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Appendix C
Utilization Management in Peer Review Organizations*

The utilization management procedures used by federal utilization and quality control peer review organizations (PROs) have been shaped by the financial incentives created by the Medicare prospective payment system (Ermann, 1988; Gosfield, 1989; Physician Payment Review Commission, 1988, 1989). The varieties and complexities of PRO review depart considerably from the types of prospective and retrospective review typical of the private sector.

• First, preadmission review by PROs is much narrower in scope than it is for most private programs. It focuses on only a handful of procedures rather than all elective admissions.

• Second, PROs perform little continued-stay review because Medicare's prospective per-case system for paying hospitals is thought to be sufficient to discourage needlessly long hospital stays.

• Third, Medicare does not provide for high-cost case management, although it is planning four demonstration projects to assess the method's value in the context of prospective hospital payment.

In addition, compared with most private review programs, PROs are required to perform a broader array of retrospective reviews of medical records to assess the quality and necessity of care. For example, they must examine a 3 percent random sample of Medicare admissions and

*The initial draft of this appendix was prepared by Alice G. Gosfield.



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Page 246 Appendix C Utilization Management in Peer Review Organizations* The utilization management procedures used by federal utilization and quality control peer review organizations (PROs) have been shaped by the financial incentives created by the Medicare prospective payment system (Ermann, 1988; Gosfield, 1989; Physician Payment Review Commission, 1988, 1989). The varieties and complexities of PRO review depart considerably from the types of prospective and retrospective review typical of the private sector. • First, preadmission review by PROs is much narrower in scope than it is for most private programs. It focuses on only a handful of procedures rather than all elective admissions. • Second, PROs perform little continued-stay review because Medicare's prospective per-case system for paying hospitals is thought to be sufficient to discourage needlessly long hospital stays. • Third, Medicare does not provide for high-cost case management, although it is planning four demonstration projects to assess the method's value in the context of prospective hospital payment. In addition, compared with most private review programs, PROs are required to perform a broader array of retrospective reviews of medical records to assess the quality and necessity of care. For example, they must examine a 3 percent random sample of Medicare admissions and *The initial draft of this appendix was prepared by Alice G. Gosfield.

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Page 247 must also review specified samples of other cases: patient transfers among hospitals, length-of-stay and cost-per-case outliers, and readmissions within 15 or 31 days of a previous discharge. Moreover, if a reviewed provider or practitioner exceeds a predetermined denial rate (six cases or 5 percent of the cases reviewed in a quarter, whichever is greater), a more intense level of review may be initiated. Altogether, the required review activities for PROs cover about 25 percent of all Medicare discharges, a considerably higher percentage than the committee was aware of in private programs. Beyond these differences in review loci in the PRO program, the essential distinctions between PRO review and private utilization management stem from two factors: (1) the direct relationship between the provider and payer in Medicare, and (2) the public law principles that guide PRO procedures. In Medicare, the responsibility for initiating preadmission review lies with the hospital or physician, not the patient. Failure to obtain the relevant certification may lead to a penalty for the provider, not the patient. The provider is also responsible if the PRO denies payment based on retrospective review of the necessity of care.1 Generally, in the private sector, a contractual relationship must exist between the payer and the provider in order for the patient to be "held harmless" (without financial liability) in similar circumstances. An even more fundamental difference between PROs and private review is founded in the public nature of PROs. Their agendas, objectives, criteria, and results are public. The manner in which they operate is subject to federal regulation and published guidelines and is informed by public law principles, including principles of due process. PROs are required by the Health Care Financing Administration (HCFA) to seek physician comments on their review criteria, to provide their criteria to state medical organizations, and to send the criteria to anyone requesting them. The Congress and the HCFA take a very directive role with the PROs. Each contract period is covered by an extensive scope of work that lays out the work expected. This scope of work is accompanied by an array of 1 In 1972, Congress recognized that the burden of a retrospective claims denial under Medicare fell unfairly on the beneficiary who incurs Medicare costs as a result of orders and charges generated by the physician and hospital. Therefore, in Section 1879 of the Social Security Act (1972), Congress established that where services were denied as not medically necessary or custodial, if the patient did not know and had no reason to know the care would be denied, Medicare would pay for the unnecessary services, waiving the patient's liability. The burden would then fall on the hospital and physician, and a judgment would be made as to whether they knew or should have known that the services would be deemed medically unnecessary. If they did not have the requisite knowledge, they too would be indemnified by Medicare. More recently, physicians have been required to reimburse Medicare patients who have paid for care (for example, through coinsurance) that was later determined to be inappropriate.

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Page 248 federal regulations and other rules governing PRO activities. About half of the original group of PROs failed the evaluation by HCFA for their first contract period, and only 15 received automatic renewals. In addition to regular performance monitoring by HCFA, a private contractor—the so-called Super-PRO—audits samples of each PRO's decisions and compares its judgments of appropriateness with those of the PRO. The Super-PRO tends to judge more care as being inappropriate than the PROs do. The Super-PRO also has reviewed a small selection of the review criteria used by PROs, but there was no provision for more systematic evaluation of the criteria (Physician Payment Review Commission, 1988). Despite this extensive oversight, the U.S. General Accounting Office recently issued a report noting the "extreme variation" in PRO organizational structure and activities (General Accounting Office, 1988). The public aspect of PRO operations is also reflected in the legislative provisions both for physician and patient appeals of PRO determinations. For the attending physician, the process may include a predenial discussion with a review physician, a postdenial reconsideration by a specialist (if possible), and, in limited circumstances, appeals to administrative law judges and even judicial reviews. Patient access to administrative and judicial review of denials is more generally available. Federal PRO law establishes that the PRO's determinations are binding upon claims payment agencies (intermediaries and carriers) on the matters assigned to PROs. The degree to which a private review entity's determinations are binding on claims administrators varies, as described in Chapter 3. Federal law establishes that PRO norms, criteria, and standards for review must be public and must reflect at least regional patterns of practice. The basis of the standards in the community standard of care is so presumed in the law that a specific malpractice exemption is provided to any practitioner or provider relying upon the PRO norms and criteria in treating patients or reviewing utilization. The law states that no practitioner and no provider can be held civilly liable under any law of the United States or of any state on account of action taken in reliance upon PRO norms, criteria, and standards, provided that he or she otherwise exercised due care. Enacted in 1972 and intended to discourage expensive defensive medicine and encourage cost containment, the provision was reenacted verbatim in the PRO law. Although this provision has never been construed by a court and is little known by the provider community, in the overall design of a public utilization management program it may well be instrumental in garnering physician conformity. It also sharply distinguishes PRO review from private sector review. Another distinguishing feature of PRO review is its range of potential sanctions. The law provides that each provider and practitioner is obligated to render medically necessary services in an economical setting, meeting

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Page 249 professionally recognized standards of quality. Failure to do so can subject an errant provider or practitioner to fines or exclusion from Medicare. This sanction authority has been increasingly used over the past few years. There are two types of sanctions: A substantial failure to comply in a substantial number of cases presents a basis to penalize a practitioner for persistent overutilization problems; a single gross and flagrant violation of the statutory requirements involving quality of care can also trigger a sanction. This type of approach to patterns of care and inclusion of providers and practitioners in an insurance program rarely exists even in the context of HMOs. Finally, it cannot be ignored that since their inception in 1984, PROs have increasingly focused their attention on quality issues. Moreover, the Consolidated Omnibus Budget Reconciliation Act of 1985 (P.L. 99-272) gave PROs the authority, not yet implemented at the time of this writing, to deny payment when services fail to meet quality standards. PROs or similar organizations are now to review the quality of care in HMOs, and they are required to consider whether accreditation agencies and state licensing boards should be notified when a possible quality problem is identified. References Ermann, Danny, "Hospital Utilization Review: Past Experience, Future Directions," Journal of Health Policy, Politics and Law, Winter 1988, pp. 683-704. General Accounting Office, Medicare PROs: Extreme Variation in Organizational Structure and Activities, GAO/PEMD-88-10, Washington, DC, November 1988. Gosfield, Alice, "PROs: A Case Study in Utilization Management and Quality Assurance," 1989 Health Law Handbook, New York: Clark Boardman Co., Ltd., 1989. Physician Payment Review Commission, Annual Report to Congress, Washington, DC, 1988. Physician Payment Review Commission, Annual Report to Congress, Washington, DC, 1989.