Recovery Audit Contractors: Coming Soon to a Provider Near You

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Medicare providers and suppliers nationwide have been preparing for increased Medicare audit activity in anticipation of the nationwide rollout of the permanent Recovery Audit Contractor (RAC) Program. CMS suspended implementation of the permanent RAC program in late 2008, but the stay was lifted in February 2009. The RAC project is back on track, with the expansion of the program beginning in Minnesota in March 2009. The updated expansion schedule was published as part of the CMS evaluation report on the RAC demonstration.¹

Providers and suppliers should make efforts now to evaluate their compliance with Medicare policies. Should a provider or supplier be subject to a RAC or other Medicare audit, effective strategies are available that can be successfully employed in the appeals process to defend Medicare audits.

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Kelly Nueske, RN, CPA

Section 306 of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 directed the DHHS to conduct a three-year demonstration program using RACs. The demonstration began in 2005 in the three states with the highest Medicare expenditures: California, Florida, and New York. The purpose of the RAC demonstration program was to determine whether the use of RACs would be a cost-effective way to identify and correct improper Medicare payments. Section 302 of the Tax Relief and Health Care Act of 2006 makes the RAC program permanent and requires the expansion of the RAC program nationwide by no later than 2010.

The demonstration program proved highly cost effective, from the point of view of CMS. Over the course of the three-year demonstration, the RACs identified and collected $992.7 million in overpayments and repaid $37.8 million in underpayments to Medicare providers and suppliers. The costs and fees associated with the RAC demonstration program totaled $201.3 million, constituting approximately $0.20 for each $1 returned to the Medicare trust funds. Approximately 96% of the alleged improper payments identified were overpayments, not underpayments.

Providers and suppliers should be ready for increased audit activity, as the RACs are tasked with identifying and correcting Medicare overpayments and underpayments and have the incentive of being compensated on a contingency-fee basis. As a result, it is the process of identifying and recouping alleged overpayments that is of particular significance to Medicare providers and suppliers. There are also significant costs incurred by providers and suppliers in developing processes and preparing for the RAC audits, as well as potential costs for defending and appealing against RAC findings.

Audit Target Areas

Reviewing the claims-denial data from the CMS RAC report1 is helpful for Medicare providers and suppliers focusing on identifying RAC target areas for the permanent program. The vast majority (85%) of claim denials in the RAC demonstration program involved inpatient hospital claims; 6% involved inpatient rehabilitation facilities; 4% involved outpatient hospitals; and the remaining denials involved the claims of physicians, skilled nursing facilities, durable medical equipment suppliers, ambulance companies, laboratories, and other providers.

Of the improper payments identified, 35% were the result of incorrect coding; 40% were denied because the claims did not meet Medicare’s medical-necessity criteria; and 8% were denied for having no/insufficient documentation (meaning that the RAC requested the information, but the entity did not respond in a timely or complete manner). The remaining 17% were denied for other reasons, which could include submitting duplicate claims, billing separately for services already included in other payments, and incorrectly following fee schedules.

In addition to reviewing claims-denial data from the RAC demonstration project, providers and suppliers should monitor their own denial patterns and the OIG work plan (which addresses the target areas of DRG validation, discharge disposition, medical necessity, and one-day stays, all of which were areas of scrutiny for the RACs during the demonstration). The Program to Evaluate Payment Patterns Electronic Report, or PEPPER, information from the local quality-review organization is also valuable in determining potential areas of vulnerability.

Together with internal auditing, using a combination of these resources is a great starting point for prioritizing target areas to be monitored first. Medicare providers and suppliers are well advised