At the end of 2008, the Centers for Medicare & Medicaid Services ("CMS") took a significant step toward the implementation of a new audit program that affects countless Medicare providers. Under the Tax Relief and Health Care Act of 2006,[1] Congress authorized the Recovery Audit Contractor Permanent Program (the "RAC Program"). Under the RAC Program, private companies selected by CMS will serve as Recovery Audit Contractors ("RACs"). RACs will be paid on a contingency-fee basis to identify and correct improper payments made under Part A and B of Medicare. On October 6, 2008, CMS named the four new RACs: CGI Technologies and Solutions, Inc., Diversified Collection Services, Inc., Connolly Consulting Associates, Inc., and HealthDataInsights, Inc.[2]  

Following a brief delay in recent months, efforts to fully implement the RAC Program are moving forward. With CMS getting so close to full nationwide implementation of the RAC Program, the time to for providers to prepare is now.  

II. Background  

CMS is vocal about its focus on minimizing improper payments to providers for services that are not medically necessary, improperly coded, or lack sufficient documentation. In January 2008, the Government Accountability Office published a report estimating that some $10.8 billion in improper payments were made through Medicare in 2007.[3] In a move to address the improper payments, Congress created the RAC Demonstration Program (the "Demonstration") under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003. The Demonstration was aimed at identifying and correcting improper overpayments and underpayments through the use of third-party companies working on a contingency-fee basis. CMS selected three RACs that reviewed fee-for-service claims in California, Florida, and New York over a three-year period.  

CMS released its evaluation of the Demonstration in June 2008. The RACs corrected $1.03 billion in improper payments.[4] The focus of the RACs is quite transparent. Some 96% of improper payments identified and collected were overpayments from providers, while just 4% were underpayments repaid to providers.[5] Of all the overpayment determinations, 22.5% were appealed, and 7.6% were overturned on appeal.[6] Some 85% of overpayment determinations were from inpatient hospital providers.[7] While the numbers indicate that hospitals will face the most significant burden, other providers must be not become complacent. Every provider under Part A and B of Medicare should prepare to face some form of audit under the RAC Program.  

III. Implementation in Ohio  

The RAC Program will be implemented nationwide no later than January 10, 2010.[8] According to CMS, the RAC Program will reach Ohio by August 1, 2009, or later.[9] Ohio is located in Region B.[10] The RAC for Ohio and Region B is CGI Technologies and Solutions, Inc.[11]  

IV. Understanding the RAC Program  

A. The Basic Structure  

The RAC Program is aimed at identifying and correcting improper payments made under Part A and B of Medicare.[12] Upon expansion into a region, RACs will begin working on a number of specific tasks. To begin, RACs will engage in provider outreach.[13] The substance of that education will inevitably focus on the two principal tasks of RACs under the RAC Program: identifying and correcting improper underpayments and overpayments.[14]  

1. Identifying and Returning Underpayments  

RACs will use automated and complex reviews to identify Medicare underpayments.[15] Any underpayment findings on claims will be communicated to the affiliated contractor.[16] Once the affiliated contractor validates the occurrence of an underpayment, an “Underpayment Notification Letter” will be sent to the provider.[17]  

2. Identifying and Collecting Overpayments  

More importantly, each RAC will use automated and complex reviews to identify Medicare overpayments.[18] The scope of these reviews will not be unlimited. CMS has excluded several potential sources of information about improper payments from RAC scrutiny, including programs other than Medicare Fee-For-Service, the cost report settlement process, Evaluation and Management services, and several others.[19] If an overpayment is identified, the RAC will document its rationale for the overpayment determination and include references to Medicare rules and policies.[20] Those determinations are then put through a validation process.[21] Once identified and validated, the RAC will seek to correct the overpayment. Part A providers will receive a written notification.[22] Part B providers will receive a demand letter.[23] The overpayment determination can result in full or partial denials.[24] Any potential fraud or quality issues will be reported.[25] The overpayment amounts will commonly be collected through recoupment vis-à-vis present or future Medicare payments or, at the provider's election, through an installment plan lasting up to twelve months.[26] Other recovery mechanisms will also be available. Collection is a crucial component of the RACs' work because the recovery of overpayments is a prerequisite to the receipt of contingency payments.[27]  

3. Referrals / Tips Possible  

RACs may receive and consider referrals or tips regarding potential overpayments, but there is no obligation to conduct a review.[28]  

4. The RAC Data Warehouse  

To prevent duplicate reviews, RACs will submit selected provider and claim data to a web-based application called the RAC Data Warehouse.[29] If a claim has already been reviewed by another entity, it will be deemed "excluded."[30] If the provider or claim is part of an ongoing fraud investigation, that provider or claim will be deemed "suppressed."[31] Before conducting a review, RACs will use the RAC Data Warehouse to ensure the target of the review is not excluded or suppressed.[32]  

5. RACs Lack Settlement Authority  

RACs will not have any authority to compromise or settle overpayment debts.[33] Should a provider make a settlement offer or consent settlement request, the RAC will forward it to a CMS Project Officer with a recommendation.[34] CMS will then determine whether the offered settlement is in its best interest.[35]  

B. The Coverage / Coding Reviews  

1. Automated Reviews  

The first way for RACs to identify improper payments is through automated reviews. Automated reviews are allowed in circumstances when it is "certain" that payment for services is improper.[36] For example, if a particular service is performed in relation to a particular condition, and a National Coverage Determination or Local Coverage Determination affirmatively states that such services are never reasonable and necessary for that condition, it is "certain" that payment for such services is improper.[37] RACs can mine for those types of billing errors through automated reviews. On the other hand, automated reviews are inappropriate if there is any chance that a claim is payable.[38] In those scenarios, RACs that wish to engage in a review must perform a complex medical review.[39]  

2. Complex Medical Reviews  

The second way for RACs to identify improper payments is a complex medical review.[40] Complex medical reviews are allowed in circumstances where there is a high probability, rather than a certainty, that the services billed are not covered.[41] Complex medical review involves the inspection of medical records.[42] RACs are sometimes required to pay for obtaining and storing medical records.[43]  

C. New Aspects of the RAC Program  

The Demonstration results encouraged CMS to make changes to the RAC Program, and all of the changes are improvements from a provider perspective:  

  • Each new RAC must hire a physician medical director and certified coders;
  • When an overpayment determination is overturned on appeal, the RAC must pay back their contingency payments;
  • The look-back period was shortened from four to three years;
  • The maximum look-back date will be October 1, 2007; and,
  • A new web-based application will allow providers to look up the status of medical record reviews.[44]

V. RAC Overpayment Determinations Based on Clinical Judgment:  

A Potential Cause for Concern  

While the RACs are required to follow Medicare policies, and it is promising that RACs will now be staffed by a physician medical director and certified coders, providers should be know that RACs will have the authority to use medical literature and clinical judgment to deny claims in the absence of a national or local policy.[45] Providers should be prepared to exercise their Medicare appeal rights in order to challenge such judgments when appropriate. CMS has also indicated that if an "issue is brought to the attention of CMS by any means and CMS instructs the RAC on the interpretation of any policy and/or regulation, the RAC" must abide by that decision.[46] CMS has not elaborated further, but that statement suggests, at a minimum, that CMS will have the authority to reign in RAC clinical judgments.  

VI. Preparing Your Organization:  

# 1: Create a RAC Coordinator / Team  

Appoint a RAC Coordinator or RAC Team to facilitate organizational preparation for the RAC Program. Once the RAC Program is implemented, the same individual or group can also keep tabs on reviews, corrective actions, and appeal deadlines.  

# 2: Perform Internal Risk Assessments  

Perform an internal risk assessment to detect problem areas. The assessment should focus on detecting coverage and coding issues, with special emphasis on the problems identified during the Demonstration:[47]  


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On a going forward basis, providers should also use the "Internal Guidelines" that are to be published by each RAC.[48] The Internal Guidelines will not change any Medicare policy, but will allow providers in each region to better understand what information will be reviewed and what results can be anticipated from a particular RAC.[49]  

#3: If Necessary, Take Corrective Action Now  

Should the internal risk assessment reveal any problem areas, take corrective action to ensure an adequate resolution. Corrective actions may involve the development or revision of internal policies or the training of key personnel. Following the Demonstration, CMS listed several corrective actions that might prevent a number of common problems that result in improper payments:[50]  


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# 4: Participate in RAC Outreach and Other Educational Opportunities  

Maintain familiarity with and participate in RAC provider outreach and professional educational opportunities. Much of the initial outreach will occur be through state hospital associations. An excellent website to stay current is maintained by the American Hospital Association:  

# 5: Provide Feedback to CMS  

Participate in any opportunity to provide feedback. CMS has already indicated that it will regularly use provider surveys.[51]  

# 6: Seek Legal Counsel As Needed  

Consult with legal counsel if serious issues are identified in the risk assessment or upon receipt of a written notification or demand letter from a RAC.