A recent report from the Centers for Medicare & Medicaid Services (“CMS”) announced that the controversial Medicare Recovery Audit Contractor (“RAC”) program recouped $992.7 million in overpayments from Medicare providers between 2005 and March 2008, while repaying providers $37.8 million in underpayments. Of the $992.7 million, nearly $700 million was returned to the Medicare Trust Fund.

The RAC Demonstration Program

The RAC demonstration program, which operated in just a handful of states over the past three years, and which will be implemented throughout the country by January 2010, is designed to identify and correct improper Medicare payments made to health care providers participating in fee-for-service Medicare. To date, the program has returned $693.6 million to the Medicare Trust Fund, after expenses, appeals and repaid underpayments. This amount is subject to change with the resolution of pending appeals.

Over the course of the RAC program, providers appealed 14 percent (73,266) of the total overpayment determinations (525,133), with roughly one-third (24,376) of the appealed determinations being overturned in favor of providers. In addition, $255 million of the RAC overpayment determinations are still eligible for appeal. Indeed, some of the program contractors have been plagued by appeals issues, which are among the areas that CMS is addressing as the program moves forward.

According to CMS, the majority of payment errors arose from noncompliance with coverage or coding regulations. Of the overpayments, 40.86 percent were classified as payments for medically unnecessary procedures and 34.66 percent were payments for incorrectly coded services. CMS’s report shows that 85 percent of the $693.6 million in overpayments were collected from inpatient hospital providers. Inpatient rehabilitation facilities and outpatient hospitals also were significantly affected by the demonstration, and have been assessed overpayments in the amounts of $59.7 million and $44 million, respectively. Other providers affected by the RAC determinations include physicians, skilled nursing facilities, ambulances, medical labs, and durable medical equipment providers.

Modifications to the RAC Program

Before introducing the RAC program on a national scale, CMS has made a number of significant changes to the program in response to concerns raised by service providers. Policy changes include:

  • requiring each RAC to retain coding experts and a medical director; 
  • shortening the look back period to three years (shortened from four); 
  • adding transparency of contingency fee arrangements between RACs and CMS, including mandatory pay back of contingency fees of overturned determinations of improper payments;
  • establishing an electronic claims tracking process; and
  • requiring public release of RAC accuracy scores, calculated by validation contractors.

It appears CMS will move forward by aggressively expanding the RAC program over the coming months. Although the collected amount of $992.7 may not appear overwhelming, the fact that the program targeted providers in only a few states is a significant catalyst for its rapid expansion. Accordingly, this is a program to watch closely as it could have a significant impact on a number of sectors, and Congressional intervention appears unlikely in the near future.