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Recovery Audit Contractors Are Coming-Part I

Recovery Audit Contractors Are Coming-Part I

Health Care Law Note
(March 2008)

Recovery Audit Contractors, or RACs, were created at the direction of Congress under Section 306 of the Medicare Modernization Act of 2003, for the purpose of detecting and correcting improper payments in the Medicare Fee For Service program.  Initially a demonstration project covering three (3) states (California, New York, and Florida) and lasting three (3) years, the success of the project has resulted in a permanent, nationwide recovery program scheduled to be in place by January 1, 2010.  Improper payments of $371.5 million were identified through RAC audits in 2007 as follows:  96% were overpayments, while 4% accounted for underpayments.  Most of the identified over and underpayments were to inpatient hospitals, although a small percentage applied to outpatient hospitals, physicians, durable medical equipment suppliers, and other ancillary service providers.  After appeals and payment to the RACs, $247 million was returned to the Medicare trust fund in 2007.

RAC audits commenced in Arizona, Massachusetts, and South Carolina in 2007.  Providers in Georgia, North Carolina, and other states in the Southeast will become subject to RAC audits on or after January 1, 2009.  Under the permanent project, RAC auditors will be able to look back three (3) years for overpayments and underpayments. However, they will not be able to look for improper payments on claims paid before October 1, 2007.

RACs will perform both automated (clear violations of Medicare rules without need for medical record review) and complex (medical record review required) claims reviews, and they can conduct both pre- and post-payment reviews.  If a RAC requests medical records and does not receive them within 45 days of receipt of the request, the RAC has authority to find that the underlying claims were overpaid. 

The RACs will be paid on the basis of a percentage of the overpayments they recover-a contingency fee.  However, it appears that RACs must pay back the contingency fee if they lose at any level of appeal by the provider.  There will be a RAC for each of four national regions (such RACs to be chosen through a competitive bidding process in early 2008), and each RAC will negotiate its percentage fee separately with CMS.  In the permanent program, RACs must employ certified coders, and CMS will impose a ceiling on the number of medical records a RAC may request from a provider.  Each RAC will use its own proprietary software to determine what providers to target and what claims to select for review.  CMS indicates that it and the RACs will conduct "extensive" provider outreach during the spring and summer of 2008, presumably before the hammer drops as RAC audits commence in the remaining states in 2009.  Additionally, once the permanent program begins, RACs must report "frequently" on problem areas they have identified.

Appeals from RAC audit determinations have a more limited time frame than the current Medicare appeals process.  Providers will have 15 days from the date they receive an improper payment letter from a RAC to rebut the findings.  Rebuttal is not required in order to appeal to the fiscal intermediary.  Providers have 30 days to appeal to the FI from the date of receiving the FI's notice indicating the amount of overpayment identified by the RAC.  Interest runs on the overpayment amount and is payable if the appeal fails.  If repayment is not made within 180 days, then the provider is referred to the Department of the Treasury.  Thus far, successful appeals have been limited; in the demonstration project, only 11.3% of RAC determinations were appealed by providers, and of those appeals, only 5% were successful (i.e., RAC determinations were fully or partially overturned only 5% of the time).

How can providers prepare for this upcoming program?

Recent Joint Commission survey activity indicates that compliance with Joint Commission standards and Medicare Conditions of Participation ("CoPs") is being scrutinized, so it is advisable for providers to prepare for RAC audits in the larger context of reviewing their compliance with the CoPs.  Further discussion of preparing for a CoP review will be provided in Recovery Audit Contractors are Coming-Part II.

Focusing solely on RAC audit preparation, providers should do the following: 

  1. Review and reinstitute the corporate compliance program-especially with regard to auditing of coding, billing, and utilization review issues.  See 42 CFR § 482.30 for hospital conditions of participation regarding utilization review.
  2. Appoint a RAC committee to determine how to receive and respond to requests for records and overpayment determinations.  The committee should include the compliance officer and staff from HIM, finance, medical staff, business office, case management, ancillary services, and nursing.  Appoint people to handle specific aspects of the process.  Regular reports should be made to the compliance committee.
  3. If not already ongoing, commence pre-billing audits in the following areas:
    • medical necessity
    • insufficient documentation
    • incorrect coding
    • duplicate claims
    • non-covered services
    • observation
    • discharge and transfer
    • high volume services

    • Retain counsel to direct the audits and advise on appropriate responses to the audit findings.
  4. Monitor the OIG Work Plan for new areas likely to be audited and begin auditing those areas.
  5. Focus on improving physician documentation (including content and legibility).
  6. Educate and train billing and coding personnel on identified areas of deficiency.
  7. Once the RACs begin auditing, seek out and request payment for underpayments.
  8. If it is not possible to respond to a RAC request within the 45-day period, ask for an extension before the end of the period.
  9. If a RAC sends a barrage of requests for records, complain to the FI.
  10. For updated information on RACs, go to

If you or your organization would like to further discuss preparation for RAC audits, please contact Lisa Shortt.

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