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Recovery Audit Contractors

Wednesday, August 14, 2013   (0 Comments)
Posted by: Joy Ingram
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by Patrick Butler, CEO, Northland Community Health Center

By 2008, a three-year demonstration by the Centers for Medicare and Medicaid Services (CMS) had exposed a billion dollars in improper Medicare payments. As a result, the 2003 private entity Recovery Audit Contractors (RAC) program, introduced in Section 306 of the Medicare Prescription Drug Improvement and Modernization Act, was declared a cost-effective means of identifying underpayments and overpayments in the Medicare fee-for-service program. Although the successful demonstration allowed for improved measures of success and greater transparency while reducing the burden on providers, I wonder if it has inadvertently given CMS a legalized bounty program that actually adds cost to healthcare delivery and intimidates providers. It seems some providers might be living in fear of burdensome audits, only to later find them unsubstantiated and the findings reversed. Sometimes it appears the provider might face unnecessary costs just to keep dollars already justly earned.


While I haven’t had firsthand experience with a RAC audit, I have been concerned enough to do some research. I’ve summarized it here for the benefit of my CHC peers and, perhaps, to start a dialogue among safety net providers.


The use of Recovery Audit Contractors was approved by Congress in order to assist the Centers for Medicare and Medicaid in the identification and correction of claims which were overpaid or underpaid, and to ensure reimbursements are collected or refunds are issued.  The use of Recovery Audit Contractors was determined to be successful after a three-year demonstration period.


In 2003, Congress approved Section 306 of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, which instructed the Secretary of Health and Human Services to establish a three-year “demonstration program.”  Basically this was a pilot program to determine whether the use of private entity contractors known as Recovery Audit Contractors would be a cost-effective means of identifying as well as correcting Medicare overpayments and underpayments in the Medicare fee-for-service program. 


The federal government retained the Recovery Audit Contractors with two main objectives in mind.  The first objective was to assist in identifying underpayments and overpayments and to refund or collect reimbursement for said payments.  The second objective was to assist the Medicare Administrative Contractors with the identification of overpayment.  The Medicare Administrative Contractors were able to examine only a very small percentage of claims during their routine reviews; therefore, the federal government felt the program needed supplementing in order to identify a larger percentage of overpayments.


The demonstration program first started in 2005 with California, Florida, and New York, the three states with the largest volume of Medicare claims.  In 2007 the demonstration program expanded to Massachusetts, South Carolina and Arizona and primarily focused on hospital and non-physician healthcare providers. During the demonstration period, Recovery Audit Contractors were paid only on a contingency fee basis. The Recovery Audit Contractors received payment only on improper overpayment and/or underpayments that were identified, and only a percentage was paid to the Recovery Audit Contractors.


According to AHIMA’s article entitled Recovery Audit Contractors (RAC), the demonstration program, or pilot, ended in 2008 and resulted in the identification of $1.03 billion in Medicare improper payments.  This amounted to .3% of the $317 billion in Medicare claim payments available for review. Of this $1.03 billion, 96% collected was due to improper overpayments collected from providers while 4% was due to underpayments paid to providers.  Of the 96% collected from providers due to improper overpayments, 85% of the overpayments were collected from inpatient hospital providers, 6% from inpatient rehabilitation facilities, and 4% from outpatient hospital providers.  As a result of these findings, it was determined that the use of private entity Recovery Audit Contractors is a cost-effective means of identifying underpayments and overpayments in the Medicare fee-for-service program.


In 2006, Section 302 of the Tax Relief and Healthcare Act of 2006 was passed by Congress and made the national Recovery Audit Contractor program permanent.  The expansion of the program was authorized in all 50 states with the requirement for it to be in place by January 1, 2010. 


The goal of this act is to identify improper payments made on claims for services provided to Medicare beneficiaries.  Improper payments consist of both overpayment and underpayments, and all healthcare providers who submit claims to Medicare are subject to review by Recovery Audit Contractors.  However, Recovery Audit Contractors are limited on the claims they may pursue.  Recovery Audit Contractors can only pursue:

1.incorrect payment amounts,

2.non-covered services,

3.incorrectly coded services

4.duplicate services


In addition, Recovery Audit Contractors cannot pursue services provided under programs other than Medicare fee-for-services, three years past the date of initial determination, prior to October 1, 2007, and plans where the beneficiary is liable for the overpayment because the provider is not at fault.  Recovery Audit Contractors are also not to review claims that have been previously reviewed by another entity.


The Recovery Audit Contractors are split into four regions within the country and are paid on a contingency fee basis on the overpayments and underpayments that are identified. Contingency fee rates range anywhere from 9% to 12.5% for each inappropriate payment they identify and recover.  Recovery Audit Contractors are required to use their own proprietary software to identify claims via an automated claims review system.  Recovery Audit Contractors look at companies and individuals with higher trends in Medicaid billing than the majority of the providers and suppliers in their community.    Recovery Audit Contractors are able to review claims beginning on October 1, 2007 and only three years prior to the date the original claim was paid.


Recovery Audit Contractors can complete two types of reviews to determine if an underpayment or overpayment on a claim has occurred.  The first type of review is considered an automated review in which proprietary software is used to review claims for errors.  The second type of review is considered a complex review conducted by using the actual medical record to make the determination that a claim was paid or unpaid in error.


The Automated Review uses proprietary software to review claims to determine with a high degree of accuracy that the claim contains an error.  The software is required to have clear perimeter guidelines to determine the overpayment or underpayment.  The claim error must be medically “unbelievable” – such as a male patient receiving a pap smear.  The claim must occur with the review of a medical record.    (American College of Emergency Physicians 2013 Recovery Audit Contractor (RAC) FAQs)


The Complex Review uses medical records to review claims for accuracy.  And each Recovery Audit Contractor is required to employ certified coders, nurses, therapists, and a medical director to assist in maintaining auditing accuracy.


Recovery Audit Contractors have to follow medical record limits and guidelines when requesting medical records:

  • Inpatient Hospital, SNF, Hospice
    • 10% of the average monthly Medicare claims (max 200) per 45 days per NPI
  • Other Part A Billers (HH)
    • 1% of the average monthly Medicare episodes of care (max 200) per 45 days per NPI
  • Physicians (including podiatrists, chiropractors)
    • Sole Practitioner: 10 medical records per 45 days per NPI
    • Partnership (2-5 individuals): 20 medical records per 45 days per NPI
    • Group (6-15 individuals): 30 medical records per 45 days per NPI
    • Large Group (16+ individuals): 50 medical records per 45 days per NPI
  • Other Part B Billers (DME, Lab, Outpatient Hospital)
    • 1% of the average monthly Medicare claims lines (max 200 per NPI per 45 days

(American College of Emergency Physicians 2013 Recovery Audit Contractor (RAC) FAQs)


  • Requests for medical records must be either completed or a request for an extension filed within 45 days of the receipt of the request or the Recovery Audit Contractor can review and make a determination on the associated claim without the medical record documentation.
  • The provider is required to notify the Recovery Audit Contractor of the appropriate contact person to send the requests to when requesting medical records.
  • The provider is required to confirm Recovery Audit Contractor’s receipt of the medical records.
  • Site visits may be requested by the Recovery Audit Contractor in order to review the records onsite.
    • The provider has the authority to deny Recovery Audit Contractor’s access to their site.
  • If the site denies access to the Recovery Audit Contractor to their onsite medical records, the Recovery Audit Contractor then has to make a request for the medical record in order to make a determination.

(American College of Emergency Physicians 2013. Recovery Audit Contractor (RAC) FAQs.)


An Overpayment Demand Letter is forwarded to the provider once the Recovery Audit Contractor substantiates that a claims error has occurred.  The demand requires that the provider make contact with the Recovery Audit Contractor within 15 days of receipt of the letter to discuss the claims error.  The letter also outlines the process to follow in order for the provider to submit evidence demonstrating why the provider does not agree with the Recovery Audit Contractor’s decision about the claim.


Recoupment will begin on the forty-first day of the demand letter if:

  • Payment is not made in full,
  • A request for extended payment schedule, or
  • A request for the claim to be reviewed again (within 30-days of the demand letter)


If a provider does not appeal or pay within 30 days of the determination, interest on the amount due starts to accrue. 

Providers may go through five levels to appeal determinations made by Recovery Audit Contractors. 

1.First Level – Redetermination – must be filed within 120 days and are conducted by MACs. However, if you appeal after 30 days you are charged interest.

2.Second Level – Reconsideration – must be filed within 180 days and are conducted by qualified independent contractors.

3.Third Level – must be filed within 60 day and the case is reviewed by an administrative law judge. If a Medicare overpayment is reversed, Medicare will refund principle and interest collected as well as pay interest on anyThe decision is issued within 90-days of the hearing request.

4.Fourth Level – must be filed within 60 days and a Health and Human Services Department Appeals Board also known as a Medicare Appeals Council will review and make a determination on the case and issue a decision within 90 days from the request.

5.Fifth Level – final level of appeal and must be filed within 60A Federal District Court will review and make a determination on the cases with at least $1220 following the fourth appeal. 


According to the Internal Medicine Alert, error rates over 50% will be investigated and will trigger criminal investigation.  Error rates between 20% and 50% will be sent to the Department of Justice for evaluation, but not all will be formally investigated.


The demonstration phase seems to have been successful. It allowed the Centers for Medicare and Medicaid Services to identify several key success factors that would be used to measure the national program success, maximize transparency of the Recovery Audit Contractors and the program, work to ensure program efficiencies and audit accuracy, reduce the burden on providers, and create an effective education program for providers.


Still, I wonder if the creation of the Recovery Audit Contractor’s program has created a legalized bounty program run by CMS that has placed many healthcare providers in fear of being overburdened with the threat of additional audits, only to have the audits unsubstantiated or the findings reversed. The reality for some providers is the addition of an unnecessary cost just to keep the dollars already justly earned. In addition, Recovery Audit Contractors have an incentive to deny or create additional burdens on providers in the hopes of further monetary gain and without recourse for falsely accusing a healthcare provider.


If CMS is truly looking to get it right the first time, they should work to ensure that Recovery Audit Contractors are accountable for inaccurate audits against healthcare providers just as feverishly as they are working toward correcting under/over payments. The cost to deliver medical care does not increase solely by overpayments paid by CMS, but also by the additional cost unjustly imposed on healthcare providers, without recourse, to further demonstrate their right to reimbursement.

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