RAC Audits and Delayed Reimbursements: Preparing Your Company for a Cash Flow Crisis

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By Betta Ferrendelli

Many who work in the O&P profession believe it is not a question of if, but when, a facility will be the target of a Recovery Audit Contractor (RAC) audit. Smaller, independent O&P firms with one to three facilities are especially vulnerable because they often lack the necessary cash reserves to wait out a RAC audit, agree O&P professionals interviewed for this story. While national O&P organizations' efforts are currently ongoing to help mitigate the impact of RAC audits, O&P facilities still have to maintain day-to-day operations. As a result, the question has become: How well are these facility owners prepared from a cash flow perspective to get through the lengthy audit process and delayed reimbursements not only with enough cash on hand to conduct business but with the ability to move forward once the audit has been completed?

Managing Cash Flow by Preparing for Audits

In the current environment, it is "very likely" that an O&P facility will face a RAC audit, says Randy Schmitke, CPA, MBA, CFO of O&P Digital Technologies, Gainesville, Florida, who has been in the O&P industry since 1999. He is also the general manager of Prosthetic & Orthotic Associates (POA), headquartered in Middletown, New York, which is currently going through its first wave of RAC audits. "We're attempting to actively manage the process, meet all dates and deadlines, and respond in a very professional manner," says Schmitke, who recognizes that there is going to be "some pain" associated with the process.

Due to the likelihood of facing an audit, today's O&P practices must include preparing for audits in their efforts to manage cash flow, says Rick Fleetwood, MPA, CEO, Snell Prosthetic & Orthotic Laboratory, Little Rock, Arkansas. Such preparation can lessen the impact of a RAC audit and keep O&P facilities' cash flow liquid. "As a profession and industry, we are ill-prepared for this situation," he says.

"[We] have lived in a Disneyland-type situation, believing that all [we] had to do was measure, fit, and deliver. The prospect of accountability to a paying source was not even on the radar."

Lessening the impact of a RAC audit has everything to do with clinical and administrative documentation, Schmitke says. "A facility must take serious and aggressive steps to put in place processes that capture the appropriate clinical documentation."

Fleetwood offers five steps that can help a facility prepare for a RAC audit:

  1. Create an audit team or designate an individual who will lead efforts to manage the audit internally. Develop a plan to allow this team or person enough time to spend on audit issues.
  2. Develop resources for counsel and advice from those who have experienced an audit. Learn from their experiences.
  3. Get the facility's house in order. Still using paper charts and scanning documents into digital charts? Now is the time to put all paperwork in one file.
  4. Manage the process and requests in a timely manner.
  5. Press back. Be willing and prepared to put together the necessary case to defend the facility's patient care.

Staff education also plays a key role in helping to lessen the impacts of RAC audits, O&P experts agree.

O&P facilities need to be keenly aware of all policy requirements and pay attention to detail, says Brian Gustin, CP, president, Forensic Prosthetic and Orthotic Consulting, Suamico, Wisconsin. He has more than 32 years of experience in the O&P profession, including owning two O&P clinical operations for 26 years, and has been active as an industry consultant working with O&P facilities and insurance companies since selling his practices.

"A large number of claims are being recouped because of a lack of dates, signatures, and prescriptions," Gustin says. "These are completely avoidable simply by paying attention to detail before hitting the 'send' button on a claim."

That detailed attention needs to be applied to clinical documentation, as well, he says. "Practitioners need to be aware of what 'medical necessity' means and how this relates to the services they are providing."

That's where Susi Ebersbach, MT (ASCP), MBA, comes in for Ability Prosthetics & Orthotics, headquartered in Exton, Pennsylvania, which has 11 patient care facilities in five states. Ebersbach has more than 25 years of experience in healthcare management and is the advanced billing and reimbursement specialist for Ability. She says she spends the majority of her working hours handling claims and addressing Centers for Medicare & Medicaid Services (CMS) issues.

RACs can request up to ten records from an O&P facility every 45 days but are limited to a three-year "look-back" period, Ebersbach says. The look-back period is the problem, Ebersbach and other O&P professionals agree.

Smaller O&P firms have to work continually in an effort just to keep up. "They still have to see patients and try to maintain their businesses," Ebersbach says. "They have to pull charts on the weekends [to provide documentation for audits]. It's hours and hours and hours of work, all of which goes uncompensated."

Preparing for Cash Flow Delays

There is little a facility can do looking back, but there are measures that they can take moving forward to prepare for the cash flow delays. The answer for Robert Benedetti, who has worked in the O&P industry for more than 20 years-the last 19 as the controller with De La Torre Orthotics & Prosthetics, headquartered in Pittsburgh, Pennsylvania-is simple, "Discipline, discipline, and more discipline.

cash flow chart

"The best thing to do is to start creating cash reserves before a crisis hits," he says. "That means putting money away when times are good, when you may prefer to invest that capital into the company."

From Schmitke's perspective, the answer can also be summed up in a single concept, "Reporting, reporting, and reporting. Facilities need to establish a reporting process that measures the activity of the business, review and study these reports, and make sound business decisions based on what is fact-not on what they 'think' is happening."

Any successful O&P business should begin with a balanced budget based on the two previous years of business activity, says Don Foley, an owner of Cailor Fleming Insurance, Youngstown, Ohio, whose primary focus is on O&P issues. In addition to establishing a budget based on history, O&P businesses need to strive to stay within that budget, he says. "It is wise to expect a 3-percent increase in all expenses as well as income," Foley adds. These figures should be monitored closely each month by creating month-end financial statements that are reviewed by the principal in your firm along with the financial person putting them together, he says. This is essential, according to Foley because "by creating a balanced budget along with monthly financial reports, it will allow your business to have a complete snapshot as to its financial picture at any given time."

Building Cash Reserves to Supplement Cash Flow

Professionals say that what constitutes a good cash reserve depends on each individual O&P business, but all agree that it is a critical piece of protecting your cash flow. In an ideal world, a business should have at least three months of reserves on hand to offset any downturn in pay or sources, Fleetwood says. The amount on hand is determined by the size of the company, and it varies, he says.

Foley says it is important when creating an annual budget to allow for extra cash in the case of unforeseen problems such as building and computer repairs. "A comfort level for me as far as cash flow is at least three payrolls with three months of expenses in reserves," he continues. "That, along with steady income or increased income, seems to be a good indicator that your business is doing well."

De La Torre O&P has developed a good working formula it uses with its business, Benedetti says, "that is 4 percent of cash receipts for any time period." He gives the example that if a business has $1 million in receipts for the year, it should have a minimum of $40,000 in cash set aside.

Schmitke says a business knows what its monthly "nut" is- the amount of the business' fixed monthly expenses. "This is the cash that it takes to operate the business no matter the amount of revenue generated," he says. "Once you know this amount, a business owner should make a decision as to how many months of expenses would be ideal to keep in cash reserves." For example, Schmitke says, if it costs $30,000 to operate monthly, then it may be ideal to hold $60,000 to $90,000 in cash reserves.

Managing Cash Flow Challenges

Audits of any kind are disruptive enough, let alone how intrusive and destructive RAC audits are, says Mark Seitzer, managing member of Process Solutions, Omaha, Nebraska, who has been in the healthcare and financial field for more than 30 years. He recommends focusing resources on ensuring that your current billing practices are as efficient as possible to help keep cash flowing. "Medicare claims are generally a significant portion of O&P facilities' business," he says. "Our focus is how to keep cash flowing from all sources including Medicare."

Sound business processes regarding a practice's accounts receivables will help mitigate cash flow issues, says Seitzer, whose background and training is in computer programming and accounting. For roughly the last decade, Seitzer has been working with the medical claims clearinghouse TKSoftware, Carmel, Indiana, through Process Solutions. "Our purpose is to move every claim and payment possible electronically," he says.

Seitzer recommends starting the following procedures as soon as possible if they are not already part of your O&P facility's efforts to manage accounts receivable:

  • Minimize the time a claim takes to get to the payer. Providers will have to get claims to the payers as quickly as possible, and the claims need to be complete enough, including supplemental information, for them to be adjudicated; otherwise, they will be rejected, denied, or delayed.
  • Maximize efforts with the payers to ensure they are paying in a timely manner. Follow up with payers when claims are not paid by the time expected for that payer. Practices must be more proactive than just checking on claims that are more than 60 days old.
  • Use electronic claims whenever possible. Payers are obligated by law to accept claims electronically.
  • Send required supplemental information electronically, if possible.
  • Sign up with payers to receive payments via electronic funds transfer, if offered.

Gustin again stresses attention to detail when it comes to cash flow and billing, emphasizing how you can defend current audited claims but also learn from them to help avoid future issues. "Cash flow is being disrupted because O&P processes lack attention to detail and consistency," he says. "One way to improve a facility's processes includes starting to learn from the recoupment letter, which states why a RAC is recouping a specific claim," he says. Then read the relevant local coverage determinations (LCDs) and policy articles and put processes in place to comply with all stated requirements. "This will not stop the audits, but it will at least give you defensible evidence to show that you complied and invalidate the claim recoupment," Gustin says.

businessman with financials

In addition to being vigilant in billing and working with payers, it is also important to establish a line of credit (LOC) with a local bank, O&P professionals agree, to have access to funds during cash flow delays. "Usually, LOCs require a zero balance for a specific time period each year to show that it is being used more as a stopgap measure than as a term loan for the purchase of an asset," says Schmitke. He adds that it's best to apply for an LOC when the business is "stable and strong," and not when it has immediate cash flow issues.

Jeff Brandt, CPO, CEO and founder of Ability, which he opened in 2004, says his company began using a new bank in May that understands healthcare finance. Ability can borrow up to six months on accounts receivables with its bank, which is typically unheard of in the O&P industry, he says. Many O&P businesses are also obtaining loans from the U.S. Small Business Administration (SBA) for working capital as well as taking out home equity loans to help them get by until cash flow increases, O&P experts say.

The Bottom Line

While the current climate of RAC audits and diminishing Medicare and other third-party reimbursements may be an unfortunate reality for today's O&P business owners, our experts agree that there are steps you can take to help prepare your company to manage the cash flow crisis through careful planning, attention to documentation, and exploring short-term funding sources, among others.

Schmitke says, "The increased documentation requirements by CMS, and frankly all payers, are forcing facilities to modify their internal processes, evaluate their software systems, monitor the effectiveness of each staff role, and manage their cash more conservatively. These are challenging initiatives, but each of these efforts will likely lead to operating a better business."

Betta Ferrendelli is a freelance writer based in Denver, Colorado.