Taking a proactive approach to prepayment audits will allow providers to sustain their financial health and avoid any risks to patient care that would come from a serious disruption in cash flow.

“The prepayment process can put someone out of business,” warns Patric Lundy, founding partner at Hooper, Lundy and Bookman, a health care law firm based in Los Angeles.

Prepayment review is an alternative to the traditional “pay and chase” model of paying improper claims and then trying to recover them later.

Under the prepayment audit system, Medicare contractors identify claims and codes with patterns of errors and investigate their merit before paying hospitals, physicians, medical equipment providers, laboratories and others.

Since 2006, Medicare administrative contractors, or MACs, have had responsibility for claims administration for inpatient and outpatient Medicare services as well as durable medical equipment. More recently, HHS has increased its use of prepayment audits to help stamp out fraud and abuse.

In February, the HHS and the U.S. Justice Department announced they had recovered a record $4.2 billion in taxpayer dollars in 2012. As part of these activities, in June 2011, the CMS started screening all fee-for-service Medicare claims through a new fraud prevention system that includes prepayment review. The system generated leads for 538 new fraud investigations and triggered 617 provider interviews, according to HHS.

And in August 2012, the CMS launched an 11-state demonstration project on recovery audit prepayment review on claims that have historic rates of high improper payments. In the three-year demonstration project, Medicare Recovery Audit Contractors , or RACs, which previously did not conduct prepayment audits, will focus on seven states with high fraud rates, including California and Florida, and four other states with high claims volumes for short inpatient hospital stays.

The CMS has estimated that 8.6%—or $28.8 billion—of Medicare fee-for-service payments in 2011 were improper. Standardizing the internal controls that Medicare contractors use to analyze whether to approve or deny claims, known as “prepayment edits” could save tens of million more dollars, according to a Government Accountability Office report released last November. The agency could have potentially saved an additional $114.7 million by using these systems to identify improper claims prior to payment, the GAO said.

For providers, prepayment review can be a lengthy process. Auditors typically pull about 40 claims by type, such as patient length of stay. If the contractor finds errors, those claims will be denied. Providers can appeal using the traditional fee-for-service process that requires them to appeal each claim separately. It routinely takes 18 months to conclude the appeals process, according to the American Hospital Association.

“This is very impactful on the hospital,” says Rochelle Archuleta, senior associate director of policy at the AHA.

In the event of a prepayment review, even proper claims can be delayed. Providers have 30 days to respond to request for documentation and auditors have another 45 days to validate the claim. This can result in a 75-day claim payment delay, according to the American Academy of Family Physicians.

Providers should educate their staff on proper documentation to identify the clinical rationale for claims, Archueleta advises. Some hospitals have even designated an in-house coordinator to respond to auditors, she adds.

“Documentation is a really important area to focus on,” Archueleta says.

Often times the methodology used by Medicare contractors can snare the innocent, Lundy says.

“It would be great if they had some reliable basis to pinpoint someone who should not be paid,” Lundy says of the auditors. “But this can wreck havoc on providers.”

The AHA is seeking clarification from the CMS on the error rate necessary to trigger a prepayment audit and the error rate reduction amount that will halt an audit in play, Archueleta says.

Lundy advises those subject to prepayment review to cooperate fully.

“The best thing for a provider or supplier to do is to open the lines of communication and tell the auditor there’s no basis for it,” he says.

Editors Note: Coping with prepayment audits and other payment compliance issues is one of six impacts identified by McKesson Corp. of health care reform on health care revenue cycle management.