Hospitals and physician groups that receive Medicaid payments for medical services could begin having these payments audited by private entities as early as April 1, 2011 under rules currently proposed by the U.S. Department of Health and Human Services Centers for Medicare & Medicaid Services (CMS).

The pending regulations would help states reduce improper payments for Medicaid healthcare claims through the use of Medicaid Recovery Audit Contractors (RACs). Medicaid RACs are contractors, working for states, who would audit payments made to healthcare providers, identify Medicaid payments that have been underpaid or overpaid, and correct underpayments and recover overpayments.

The proposed rules are in response to the Patient Protection and Affordable Care Act, which requires states to contract with at least one Medicaid RAC and submit a State Plan Amendment indicating initiation of the RAC program by December 31.

The proposed Medicaid auditing program is similar to the already established Medicare RAC program and strives to eliminate fraud and abuse within the nation's healthcare system. Based on lessons learned from its precursor, the proposed Medicaid RAC program would provide training for healthcare providers and state managers responsible for implementing the auditing system.

Further highlights of the proposed rules are summarized below.


A state may use its current administrative appeals process or may modify this process for Medicaid RAC appeals. This particular policy in the proposed rule could potentially result in the creation of more than 50 distinct appeals processes -- one for each state and territory covered by the Medicaid program.

Contingency Fees

Medicaid RACs will be paid by the states on a contingency basis. Unless a state provides ample justification for an exception based on existing state law, no state will pay a contingency fee higher than the maximum allowed under the Medicare RAC program, which is currently 12.5 percent for up to a 5-year period ending July 1, 2014. If state law mandates a higher contingency fee for similar services, a federal match will not be paid to the state plan on any amount above the Medicare RAC fee maximum. All fees paid to the Medicaid RACs must come from amounts recovered after all available appeals have been exhausted. As is the case with the Medicare RAC program, states must amend their plans to provide incentives for the identification of underpayments to Medicaid providers. The total combined contingency fee paid to the Medicaid RAC for underpayments and overpayments cannot equal more than the total amount of overpayments collected by the contractor.


States would report only the net amount after payment of contingency fees to the contractor is subtracted. After this amount is determined, each state is required to refund the federal share of the net overpayment amount to the federal government. States would be required to issue reports describing the effectiveness of their Medicaid RAC programs.

Coordination of Audit Efforts

Medicaid RACs do not replace existing state auditing programs. Rather, states would coordinate efforts between Medicaid RACs and other audit entities to minimize duplication.

Lessons Learned from Medicare RAC Program

CMS asserts that it intends to apply lessons learned from its Medicare RAC program to the proposed Medicaid counterpart. For example, states would require Medicaid RACs to employ trained medical professionals to review Medicaid claims, as CMS now requires Medicare RACs to do. States may also consider establishing requirements regarding the documentation of good cause to review a claim.

CMS is accepting public comments on the proposed Medicaid RAC rules until January 10, 2011. View the Federal Register listing of the rules here.