As providers nationwide prepare for the impact of the March 1, 2009, rollout of the Medicare recovery audit contractor (RAC) permanent program, they should study the experiences of those that have been wading in its murky waters for the past three years. Congress authorized the RAC demonstration in the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) for the purpose of identifying past inaccurate payments under the Medicare fee-for-service program.[1] Over the course of the three-year demonstration, the RACs identified more than $1.03 billion in improper payments.[2] The RAC demonstration program began in California, Florida and New York in 2005 and expanded to include Arizona, Massachusetts and South Carolina in the summer of 2007. Although providers in these states consistently raised concerns regarding the program’s structure, scope and direction, Congress made the program permanent under the Tax Relief and Healthcare Act of 2006.[3]

Initially, the RAC permanent program was primed to be implemented gradually, rolling out in the four geographic regions of the United States in three stages, beginning in selected states in late 2008, and continuing with full national expansion by January 10, 2010. However, this rollout was revised following the delay resulting from the protest filed by two unsuccessful RAC bidders for the permanent program. On February 6, 2009, the Centers for Medicare and Medicaid Services (CMS) announced that the bid protests to the RAC permanent program had been settled.[4] CMS released a revised map reflecting the amended two-stage RAC expansion schedule and showing the projected implementation date for each state.[5]

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Target Areas

In the demonstration program, CMS allowed the RACs to unilaterally decide the types of claims they wished to target. Since the RACs are paid on a contingency fee basis, they stand to make the most return on their investment by structuring their claim review strategies on high-dollar improper payments, like inpatient hospital claims. As a result, hospitals accounted for 95 percent of overpayments collected by the RACs during the demonstration program, with 85 percent from inpatient services 4 percent from outpatient services and 6 percent from inpatient rehabilitation facilities.[6]

In the permanent program, CMS will have more oversight of the types of audits selected by the RACs. CMS has contracted with Provider Resources, Inc., to work as the RAC Validation Contractor (RVC). The RVC will work with CMS and the RACs to approve new issues the RACs want to target for improper payments, as well as perform accuracy reviews on a sample of randomly-selected claims on which the RACs have already collected overpayments. The look-back period will be counted, starting from the initial determination date and ending with the date a RAC issues a medical record request (for complex reviews) or the date of the overpayment notification letter (for automated reviews). The initial determination date will be the claim paid date. However, RACs may not review claims with paid dates earlier than October 1, 2007.

Although CMS will have more oversight under the permanent program, providers should be aware of past RAC targets in order to review and strengthen compliance in these specific areas. A report, released by CMS in July 2008, and updated twice since, details the outcomes and lessons learned from the RAC three-year demonstration program (Report). The Report reveals that most common errors detected by the RACs include medically unnecessary (40 percent), incorrectly coded (35 percent) and no/insufficient documentation (8 percent).[7]

The RACs attempt to identify improper payments resulting from incorrect payment amounts, non-covered services, incorrectly coded services and duplicate services issues through the use of software programs that analyze claims data (automated review) and through medical chart reviews (complex review). An automated review would highlight clearly improper payments such as duplicate surgical procedures. The RAC would then contact the provider to disclose the claim information and request payment. The RAC could perform automated review only when the improper payment was obvious or a written Medicare policy, Medicare article or Medicaresanctioned coding guideline existed and precisely described the coverage conditions. On the other hand, in a complex review, a claim may not be clearly erroneous but rather identified as likely containing errors. In that case, the RAC could request medical records from the provider on further review. Although the RACs were bound by Medicare policies, regulations, national coverage determinations, local coverage determinations and manual instructions when conducting these complex claim reviews, concerns were raised during the demonstration program regarding the RACs’ ability to adhere consistently to these guidelines.

The American Hospital Association (AHA) has identified specific areas that the RACs targeted, including: (1) debridement (excisional versus nonexcisional); (2) incorrect selection of principal diagnosis (respiratory failure versus sepsis); (3) wrong diagnosis code (sepsis, septicemia versus urosepsis); (4) diagnosis-related groups designated as complicated or having comorbidity with only one secondary diagnosis; and (5) unit of service (multiple colonoscopies for the same beneficiary on the same day).[8] Additionally, a number of medically unnecessary target areas have been identified, including such inpatient acute services as short-stay claims and outpatient versus inpatient surgeries. Short-stay claims were specifically targeted in Florida and New York. Large numbers of one-day stays were denied based on RAC determinations that the cases should not have been admitted for inpatient care because they were clinically appropriate for outpatient observation or other lessintensive care. A number of three-day stay claims also were denied because the RACs found the stay was inappropriately extended in order to qualify a beneficiary for Medicare Part A coverage of post-acute skilled nursing care. Specifically, medical back problems were commonly denied, finding the service medically unnecessary if they determined the care could be provided on an outpatient basis and the patient was primarily admitted for three days in order to qualify for skilled nursing coverage. Outpatient versus inpatient surgeries proved to be another target area. Procedures not found on Medicare’s "inpatient-only list," must be well documented and provide a medical reason for performing the procedure on an inpatient basis. In addition, providers, when examining potential target areas, should look to reoccurring medical necessity errors, including chest pain (17.9 percent), medical back (17 percent), esophageal, gastroenterological and miscellaneous digestive disorders (10.3 percent), nutritional and miscellaneous metabolic disorders (10.3 percent), and blood glucose/reagent strips (10.1 percent).[9]

Objections to RAC Program

One of the most controversial aspects of the demonstration program, which remains in the permanent program, is the RAC contingency payment for detecting overpayments and underpayments. CMS selected three Claim RACs and two Medicare Secondary Payer (MSP) RACs for the demonstration. Through March 27, 2008, the RACs collected $187.2 million in contingency fees for identifying improper payments.[10] According to the Report, this was the first time the Medicare program paid a contractor on a contingency fee basis. When CMS announced its selection of the four permanent program RACs, it stated that "selection of the new contractors was based on a best value determination for the Federal government that included a sound technical approach for the level and quality of claim analysis and detail to exceptional customer service, conflict of interest reviews and lowest contingency fee."[11] However, when the two unsuccessful bidders protested the selection process, they both were awarded subcontractor positions.[12]

Critics of the RAC program claim these "bounty hunter-style" payments encourage aggressive claim denial practices by the RACs as well as a disproportionate focus on overpayments.[13] From 2005 through March 27, 2008, RACs succeeded in finding more than $1.03 billion in Medicare improper payments. Of the $1.03 billion in Medicare improper payments the RACs identified, approximately 96 percent were overpayments collected from providers. This sharply one-sided recovery has caused some to question CMS’s claim that capturing underpayments is a goal of the program. Adding to the controversy was the fact that the RACs would receive their contingency fees even if their determinations were overturned at the second level of appeal. CMS agreed with providers who protested loudly that paying RACs for making incorrect claims denials does not make good practice. As such, in the permanent program, CMS has removed the contingency payment when a denial is overturned at any level.

One of the major concerns echoed consistently by hospitals during the demonstration program was the performance of medical necessity determinations by "unqualified personnel, and review practices …. inconsistent with Medicare policies."[14] During the demonstration program, the RACs were not mandated by CMS to employ a physician medical director to oversee the programs. Interestingly, in the permanent program, the RACs are not required to involve physicians in the medical record review process; instead registered nurses or therapists can make determinations regarding medical necessity. Specifically, a number of providers in California were successful in shedding light on errors and inconsistencies in the RACs’ medical necessity criteria for rehabilitation claims. The problems in California were so widespread that in September 2007, CMS instituted a "pause" in all inpatient rehabilitation facility (IRF) reviews to allow for an independent review of a sample of denied claims and further discussion with the other Medicare contractors on IRF medical record review.[15] It became clear that with respect to IRF reviews in California, CMS contractors were not consistently applying Medicare policy for IRF services. CMS provided training to contractors reviewing IRF claims in California, and then instructed the RAC for that jurisdiction to re-review all previously denied IRF claims using the medical review methodology described in the training. Although the RAC refunded $14 million to IRF providers for improperly reviewed claims, for many providers who suffered financial hardships requiring them to scale back services, the damage had already been done.

Thirty-two hospitals in South Carolina filed a lawsuit against the U.S. Department of Health and Human Services alleging overpayments were improperly collected before the providers could appeal the RACs’ determinations.[16] The complaint alleged that CMS and the RAC violated a provision in the MMA that "precludes recoupment of alleged overpayments prior to a ‘reconsideration,’ which is the second level of appeal available to a Medicare provider of an alleged overpayment." The hospital plaintiffs assert that in most instances the fiscal intermediary recouped the alleged overpayments from plaintiffs either at or before the time that its notice letters were received by the plaintiffs, thus, effectively leaving the plaintiffs no time to request a redetermination before recoupment, despite statutory framework allowing 120 days from the date the provider receives notice of the initial determination to request a redetermination by the fiscal intermediary. The plaintiffs said that although they appealed the RACs’ decisions, CMS recouped about $30 million in alleged overpayments. Currently, the U.S. District Court for South Carolina is considering CMS’s motion to dismiss the action based on lack of jurisdiction.[17]

Response to Concerns

In response to comments from the AHA and others regarding the concerns and issues discussed above, CMS released a revised Statement of Work in November 2007 that contained several refinements to the RAC permanent program.[18] More recently, CMS identified additional changes that will be included in the permanent program as it is rolled out. These changes include: (1) requiring that RACs have a physician medical director; (2) setting a monthly cap on the number of medical records that a RAC can request from a provider (for example, RACs may request from hospitals a maximum of 200 medical records per NPI in a 45-day period, further limited to no more than ten percent of average monthly Medicare paid claims in the 45-day period);[19] (3) shortening the look-back period for claims review from four to three years; (4) providing that no claims with dates of service prior to October 1, 2007, will be reviewed; (5) allowing review of claims during the current fiscal year; (6) requiring mandatory use of certified coders; and (7) independently auditing RAC denials for accuracy. CMS will require new areas targeted by RACs to be approved by CMS in advance and RACs will announce the expanded target areas on RAC websites prior to widespread review. In addition to these modifications, AHA is advocating for more changes including: (1) an expanded role for physicians, especially with regard to medical necessity reviews; (2) the establishment of a reliable process for re-billing denied claims; (3) a 12-month look-back period instead of three years; (4) a more balanced approach on overpayments versus underpayments; and (5) audits targeted across provider types.

In response to concerns about the RAC demonstration program, the Medicare Recovery Audit Contractor Program Moratorium Act (H.R. 4105) was introduced by Reps. Lois Capps (D-Calif.) and Devin Nunes (R-Calif.) and backed by the AHA.[20] The bill, which died in committee last session, would have placed a one-year moratorium on the RAC permanent program in an effort to provide CMS with sufficient time to "thoroughly examine the practices of private Recovery Audit Contractors to ensure they are properly interpreting and applying Medicare criteria and using qualified personnel to review claims." On the same day the Report was released, the Government Accountability Office was asked by Congress to study the RAC program and report on changes that CMS implemented in response to various problems, including oversight of auditing and the interaction between the RACs and providers.[21] The request cites the above-mentioned challenges for many inpatient rehabilitation facilities in California and the number and depth of changes made to the program going forward as requiring the need for further review. However, with no action on the requested moratorium, the RACs are currently moving forward.

Appeals Process

All RAC findings are subject to the Medicare appeals process. The January 5, 2009, update to the Report includes appeals statistics through August 31, 2008. According to the second update, providers appealed 22.5 percent (118,051) of RAC determinations, and of those, 34 percent (40,115) were overturned in favor of providers. CMS is still unable to determine the number of appeals at the first level and will continue to update the report until all appeals have completed the Medicare appeals system. The following is a CMS chart reflecting the Medicare appeals process.

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The January 2009 update to the Report shows that through August 31, 2008, 7.6 percent of RAC overpayments were overturned on appeal.[22] There have been objections to how CMS presented these appeals numbers because, although there are many denials still in the appeals process, of those already decided, a little over one-third ended with a decision in the provider's favor. In fact, of those claims appealed, decisions were made in the provider’s favor 54.1 percent of the time in New York and Massachusetts; 41.0 percent of the time in Florida and South Carolina and 16.8 percent of the time in California.[23] It is important to note also that, although CMS counts the pending claims as part of overall program savings, some of these claims ultimately may be overturned in the providers’ favor.

Also, late last year, CMS issued guidance preventing the recoupment of funds during the first two stages of the five-stage appeals process (as shown above).[24] The guidance addresses the appeals process available to healthcare providers who wish to contest overpayment determination by a RAC. Currently, Medicare begins the overpayment recovery process from a provider as soon as the overpayment is identified. Under the guidance, which was adopted to conform to the statutory requirements of Section 935(a) of the MMA, healthcare providers will have 30 days to submit an appeal for redetermination before Medicare contractors may begin recouping an overpayment. If the appeal is submitted within the 30-day period, the recoupment will be further delayed until a redetermination decision is issued. If the overpayment determination is affirmed at the first level of the appeal process, Medicare contractors may begin recoupment 60 days after the decision is affirmed unless the provider appeals to a Qualified Independent Contractor (QIC) for reconsideration.[25] If the provider requests reconsideration, recoupment is again delayed while the second level of the appeal process is underway. If the QIC denies the provider’s appeal for reconsideration, recoupment may begin immediately after the QIC issues its decision, even if the provider appeals to an administrative law judge (the third level of the appeal process). The delays in recoupment will create greater incentives for providers to appeal overpayment determinations quickly and examine the accuracy and appropriateness of such determination. However, providers should note that while the recoupment may be delayed during the first two appeal levels, interest will accrue on any overpayments that ultimately are affirmed.

Conclusion -- Prepare Now

Although there is uncertainty surrounding the RAC permanent program, providers should take notice of new developments to the program and how these changes will affect their preparation as the permanent program rolls out. As providers ready themselves for RAC implementation, there are a number of preparations that should be made, including identifying where improper payments have been persistent by reviewing the RACs’ websites and identifying any patterns of denied claims within the provider’s own practice or facility. In order to prepare for the inevitable, providers should consider establishing an interdisciplinary taskforce that meets regularly in order to establish communication channels and loops to review RAC requests, findings and appeals, and monitor updates by CMS.

Of the $1.03 billion in improper payments found by the RACs since the inception of the demonstration program, over half were identified in the last year of the three-year program. The permanent RACs increasingly efficient detection of possible improper payments will soon demonstrate that the financial impact felt by providers during the demonstration program is just the tip of the iceberg. Providers do not have much time to prepare before they will begin receiving requests for medical records and/or overpayment demand letters. When deciding on what action to take when these letters arrive, providers should consider that approximately one third of those providers who chose to appeal determinations made during the demonstration program were successful. Although our experience with the Medicare appeals process has shown that it is not always a friendly process to the providers, Baker Hostetler has had repeated success in appealing Medicare overpayment decisions.