The RAC Reserve Debate

One approach some hospitals are taking is to look at the published reports on Medicare's comprehensive error rate testing program, which has determined that 4% of Medicare payments are made in error, says Dugan. "So some organizations may say, 'We are going to set aside 4% over the last 2.5 years as our reserve for Medicare funds,'" says Dugan, who is quick to point out that he doesn't necessarily support this methodology.

"A more finite way to calculate it would be to wait for the RAC, wait for the records request, and from the records request go ahead and calculate your universe of risk," says Flood. That is probably a better documented basis to set reserves and may not cause as much financial alarm than by just picking a gross number, he observes.

As hospitals go through the process of setting a reserve, Hemker with Palomar Pomerado Health, recommends bringing together internal groups to help determine risk. "Work with your risk management group to determine exposures, talk to your quality group, and consider what risk mitigation factors you have in place currently and going forward and how this compares retroactively," he says.

Hospitals that haven't been under the RAC microscope, Boyle says, must recognize it as a real threat. RAC reserves should be part of strategic planning sessions. "This has to be up there in terms of real financial impacts to the bottom line."

—Michelle Ponte