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The AHA Argues Fundamental RAC Program Reforms are Needed

(January 21, 2014):  In a contentious letter to the head of the Centers for Medicare & Medicaid Services (CMS), The American Hospital Association (AHA or Association) has argued that the current two-year backlog in Medicare appeals (totaling more than $1 billion), along with a growing number of claims denials by Recovery Audit Contractors (RACs), have resulted in a serious “detrimental impact” on the Association’s member hospitals. To help alleviate this problem, serious RAC program reforms are needed.  In a separate, yet similarly strongly worded letter to Congress, the AHA has shared its concerns with Capitol Hill.  The Association is seeking Congressional support in connection with the current appeals backlog. Perhaps most significantly, the Association is urging Members of Congress to pressure CMS to adopt a number of fundamental RAC program reforms to the current recovery audit framework.

I.  ALJ Hearings are Delayed for at Least Two Years:

The two AHA letters are in response to a recent memorandum from the Department of Health and Human Services (HHS) outlining operational changes to the Office of Medicare Hearings and Appeals (OMHA) system. Effective July 15, 2013, OMHA will temporarily suspend the assignment of most new requests for Administrative Law Judge (ALJ) hearings.

 According to HHS, this suspension will allow OMHA and its 65 ALJs to focus on the nearly 357,000 appealed claims for Medicare services and entitlements already in the system. HHS claims that the suspension was “necessitated by a dramatic increase in the number of decisions being appealed” to ALJs, which have grown by 184% since 2010. Due to the current backlog in claims, the agency does not expect the suspension to be lifted for at least 24 months.

II.  AHA Claims that Avoidable RAC Denials are Straining the Medicare Administrative Appeals System:

As argued by the AHA, the proposed delay is quite significant. The group highlights the fact that these delays “are not only unacceptable, they are a direct violation of the Medicare statute,” which requires that an ALJ issue a decision on the appeal within 90 days of receiving a request for a hearing. Even more, the AHA argues that ALJs’ failure to comply with this statutory deadline is not new.

For example, 94% of hospitals participating in the AHA’s RACTrac survey reported experiencing at least one delay longer than the statutory 90 days. Equally disturbing is the fact that this problem isn’t merely isolated to the third level of administrative appeal. Sixty-six percent of hospitals also reported receiving notification from a Qualified Independent Contractor (QIC), the contractor responsible for handling second level administrative appeals, that the QIC could not make a decision within the 60 days required by the statute.

 So what’s the greatest cause of this strain on the administrative appeals process? According to the AHA, it’s overzealous RACs. The AHA’s letters detail a growing frustration among the Association and its member hospitals in dealing with the private contractors.  As the AHA has noted, this has put many member hospitals in an “an untenable position” due to: 

 “…the nearly unfettered ability of RACs to churn out erroneous denials forces [hospitals] to pursue appeals in order to receive payment for medically necessary care, while the inability of OMHA to manage the appeals process within the timeframes required by the Social Security Act holds that payment hostage.”  (emphasis added).

The overburdened appeals system may stem (at least in part) from the fact that  RAC commissions are based on claims that are “denied” by the contractor BUT no penalties are levied against the RAC if the claims at issue are ultimately found to qualify for coverage and payment. As a result, RAC contractors are arguably incentivized to deny as many high-dollar inpatient hospital claims as possible, regardless of whether or not the RACs’ claims denials are truly non-payable.

According to the AHA, inaccurate denials by the RACs are forcing hospitals to “shoulder the significant administrative burden of pursing appeals in order to receive payment for the medically necessary services they provide to Medicare beneficiaries.” Adding to the AHA’s frustration is the fact that the Association contends that many of the RACs’ denial actions are themselves incorrect. The AHA notes that its hospitals are winning more than 70% of inpatient denials, which “speak to the inaccuracy and abandon with which RACs deny claims.”

III.  The AHA Argues that Fundamental RAC Program Reforms are Needed:

While the hospitals’ have experienced a high rate of success when appealing RAC denials, it is important to note that, over 70% of the RAC denials issued by the contractor thus far, have been appealed by member hospitals since the RAC program began and are still pending in the appeals system.  The AHA notes that there is currently nearly $1.5 BILLION in appealed hospital claims being held up in the Medicare appeals process.

The AHA further argues that RACs are directly contributing to this figure and that RAC program reforms are badly needed to help alleviate this backlog.  Since 2010, RAC denials “have increased nearly 30-fold,” with the average number of appeals per hospital growing from 17 in 2010 to 300 in 2013.  This increase simply leads to a further spiral in the number of claims being held up – and adds to the hold up in reimbursements for their services. According to the AHA:

 “Hospitals are bearing the financial burden with over a billion dollars caught in a broken appeals process that takes several years to issue a final determination.”

The Association’s January 14th letter to Marilyn Tavenner, Administrator for CMS, asks that the agency make fundamental changes to Medicare’s claims auditing system.  AHA has made several suggestions to help mitigate the detrimental impact that the currently delay is having on hospitals.

For example, the AHA has proposed that the most straightforward solution to this problem would be for CMS to suspend RAC audits until the appeals system has had an opportunity to catch up with the current workload.  Other suggested remedial measures include:

 ·   Postponing recoupment for appealed claims should until after the hospital receives an ALJ determination.

 ·  Enforcing the statutory timeframes that ALJ must abide by in issuing appeals decisions by entering a default judgment in favor of the provider if an appeal has not been heard within the required statutory time period.

 ·    Addressing systematic issues with the RACs that lead to avoidable claim denials and appeals and provide a mechanism for erroneous denials to be reversed outside of the appeals process.

 ·    Lowering the alternative dispute resolution (ADR) limit, which would decrease the volume of claims that can potentially end up in the appeals system.

 ·    Enforcing the RAC’s deadline to issue a decision on a claim by denying a RAC its contingency fee for any claim for which it has missed its deadline.

Whether CMS is likely to adopt any of AHA’s recommendations is yet to be determined. As a result, the Association has also taken its fight to Members of Congress. The AHA’s letter to Congress contends that “the need for fundamental RAC relief has become even more apparent and urgent.”

 Rick Pollack, the Executive Vice President for AHA, reiterated the success rate that many of its member hospitals have been having in their appeals of claims denied by RACs.  As Mr. Pollack argued:

 “…hospitals win more than 70 percent of appealed inpatient denials, meaning that the majority of appealed inpatient claims that were denied by RACs are accurate, necessary, and supported by clinical guidelines.”

Mr. Pollack further stressed that hospitals’ resources should be used on providing quality services to Medicare beneficiaries. Instead, hospitals’ funds are being used to fight “incorrect RAC denials for years on end.” This results in insufficient or adverse care to patients, as well as higher out-of-pocket expenses.  Without fundamental reforms of the current RAC program. Mr. Pollack states that “the RAC program will continue to improperly harm Medicare beneficiaries and hospitals.”

The AHA is asking that Congress encourage CMS to adopt a number of necessary reforms to the national RAC program.  The recommended reforms track those set out in the previously introduced Medicare Audit Improvement Act of 2013, (S. 1012 & H.R. 1250).  First introduced in March 2013, this proposed legislation currently remains in House and Senate committees.

IV.    Final Remarks:

If the results of the RACTrac survey prove accurate, RAC auditors have unfairly denied thousands of inpatient hospital claims, holding up a significant amount of reimbursement money for hospitals.  In many instances, we have seen auditors focusing claims for care provided during a short length in stay where they presume that, if the length of stay is short, the patient likely could have been seen in a lesser intensive level of care.  These include outpatient services in a skilled nursing home or through a home health agency.  Unfortunately, beneficiaries may not qualify for Medicare coverage in these types of care.

As seen at the ALJ hearing, a number of the RACs’ presumptions regarding the claims at issue have been shown to be incorrect.  Unless Congress and / or CMS moves to restrain RACs in their overzealous pursuits, hospitals and other Medicare providers are likely to continue to see increasing RAC audits (and denials) of their Medicare claims.  In that case, providers will continue to spend countless dollars fighting to receive payment for the services they have rendered.  As both hospitals and physicians can attest, although their administrative appeal of denied claims may ultimately be successful, these providers will have spent significant time and money defending themselves.  These appeal activities make it even more difficult to focus on treating  our nation’s Medicare beneficiaries.

Should you receive a medical records request for records from a RAC, ZPIC or another CMS program integrity contractor, please feel free to give us a call.

Healthcare LawyerRobert W. Liles, Esq., serves as Managing Partner at Liles Parker, Attorneys & Counselors at Law.  Liles Parker attorneys represent health care providers and suppliers around the country in connection with Medicare audits by ZPICs and other CMS-employed specialty contractors.  The firm also represents health care providers in HIPAA privacy breach matters, state medical board inquiries and regulatory compliance reviews. For a free consultation, call Robert at:  1 (800) 475-1906.  

Prepayment Reviews and Postpayment Audits are Increasing in Frequency — New Guidance has Been Issued to ZPICs

RACs and ZPICs are Conducting Prepayment Audits

Prepayment Audits are here to Stay. Is Your Practice Ready?

(September 3, 2013):  On August 21, 2013, the Centers for Medicare & Medicaid Services (CMS) released Transmittal 485/Change Request 8079. This transmittal imposes an obligation on Zone Program Integrity Contractors (ZPICs) and Program Safeguard Contractors (PSCs) to notify a health care provider prior to placing them on the provider on prepayment or postpayment review.

There are four major requirements for the notice:

  1. 1.  PSCs and ZPIC must notify providers of a provider-specific review by individual written notice prior to beginning the review.
  2. 2.  The written notice must delineate whether the review is to occur on a prepayment or postpayment basis.
  3. 3.  The contractors are required to maintain a copy of the letter and the date it was mailed.
  4. 4.  Finally, the notification must be mailed the same day the edit request is forwarded to the Medicare Administrative Contractor (MAC).

Benefits of receiving prior notice of a prepayment and/or postpayment review include:

  1. Advance Notice Allows Additional Time for a Health Care Provider to Prepare:   This notice requirement will give a health care provider more time to prepare for review and to determine what kind of assistance they may need in addressing the review, such as outside legal counsel.  As any health care provider who has undergone a prepayment review or a postpayment audit can attest, responding to onsite visits and documentation requests can be very time consuming. This is particularly true when supporting medical documentation is incomplete.  In such a case, you may require affidavits from the rendering provider or even outreach to a network of health care providers involved in the care of a single beneficiary.  Similarly, if you are dealing with documentation that is alleged to be illegible, you may need to which may require transcription or affidavits.

  2. CMS’ Template Letter to be Used by Contractors Leaves Little or No Room for Doubt:  Fortunately, CMS has drafted a template letter for its ZPIC and PSC contractors that is to be sent to providers in order to properly provide them with the mandated notice (see exhibit 45).  We believe this form letter is helpful because (a) health care providers will immediately understand the purpose and implication of the letter upon receipt; and (b) health care providers will know if a review is initiated without the provision of this letter, thereby invalidating the review.

Now, more than ever, it is imperative that you fully understand and comply with your obligations as participating provider in the Medicare program.  Prepayment reviews and postpayment audits are increasing in frequency and are being conducted based on data mining.   Depending on how you “slice and dice” the data, virtually any health care provider can appear to be an outlier.  All health care providers should carefully review their coding and billing practices to ensure that they are fully compliant with applicable statutory and regulatory requirements.  Do your services meet Medicare’s medical necessity requirements?  Are your documentation practices consistent with applicable NCD, LCD, LMRP and Medicare Benefit Policy Manual requirements?  Are you checking to ensure that Medicare’s coverage requirements are being met?  Are your coding and billing practices in full compliance with applicable regulations and requirements?  Finally, are you engaging in any business practices that might otherwise “taint” an otherwise payable claim?  If you cannot answer these questions, you will not be prepared if your practice is placed or prepayment review or subjected to a postpayment audit.

Healthcare LawyerRobert W. Liles, JD, MBA, MS, serves as Managing Partner at the health law firm of Liles Parker.  Our attorneys represent physicians, group practices, home health agencies, hospices and a wide variety of other health care providers around the country.  Please give us a call for a free consultation regarding your situation.  We can be reached at: 1 (800) 475-1906.

The Recovery Audit Contractor Program Continues to Expand its Medicare Footprint

(November 26, 2012): The Medicare Fee-for-Service (FFS) program consists of numerous payment systems, with a complex network of contractors that process more than one billion claims submitted by more than one million healthcare providers each year.[1]  Medicare providers include hospitals, physicians, skilled nursing facilities, labs, ambulance companies, and durable medical equipment, prosthetics, orthotics, and supplies (DMEPOS) suppliers, among others.[2]  Medicare Administrative Contractors (MACs), also known as “claims processing contractors,” process claims, make payments to health care providers in accordance with Medicare regulations, and educate providers regarding how to accurately submit coded claims under Medicare guidelines.[3]

The Centers for Medicare & Medicaid Services (CMS) and its MACs are required to actively review Medicare payments for services to determine their accuracy and ensure provider compliance.[4]  A major concern for CMS is the distribution of improper payments.  Improper payments occur when payments are made for items or services that do not meet Medicare’s coverage and medical necessity criteria or are incorrectly coded, or where the supporting documentation submitted does not support the ordered service.[5]  CMS has implemented various procedures in order to pre-screen claims for improper payments.  However, many of these claims are generally paid without requesting any supporting medical records.  In particular, only about 0.002 percent of all claims are reviewed against the supporting medical records prior to payment.[6]  These systems simply cannot prevent all erroneous payments due to the extremely large volume of claims processed in the Medicare program.

As a result, CMS has instituted post-payment review programs in order to alleviate the amount of improper payments that are unfortunately paid.  One such program is the Recovery Audit Program.  While this program has seen an ebb and flow of success, it has also become a significant administrative burden for Medicare providers.  The question remains – is the Recovery Audit program doing more harm than good?

I.  The Recovery Audit Contractor Program:

The Recovery Audit Program was initially established in Section 306 of the Medicare Prescription Drug, Improvement and Modernization Act of 2003.[7]  Under this program, Recovery Audit Contractors (RACs) identify underpayments and overpayments made in the FFS system.[8] RACs then recoup overpayments amount back to the Medicare Trust Fund or refund underpayments back to the provider.[9]  For their efforts, RACs are paid on a contingency fee basis – they receive a percentage of the improper overpayments and underpayments they collect from providers.[10]  In 2009 and 2010, these fees ranged from 9 to 12.5 percent.[11]  These fees are paid once the improper payment is recouped or refunded, not when the improper payment is first identified.[12]  In fact, RACs must return any fees if an overpayment or underpayment is overturned in a subsequent appeal.[13]  This payment structure makes the Recovery Auditor a type of “bounty hunter” for recouping overpayments.[14]

Recovery Auditors have a defined scope of work.  They may only review the last three years of claims submitted by providers.[15]  Importantly, these reviews must be conducted with “good cause” and not through any form of random selection.[16]  The auditors also must send a “demand letter” to each provider explaining how an improper payment determination was made.[17]  RACs may use their own proprietary software programs to identify claims most likely to contain improper payments, a process known as “targeted review.”[18]  They may also utilize “extrapolation techniques” in these targeted reviews.[19]  Nevertheless, RACs must ensure that administrative burdens are minimal for providers.[20]  This may require refining edit parameters so that only those claims with the greatest probability of being improperly submitted are selected, or limiting the amount of documentation requests so that it does not impact the provider’s ability to provide care to beneficiaries.[21]  RACs also must complete their reviews within 60 days from receipt of the necessary medical record documentation and/or claims submission.[22]

RACs primarily engage in two types of claims review: automated and complex.  Automated reviews do not involve any human review of medical records.[23]  They occur only when the RAC is certain that both a service is not covered or incorrectly coded and a written Medicare policy, article, or sanctioned coding guideline exists (e.g., when a service is incorrectly coded or billed twice).[24]  On the other hand, a complex review does require a human review of the medical records.[25]  For the most part, the medical necessity of a billed procedure will be at issue due to the high probability, but not certainty, that the service is not covered or where no Medicare policy, article, or sanctioned coding guideline exists.[26]  Medical necessity determinations are primarily outlined in either CMS’s National Coverage Determinations (NCDs) or through a MAC’s Local Coverage Determinations (LCDs).[27]  RACs are also required to have a registered nurse or therapist make any medical necessity determinations based on the NCD/LCD or a certified coder to make coding determinations.[28]

However, Medicare RACs are prohibited from auditing payments in certain circumstances.  These restrictions include: services provided under a program other than the Medicare FFS program; claims more than three years past the date of the initial determination; claims where the beneficiary is liable for the overpayment because the provider is without fault with respect to the overpayment; claims arising from prepayment review; or random selection of claims, among others.[29]  Compliance to these constraints is assured, at a minimum, through CMS’s annual reviews of an auditor’s activities.[30] 

II. Coordination Among Medicare Contractors:

RACs are just one of several contractors that CMS employs to ensure the Medicare program is operated efficiently and effectively.  For example, while RACs are primarily concerned with preventing and identifying errors, they are not responsible for reviewing claims for fraudulent activity.  Instead, CMS contracts with Zone Program Integrity Contractors (ZPICs).  ZPICs are responsible for implementing the Medicare Benefit Integrity program, which involves the identification of suspected fraud.[31]  Specifically, ZPIC must “identify cases of suspected fraud, develop them thoroughly and in a timely manner, and take immediate action to ensure that Medicare Trust Fund monies are not inappropriately paid out and that any mistaken payments are recouped.”[32]  Thus, whenever RACs come across situations where the overpayment appears to involve fraudulent activity, they must refer these cases of potential fraud to the appropriate ZPIC.

Finally, while ZPICs and RACs are becoming more prevalent in Medicare auditing, Medicaid Integrity Contractors (MICs) are gaining similar notoriety in the in the area of Medicaid.  CMS contracts with MICS in order to further support efforts to combat fraud and abuse in the Medicaid Program and accomplish the goals of the Medicaid Integrity Program.  Among the tasks for which MICs are responsible for include: the review of actions of those seeking payments from state Medicaid programs; the audit of those claims; the identification of overpayments related to those claims; and the education of providers and others with respect to payment integrity and quality of care.[33]  While the use of MICS is similar to the RAC program, Audit MICs are not paid on a contingency basis.[34]  Rather, Audit MICs are paid in a virtual fee-for-service model, which includes bonuses for efficiency and effectiveness.[35]

III. The Recovery Audit Program Appeals Process, Collection and Repayment:

Providers are allowed to appeal improper payment determinations made by a RAC.  However, this process includes up to five levels of appeal and is often time-consuming and expensive.  A redetermination must be requested within 120 days of receiving an adverse claim determination.[36]  The MAC will then have 60 days to examine and rule on the redetermination request.[37]  If the provider remains dissatisfied with the redetermination decision, a notice for reconsideration must be made within 180 days.[38]  In this situation, a Qualified Independent Contractor (QIC) will review the appeal and must make a decision within 60 days.[39]  The third level of appeal is an Administrative Law Judge (ALJ) hearing.  For this appeal, the ALJ will conduct and conclude a hearing on the QIC’s conclusion; the judge must then render a decision within 90 days.[40]  Unfortunately for the provider, ALJs are bound by all NCDs, the Medicare Act, applicable regulations, and CMS rulings, and must give deference to non-binding CMS and MAC policies, such as LCDs, local medical review policies, manual instructions and program memorandum.[41]  Nevertheless, if either party, whether it is the provider or CMS/MAC, is dissatisfied with the ALJ decision, an appeal may be made within 60 days to the Medicare Departmental Appeals Board (the Board).[42]  In general, the Board will render a decision within 90 days of the appeal.[43]  Finally, if the amount in controversy exceeds $1000, a final judicial review of an adverse MAC decision may be appealed within 60 days to a Federal District Court.[44]  In sum, the appeals process for any adverse determination decision can be a time-consuming and financial burden for any provider.

Collection of overpayments or repayments of underpayments are also detailed and systematic processes.  As previously noted, MACs within the provider’s jurisdiction will process these actions.[45]  Importantly, recoupment of an overpayment may be offset against future payments made by the claims processing contractor if payment is not received by a specific time period.[46]  This ordeal can also have significant secondary financial burdens for the provider.  The provider may apply for an extended repayment plan; however, any recoupment from future repayments cannot occur until 41 days after the adjustment/date of demand letter.[47]  In addition, the receipt of a valid appeal may also delay recoupment.[48]

IV. RACs in Their Infancy — The Demonstration Phase:

The RAC program initially began as a “demonstration” that lasted from March 2005 to March 2008.[49]  During this period, RACs had two significant restrictions.  They could only identify improper payments made under Medicare Part A and Part B and could only review claims processed from the six states[50] that had the highest per capita utilization rates of Medicare services.[51]  Nonetheless, the RACs were given two primary tasks: (1) detect and correct past improper payments in the Medicare FFS program, and (2) provide information to CMS and to the MACs in order to help protect the Medicare trust funds by preventing future improper payments.[52]  The demonstration would also provide CMS with a cost-benefit analysis in using private contractors to identify and correct improper payments.  Ultimately, the demonstration proved to be extremely positive and produced significant lessons for the future.

During the demonstration, RACs succeeded in correcting more than $1.03 billion in improper Medicare payments.[53]  Approximately 96 percent of these improper payments were overpayments collected from providers; as a result, $980 million was returned to the Medicare Trust Fund.[54]  The remaining 4 percent ($37.8 million) were underpayments repaid to providers.[55]  In addition, RACs became more effective at correcting improper payments over the course of the demonstration.  The first half of FY 2008 alone accounted for 62 percent of the overall corrections.[56]

In particular, the results revealed that a majority of the overpayments, approximately 85 percent ($828.3 million), were made to inpatient hospital facilities.[57]  Whether this statistic demonstrates that these hospitals are more likely to submit improper claims is uncertain.  Alternatively, CMS believed that its bounty hunters might have simply been incentivized by their contingency fee payment structure in order to focus their efforts on high-dollar payments, which are predominantly found in inpatient hospitals.[58]  This scheme would therefore give RACs the highest return-to-expense in claims and medical record reviews.  RACs also found that most improper payments occurred as a result of services being rendered in a “medically unnecessary setting,” i.e., where the patient “needed care but did not need to be admitted to the hospital to receive that care.”[59]

While these numbers may demonstrate significant intrusion into the overall claims processing system, most Medicare claims were unaffected.  CMS allowed RACs to review approximately 1.2 billion claims, valued at $317 billion[60]; hence, the $1.03 billion in identified improper payments represented less than 1 percent of the dollar value of all claims given to RACs.  In addition, providers’ financial revenues were only slightly impacted by the demonstration.  For example, over 94 percent of the hospitals in one region had their Medicare Part A revenue impacted by less than 2.5 percent.[61]

The results indicate that a large majority of the improper payments identified appear to have been appropriately targeted.  Notably, providers chose to appeal only 12.7 percent of the RAC determinations.[62]  However, it is difficult to conclude whether this percentage was due to effective targeting or provider apathy.  In fact, when providers did choose to appeal, they were successful 64 percent of the time.[63]  Nevertheless, of all the RAC overpayment determinations, only 4.6 percent were eventually overturned on appeal.[64]  RACs appeared to effectively utilize their propriety software programs to screen improper payments.  Ultimately, after accounting for the underpayments repaid to providers and the overpayments overturned on appeal, the RAC demonstration resulted in returning $693.6 million to the Medicare Trust Funds.[65]

The RAC demonstration proved to be extremely financial success.  The cost to run the program was less than the amount returns to the Medicare Trust Fund.  Specifically, CMS spent only $201.3 million to run the demonstration, which meant that it cost CMS a mere $0.20 for each dollar collected.[66]  The next step for CMS was all but predictable: the RAC program would go nationwide.

V.  The Recovery Audit Contractor Program Grows and Become Permanent:

Section 302 of the Tax Relief and Health Care Act of 2006 authorized a permanent Recovery Audit program to become effective nationwide by January 2010.[67]  CMS immediately began implementing this authority.  CMS divided the country into four regions and awarded four permanent RAC contracts.[68]  Yet, the program’s expansion did not end there.

Section 6411(b) of the Patient Protection and Affordable Care Act (PPACA) extended Medicare RACs audit coverage even further to Part C and Part D.[69]  For these parts however, RACs would be limited under “special rules;” for example, they would have to ensure that each Medicare Advantage plan under Part C had an anti-fraud plan in effect and to review the effectives of these plans.[70]  Section 6411(a) of the PPACA also required that States develop a similar Medicaid RAC program no later than December 31, 2010.[71]  Furthermore, the PPACA mandated that the Secretary of Health and Human Services submit a yearly report to Congress on the program’s effectiveness.[72]  These reports would include information on each contractor’s performance, savings recouped under the program, and the Secretary’s determination on the overall effectiveness of the program, including a cost-benefit assessment.[73]

CMS also found guidance elsewhere.  Medicare providers presented the agency with several concerns of their own that arose from the demonstration.  CMS analyzed these issues and responded by incorporating several important adjustments into the permanent program.  These changes included: building cooperative relationships with Medicare claims processing contractors, fraud enforcers, the Department of Justice, and appeals entities; contracting with a RAC validation contractor to conduct independent third-party reviews of RAC claim determinations; limiting the claim review look-back period to three years; requiring each RAC to hire a physician medical director; ensuring RACs consistently documented their “good cause” for reviewing a claim; ensuring that RACs pay back their contingency fee if the claim is overturned at any level of appeal, not just the redetermination level; and conducting significant outreach to providers.[74]  These annual reports would indicate whether or not the nationwide program continued to be effective.

VI.  National Recovery Audit Contractor Program Results:

The first annual report to Congress analyzing the results from the national Medicare RAC program occurred for fiscal year (FY) 2010.  Notably, this report did not include the identification and recoupment of improper payments for Medicare Part C, Part D, or Medicaid.  After reviewing the first year’s results, CMS concluded that the RAC program was once again a success story in correcting improper payments.  Objectively however, the results demonstrated that the nationwide program did not live up to its demonstration predecessor.

During FY 2010, RACs identified and corrected approximately 192,000 claims in combined overpayment and underpayment determinations.[75]  This figure represented a mere $92.3 million in overall improper payments.[76]  In particular, 82 percent ($75.4 million) of the identified corrections were overpayments that were recouped back to the Medicare Trust Fund, while 18 percent ($16.9 million) were underpayments refunded to providers.[77]  These figures are further underscored by the effectiveness of RACs during their demonstration.  Comparatively, in FY 2008, RACs were limited to a much smaller region but identified over $634.6 million in improper payments, repaid $37.8 million back to providers, and more importantly, recouped almost $1 billion back to Medicare.[78]

The FY 2010 figures cannot be completely denounced; in truth, they do not represent the full extent of the program’s “success.”  RACs had demanded approximately $135.6 million in overpayments.[79]  There were several potential reasons for the different measures.  Notably, CMS granted providers a 41-day “grace period” before collections would begin.[80]  More disturbing however, many providers simply terminated their participation in Medicare or could not financially reimburse the program for the alleged overpayments.[81]

Despite these concerns, the FY 2010 report did yield some positive trends.  HDI and Connelly, Recovery Auditors who participated in the demonstration, appear to have been able to leverage their prior experience and more effectively identify Medicare improper payments compared to the two new contractors.  Specifically, these two contractors accounted for approximately 77 percent ($70.9 million) of the total amount corrected.[82]  Moreover, many of the problem areas identified in the demonstration were also found under the national program.  Collections from inpatient hospitals continued to involve a majority of the identified overpayments ($41.4 million).[83]  Only in Region D (HDI) did DME collections comprise most of the identified overpayments by region.[84]

RACs did witness one area of improvement: success in the appeals process.  Unfortunately, most of the data included in the FY 2010 Congressional report was incomplete due to the extensive time involved in the administrative appeals process.  Nevertheless, the report revealed that providers appealed only 5 percent of all claims (8,449 claims) collected in FY 2010.[85]  Of these, only 2.4 percent (3,902 claims) were overturned on appeal in favor of the provider.[86]  As previously described, providers chose to appeal 12.7 percent of the RAC determinations during the demonstration, and 4.6 percent of the overall determinations were eventually overturned.  Ultimately, $2.6 million were returned back to providers through the appeals process in 2010.[87]  These results could be construed in one of two ways: either RACs were utilizing their targeting software more effectively to identify improper payments, or providers were submitting fewer claims that included improper payments.

As the program expanded nationwide, CMS spent much of 2010 refining processes, improving operations, and gaining additional experience dealing with the claims processing contractors and the providers.  For example, CMS began to track what it called “vulnerabilities” – these are problem areas identified by RACs for the purposes of developing corrective actions.[88]  CMS tracks these vulnerabilities and institutes corrective adjustments as necessary.  CMS also publishes the major findings so that providers can understand where improper payments are occurring in order to develop additional corrective actions.  Broadly speaking, major overpayment issues in FY 2010 concerned incorrect coding or billing for bundled services separately.[89]  Incorrect coding was also the primary error code for underpayments identified by the RACs.[90]  This back-and-forth learning process may have also contributed to providers submitting fewer improper claims.

CMS was aware that the RAC program inherently burdened the provider.  As a result, it implemented new processes to help alleviate problems associated with the claims processing system and the RAC program.  The agency developed a new mass adjustment process for improperly paid claims.[91]  This new system allowed CMS to automatically adjust a large number of claims that had been paid improperly, without having to resort to manual post-payment reviews and intrusions.[92]  CMS also continued to limit increases in additional documentation requests and implemented a new issue-approval process for all issues reviewed by the RACs.[93] Generally, CMS took proactive approaches to educate the auditors on Medicare payment policies, statutes, and regulations to ensure that the RACs were not erroneously identifying improper payments.[94]  As CMS stated, this continuous process would help it be successful in “paying the claim right, the first time.”[95]

VII.  Recovery Audit Contractors Find Success:

A detailed Congressional report for FY 2011 is not yet available.  Nevertheless, CMS does provide quarterly newsletters that provide objective financial snapshots of the RAC program.  Based on the most recent newsletters, it appears that the RAC program may have rediscovered the successes it produced during the demonstration phase.

The FY 2011 third quarter newsletter details the beginning of a positive trend for the program.  During this quarter, Recovery Auditors corrected $289.3 million in improper payments.[96]  This figure includes $233.4 million in overpayments recouped back to the Medicare Trust Fund and $55.9 million in underpayments returned to providers.[97]  Subsequent financial data is even more encouraging for CMS.

The final quarterly newsletter for FY 2011 is important because it not only includes data for the quarter but also provides a yearly wrap-up of the program’s overall results.  RACs were able to correct $353.7 million in improper payments during the quarter, a 52 percent increase over the previous period.[98]  This amount included $277.1 million in overpayments collected, as well as $76.6 million in underpayments returned to providers.[99]  More importantly, RACs corrected $939.4 million in improper payments for all of FY 2011.[100]  This amount represented a ten-fold increase over the previous fiscal year.  While a detailed cost-benefit analysis for this year cannot be assessed without a detailed Congressional report, these initial objective figures demonstrate a significant improvement in the program’s effectiveness in identifying improper payments.

This positive trend continued into the following year.  During the first quarter of FY 2012, RACs identified $422.7 million in improper payments.[101]  Interestingly, the monetary gap between identified overpayments and underpayments during this period reflects that the Recovery Auditors were becoming more beneficial for CMS than for the providers.  The auditors recouped nearly $400 million in overpayments but only returned $24.9 million back to providers.[102]  This latter figure represented nearly $50 million less for providers than the previous quarter.

The most recent quarterly report for FY 2012 indicates that the program’s success has exploded.  During this period, RACs identified almost $650 million in improper payments.[103]  This amount included $588.4 in overpayment collections and $61.5 million in underpayment returns.[104]  Thus, for the first two quarters of FY 2012, the program was able to identify over $1.07 billion in improper payments.[105]

These figures may demonstrate that the national Recovery Auditor program has found the success CMS was hoping for in combating improper payments.  By the second quarter of FY 2012, the national program had corrected $2.1 billion in improper payments.  Nearly half of this amount, $939.3 million, occurred in FY 2011.  More importantly, over half, $1.07 billion, was corrected in just the first two quarters of FY 2012.  After initial missteps in expanding the program nationally, CMS and its bounty hunters have implemented a program that is becoming more effective in identifying and correcting improper payments for the Medicare FFS system.

VIII.  Provider Concerns:

While the results from the national program are trending in a positive direction for CMS, the agency’s data does not provide a complete picture.  Other factors must be assessed to determine whether the program, as a whole, is positive for all entities within the Medicare FFS system.  Notably, the RAC program must also be analyzed from the providers’ perception.  From their point of view, the national Recovery Auditor program has become an administrative nightmare.

The American Hospital Association (AHA) created a program called RACTrac, a free, web-based survey developed in response to what AHA felt was a lack of data provided by CMS on the impact of the RAC program on hospitals.  Recently, AHA enhanced the RACTrac survey to capture more detailed information on medical necessity review denials and administrative difficulties due to problems with the RAC post-payment review process.  Data from the latest RACTrac survey for the first quarter of 2012 yield some interesting results.

The 2012 first quarter survey captured RAC activity from January of 2012 through March 2012.[106]  The survey analyzed feedback from 2220 hospitals, 87 percent of which reported experiencing some form of RAC activity.[107]  Most of this activity affected general medical and surgical hospitals.[108]  Overall, the feedback indicates that the national RAC program has become a significant administrative burden for hospital providers.

From the outset, participating hospitals reported dramatic increases in RAC denials and medical record requests over the previous three quarters.[109]  These increases are in direct contradiction to CMS’s statements.  As indicated earlier, CMS sought to limit the amount of documentation and medical review that its contractors could request.  Despite these increases, over two-thirds of medical records reviewed by RACs did not contain an improper payment determination.[110]  Thus, a large majority of hospitals were wasting valuable time – and as will be revealed below, money – dealing with the contractors and their unnecessary audits.

Participants also indicated that payment denials amounted to $741 million in the first quarter of 2012 alone; this figure was nearly double the amount reported in the final quarter of 2011.[111]  Furthermore, 96 percent of denials occurred as a result of the more in-depth complex review and were largely attributed to denials in the inpatient setting.[112]  Analyzing the denial data even further, 93 percent of hospitals indicated that medical necessity denials were the most costly complex denials.[113]

RACs did provide some beneficial assistance for the hospitals.  Nearly 75 percent of the hospitals affected by RAC activity reported receiving at least one underpayment determination.[114]  In all, hospitals reported that the auditors identified nearly $73 million in total underpayments due to these providers.[115]  This value constituted a 30% increase in identified underpayments over the same period in 2011.[116]  Nevertheless, monetary losses due to overpayment denials were ten times greater that gains from underpayment recoupment.

The survey also offered insight into the providers’ complaints in dealing with the administrative appeals process.  The feedback reveals that hospitals appealed more than one-third of all RAC denials; in particular, hospitals in Regions A, B and D appealed 40 percent or more of the denials.[117]  In addition, 83 percent of hospitals reported appealing at least one RAC denial, while each hospital reported appealing, on average, 83 denials.[118]  This amounted to more than $380 million in appealed claims.[119]

The results from these appeals provide valuable insight for future actions on the part of the hospitals.  To be sure, when the hospitals chose to appeal an adverse determination, they were very successful.  For those claims that have completed the appeals process, 75 percent of all adverse determinations were overturned in favor of the hospital.[120]  Region B had the highest overturn rate – 84 percent of its appeals were later overturned.[121]  More than one-third of the participating hospitals had a denial reversed during just the discussion period, or “grace period.”[122]  This success amounted to $51.5 million in overturned denials that hospitals would otherwise have had to pay.[123]  In particular, more than half of the RAC denials were overturned because the care was found to be medically necessary.[124]  Nevertheless, the administrative adjudication process was still regrettably slow.  The hospitals stated that nearly three-fourths of their appealed claims were still sitting in the appeals process.[125]

The hospitals also provided significant information related to their administration burdens.  Notably, 76 percent of the survey participants indicated that RAC activity impacted their organization over the previous quarter, and 55 percent reported increased administrative costs.[126]  The specific dollar amounts provide a more troublesome view.  Of those participating in the survey, 55 percent spent more than $10,000 managing the RAC process during the first quarter of 2012, 34 percent spent more than $25,000 and 7 percent spent over $100,000.  Clearly, these results demonstrate that hospital staff members are spending an increasing amount of money and time responding to RAC activity.  On average, a hospital’s RAC Coordinator reported spending approximately 114 hours – almost 5 full days – just managing the administrative issues related to RAC activity.[127]  In fact, these staff members spent 22 hours more than the previous year responding to RAC activity.[128] More troubling, these hourly figures do not even include the amount of time spent by other hospital staff members (e.g., nurses, medical records staff, administrative/clerical staff, etc.).

Many hospitals also reported utilizing, and paying for, external resources to deal with the RAC process.  For example, 42 percent outsourced Utilization Management Consultants, at an average cost of over $34 thousand, to deal with the administrative burdens.[129]  These consultants were used in addition to in-house personnel already staffed for these particular administrative purposes.  While CMS indicated that one of its primary goals for the nationwide RAC program is conducting provider education, the agency appears to be falling short of this task as well.  The survey indicates that 59 percent of the providers stated that they had yet to receive any education related to avoiding payment errors from CMS or its contractors.[130]

Ultimately, hospitals indicated that the two most significant problems in the RAC process was “reconciling pending and actual recoupment due to insufficient or confusing information on the remittance advice” and “not receiving a demand letter;”[131] the latter concern is in direct contradiction to the RACs’ scope of work.  Hospitals also continued to report that RACs would rescind medical record requests after the hospital had already submitted the records.[132] If there was any positive feedback for CMS from this survey, it may be solely limited to the providers’ perception of RAC feedback.  One-third of the providers indicated that the RACs’ responsiveness was “good” and approximately 31 percent indicated it was “fair.”[133]

IX.  Conclusion:

After a successful demonstration phase, the Recovery Auditors shifted their attention to their main tasks of identifying and correcting improper payments.  With the results of the demonstration program, CMS identified five key success factors it would use to measure the success of the national program: minimize provider burden; ensure accuracy of its audits; maximize transparency of the program and its contractors; ensure the program operated efficiently and effectively; and provide a more robust provider education program.

While the national program got off to a slow start, recent data indicates that the program has become the effective bounty hunter CMS had hoped for since the program’s inception.  With over $1 billion in identified improper payments in the first half of FY 2012 alone, this success trumps the similar figure that RACs had corrected in three years of the demonstration.  While this payment accuracy program is well intentioned, providers – in particular, inpatient hospitals – continued to be frustrated by the intrusion of these contractors.

Hospitals may often be responding to duplicative record requests, simultaneous audits, or dealing with the burdens of an audit simply to have it later rescinded.  Surveys from these providers indicate that RACs are becoming more involved but not necessarily more effective.  When more than two-thirds of the hospitals’ medical records that are reviewed do not contain an improper payment, there is clearly a flaw in the RAC system.

Furthermore, the RACs have a strong financial incentive to deny claims.  Based on their contingency fee structure, the more claims the RACs deny, the more these contractors are paid.  CMS has implemented measures to assist providers – in particular, ensuring that RACs must pay back any fees if an appeal is later overturned – but these measures do not counteract the burdens to providers.  While providers have become more successful in winning their appeals, the simple time and financial burdens imposed by the administrative appeals process can act as a significant impediment to bringing forth an appeal.  Moreover, even when the provider obtains a favorable decision on appeal, there is little to no precedential value so RACs will continue to review and deny substantially similar claims.

CMS must review the goals it outlined as the RAC program moved from its demonstration period to its national program.  It must also continue to offer significant provider and contractor education in order to ensure that the Medicare FFS program runs effectively and efficiently.  Only then will “paying the claim right, the first time” actually occur.

Robert Saltaformaggio is a Senior Litigation Paralegal at Liles Parker, and works out of our Washington, D.C. office. Robert is in his last year of law school and will be sitting for the bar in the next few months.  Over the past three years, Robert has assisted Liles Parker attorneys on a wide variety of Medicare and Medicaid post-payment audit appeals.  In addition, Robert has provided research, brief writing and litigation support on complex health law matters and cases. For more information on RACs, ZPICs and other pre-payment and post-payment audits of Medicare and / Medicaid claims, please call us today for a free initial consultation.  We can be reached at 1-800-475-1906.

[1] Centers for Medicare & Medicaid Services, Implementation of Recovery Auditing at the Centers for Medicare & Medicaid Services. FY 2010 Report to Congress as required by Section 6411 of the Affordable Care Act, p.1, [hereinafter FY 2010 RAC Congressional Report].


[3] 42 C.F.R. § 421.304 (2007).

[4] Medicare Program Integrity Manual, Ch. 3, §3.1.

[5] Centers for Medicare & Medicaid Services, Statement of Work for the Recovery Audit Contractor Program, J-1 RAC SOW, p. 8, [hereinafter RAC SOW].

[6] FY 2010 RAC Congressional Report, p. 2.

[7] Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Pub. L. 108-173, 117 Stat. 2066 (2003).

[8] Id.

[9] 42 U.S.C.A. §1395ddd (2010).

[10] Id.

[11] FY 2010 RAC Congressional Report, p.10.

[12] Id.

[13] Id.

[14] Andrew B. Wachler, et al., One Year Later: The Impact of Health Care Reform on Health Care Provider Audits and Compliance Programs. 90 Jun. Mich. B.J. 24. June 2011.

[15] RAC SOW, pp. 8, 9.

[16] Id., at 8, 11.

[17] Id., at 24.

[18] Id. at 11.

[19] Id.

[20] Id. at 8.

[21] Id.

[22] Id. at 23.

[23] Id. at 20.

[24] Id.

[25] Id. at 21.

[26] Id.

[27] Id. at 6.

[28] Id. at 23.

[29] Id., 9–12.

[30] Id. at 9.

[31] Medicare Program Integrity Manual, Pub. 100-08, Chapter 4, § 4.2.

[32] Id.

[33] Deficit Reduction Act of 2005, Pub. L. 109-171, 2006 § 1932, sec. 6034 (2006).

[34] Medicaid Integrity Program; Eligible Entity and Contracting Requirements for the Medicaid Integrity Audit Program, 73 Fed. Reg. 55768-01 (Sept. 26, 2008) (to be codified at 42 C.F.R. pt. 455).

[35] Id.

[36] 42 U.S.C.A. § 1395ff (2011).

[37] Id.

[38] Id.

[39] Id.

[40] Id.

[41] 42 C.F.R. § 405.1062 (2005).

[42] § 1395ff

[43] Id.

[44] Id.

[45] FY 2010 RAC Congressional Report, at 10.

[46] Id.

[47] Id.

[48] Id.

[49] Medicare Prescription Drug, Improvement and Modernization Act of 2003 § 306.

[50] Initially, the demonstration was limited to just California, Florida, New York, but expanded to Massachusetts, South Carolina and Arizona in March 2007.

[51] Centers for Medicare & Medicaid Services, The Medicare Recovery Audit Contractor (RAC) Program: An Evaluation of the 3-Year Demonstration, June 2008, p. 11, [hereinafter RAC Demonstration Evaluation].

[52] Id.

[53] Id. at 15.

[54] Id. at 15, 17.

[55] Id.

[56] Id. at 2.

[57] Id. at 18.

[58] Id. at 18.

[59] Id. at 19.

[60] Id. at 18.

[61] Id. at 20.

[62] Id.

[63] Id.

[64] Centers for Medicare & Medicaid Services, The Medicare Recovery Audit Contractor (RAC) Program: Update to the Evaluation of the 3-Year Demonstration, January 2009, p. 2,

[65] RAC Demonstration Evaluation, at 18.

[66] Id. at 23.

[67] Tax Relief and Health Care Act of 2006, P.L. 109-432 § 302(a), 120 Stat. 2922 (2006).

[68] Centers for Medicare & Medicaid Services, Recovery Audit Contractors: Overview, The four RAC contractors are: Diversified Collection Services, Inc. (DCS) (Region A); CGI Federal (CGI) (Region B); Connolly, Inc. (Region C); and Health Data Insights, Inc. (HDI) (Region D).

[69] §1395ddd

[70] FY 2010 RAC Congressional Report, at 7.

[71] Patient Protection and Affordable Care Act, Pub.L. 111-148, § 6411(a), 124 Stat. 119 (2010).

[72] §1395ddd.

[73] Id.

[74] RAC Demonstration Evaluation, at 24-27.

[75] FY 2010 RAC Congressional Report, at 14, A7.

[76] FY 2010 RAC Congressional Report, at 14.

[77] Id.

[78] RAC Demonstration Evaluation, at 34.

[79] FY 2010 RAC Congressional Report, at 14.

[80] Id.

[81] Id.

[82] Id. at A8.

[83] Id. at A10.

[84] Id. at A11.

[85] Id. at A16.

[86] Id. at 14.

[87] Id.

[88] Id.

[89] Id. at 15.

[90] Id. at A15.

[91] Id. at 17.

[92] Id.

[93] Id.

[94] Id.

[95] Id.

[96] Centers for Medicare & Medicaid Services, Medicare Fee For Service National Recovery Audit Program (3rd Quarter, FY 2011) Quarterly Newsletter,

[97] Id.

[98] Centers for Medicare & Medicaid Services, Medicare Fee For Service National Recovery Audit Program (July 1, 2011 – September 30, 2011) Quarterly Newsletter,

[99] Id.

[100] Id.

[101] Centers for Medicare & Medicaid Services, Medicare Fee For Service National Recovery Audit Program (October 01, 2011 – December 31, 2011) Quarterly Newsletter,

[102] Id.

[103] Centers for Medicare & Medicaid Services, Medicare Fee For Service National Recovery Audit Program (January 01, 2012 – March 31, 2012) Quarterly Newsletter,

[104] Id.

[105] Id.

[106] The American Hospital Association, Exploring the Impact of the RAC program on Hospitals Nationwide, Results of the AHA RACTrac Survey. 1st Quarter 2012, May 10, 2012, at 8, [hereinafter AHA RACTrac Survey].

[107] Id.

[108] Id. at 9.

[109] Id. at 13.

[110] Id. at 17.

[111] Id. at 19.

[112] Id. at 20, 23.

[113] Id. at 33.

[114] Id. at 42.

[115] Id. at 43.

[116] Id.

[117] Id. at 48.

[118] Id. at 49.

[119] Id.

[120] Id. at 50.

[121] Id. at 51.

[122] Id. at 46 (“The discussion period is intended to be a tool that hospitals may use to reverse denials and avoid the formal Medicare appeals process. All RACs are required to allow a discussion period in which a hospital may share additional information and discuss the denial with the RAC. During the discussion period, a hospital may gain more information from the RAC to better understand the cause for the denial and the RAC may receive additional information from the hospital that could potentially result in the RAC reversing its denial.”).

[123] Id. at 53.

[124] Id. at 54.

[125] Id. at 52.

[126] Id. at 56.

[127] Id. at 59.

[128] Id. at 60.

[129] Id. at 61.

[130] Id. at 62.

[131] Id. at 63.

[132] Id. at 64.

[133] Id. at 65.

Medicaid RACs to Increase Enforcement Efforts

Medicaid RACs Auditing Claim(May 23, 2012): Recent efforts by CMS to improve Medicaid audit performance have resulted in procedural changes for Medicaid Integrity Contractors (MICs) and financial incentives for Medicaid Recovery Audit Contractors (Medicaid RACs) to increase their audit efforts and effectiveness. RACs have long been regarded as “bounty hunters” within the Medicare/Medicaid and healthcare provider communities. These entities essentially “eat what they kill”; therefore their profitability ultimately depends on their ability to identify overpayments.  RACs receive a percentage of any overpayment recovery they obtain based on contingency fee rates established by each state under the Medicaid RACs final rule, issued September 16, 2011.  On June 1, 2011, CMS increased the contingency fee for Medicaid RACs who identify overpayments by Durable Medical Equipment (DME) home health providers by 5%, increasing the Medicaid RAC maximum contingency fee from 12.5% to 17.5%.  CMS finally gave notice of this fact on February 24, 2012 when it announced that the Medicaid maximum RAC contingency fee for non-DME claims would remain at 12.5%, while DME claims would be paid at the higher rate of 17.5%.  By authorizing this rate change, CMS has given Medicaid RACs additional monetary incentive to focus on DME providers in finding Medicaid overpayments. The result will be even more pressure on DME providers to follow the law.  Remember that government contractors have a duty to report and refer suspected fraudulent activity.

For example, DOJ recently indicted a DME provider in South Texas who pled guilty to a felony charge of conspiracy for violating the federal Anti-Kickback Statute:

“The federal anti-kickback statute prohibits individuals and entities from knowingly and willfully paying or offering to pay, as well as soliciting or receiving remuneration (money or things of value) in return for the referral of patients for medical services or items which are benefits under a federal health care program, such as Medicare or Medicaid. A violation of the statute is a felony offense.”

The DME service provider’s owner now faces up to 5 years in federal prison and a $250,000 fine.  DME providers should, at a bare minimum, make sure they have supporting documentation for all ordered equipment and supplies from the referring physician they do business with.  This would include diagnostic information, supporting medical tests, and physician orders for medically necessary equipment and supplies.  Such documentation is essential to supporting your DME claims in the event of a RAC audit or law enforcement investigation.

Healthcare LawyerLiles Parker is a full service health law firm, providing assistance and representation with Medicaid and Medicare compliance concerns, government audits and appeals, and other health law matters.  Should you have any questions, please contact Richard Pecore at 713-432-4747 for a free consultation.