On March 10, 2015, the U.S. Court of Appeals for the Federal Circuit found that the Federal Acquisition Regulation (FAR) applies to CMS’s revised payment terms for new Recovery Audit Contractor (RAC) contract solicitations, and consequently, the new payment terms violate the FAR’s prohibition against terms inconsistent with customary commercial practice.

Among other changes included in CMS’s 2014 Request for Quotes (RFQ), CMS required that RACs wait until after providers passed the second level of administrative appeal before seeking payment for contingency fees (i.e., the payments made to RACs for identifying overpayments).  Pursuant to the original contracts from 2008, the RACs invoiced CMS for the contingency fee when the overpayment was collected from the provider, typically 41 days after the demand letter.  Incumbent RAC CGI Federal, Inc. (CGI) filed a protest at the Court of Federal Claims in April 2014 challenging the new payment terms.  As previously reported, on August 22, 2014, the U.S. Court of Federal Claims found for CMS and held that the new payment terms did not violate any regulatory provisions.

CGI appealed, and the U.S. Court of Appeals for the Federal Circuit reversed the lower court’s decision, finding that the FAR applies to the 2014 RFQ and that the new terms violate the FAR’s proscription against terms that are inconsistent with customary commercial practice.  The Federal Circuit Court remanded the case back to the Court of Federal Claims for additional proceedings consistent with the Federal Circuit’s decision.

Notably, this litigation has delayed CMS from finalizing new RAC contracts.  Because the previous RAC contracts would have lapsed, CMS modified them to allow limited RAC reviews through the end of 2015.  Further, as previously reported, CMS announced a number of RAC program reforms effective whenever the new RAC contracts are implemented.  However, because the litigation remains unsettled, it is unclear when CMS will be able to award the new RAC contracts.

The full order is available here.