rehab.

"We are not the same organization that we were three years ago," Fox said.

The number of Fox Rehab payment claims being audited has jumped because of new efforts to recoup improper payments.

Year       Audited Claims

2011 503

2012 4,709

2013 19,736

SOURCE: Fox RehabEndText