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Preparing for the Inevitable Medicare and Medicaid RAC Reviews

Gaines, Edward R. III JD

doi: 10.1097/01.EEM.0000413674.35761.64

    Hit with improper provider payments that totaled nearly $11 billion in 2007, the Centers for Medicare & Medicaid Services (CMS) fought back with an aggressive new program designed to root out fraud, waste, and abuse at virtually every level of the Medicare program.

    The Medicare Recovery Audit Contractors Program, now commonly known as RAC, marked a major shift in the way CMS pursued improper provider payments. Prior to RAC, Medicare audits had been conducted primarily by fiscal intermediaries on Part A or CMS on Part B carriers. With RAC, however, independent contingency fee paid contractors were enlisted to ferret out improper payments in exchange for a percentage of the dollars recovered for over- and underpayments.

    Thanks to this incentivized structure, reimbursement investigations have been pursued in a number and with a tenacity not previously seen in the Part B Medicare program. Physicians should continue to ensure that their organizations are ready if and when a RAC investigation is launched. The program was first limited to Medicare Part B only, but the Patient Protection and Affordable Care Act of 2010 expanded the RAC program to all states in the Medicaid program beginning in 2012, and will eventually apply to Medicare Advantage (Medicare managed care, formerly Medicare Plus Choice) and Medicare Part D, the prescription drug program.

    A Sea Change

    The good news for providers is that CMS has acknowledged that the vast majority of improper Medicare payments are because of errors, omissions, or negligence, not willful fraud or abuse. That means physicians, hospitals, nursing homes, laboratories, and suppliers should not become unduly concerned that improper payments will result in civil sanctions or criminal prosecution.

    Nonetheless, it is critical that providers understand that the RAC program represents a sea change in the way Medicare reimbursement rules are enforced. Never before had contractors been empowered and financially incentivized to seek out improper payments across the full breadth of the $200 billion Medicare Part B program. Safeguards exist to ensure that contractors do not abuse their newfound power, but relatively minor payment problems could escalate quickly if physicians do not respond to RAC inquiries in a forthright, timely fashion.

    Pilot Collected $900 Million

    The original Medicare Part B RAC program was authorized as part of the Tax Relief and Health Care Act of 2006 to help improve enforcement across the sprawling Medicare program. The sheer scope of the government's fiduciary challenge was staggering: Medicare processes 1.2 billion medical claims a year — about 4.5 million per day — for more than one million registered health care providers and suppliers. The volume of claims dwarfed the number of returns processed by the Internal Revenue Service, and is expected to increase significantly as the baby boomer generation moves into retirement.

    CMS officials recently said more than 10,000 baby boomers turn 65 and become Medicare-eligible each day. Medicare is 19 percent of the federal budget and growing, is the largest health program in the world, and represents on average 40 percent of state budgets.

    The four RAC contractors are paid between nine percent and 12.5 percent of monies recovered, and CMS hopes to reduce improper payments significantly while generating a windfall for the agency. The government's total cost of the RAC program, including administrative overhead and contractor payments, equals about 22 cents on each dollar recovered, according to CMS, so major financial incentives are built into the system for the agency and the contractors. In the era of pay-as-you-go legislation, the RAC program was scored by the nonpartisan Congressional Budget Office as “savings,” and such savings were used to “pay for” the “doc fix” on the Medicare fee schedule formula known as the “sustainable growth rate.”

    Results from the three-year RAC demonstration project suggested the approach would be effective. The program, launched in 2005, returned more than $900 million to the Medicare Trust fund, despite being limited to only Medicare claims originally from California, Florida, and New York. Massachusetts, South Carolina, and Arizona were later added to the demonstration program. The program also identified nearly $38 million in underpayments returned to health care providers.

    RAC Results

    The Medicare RACs are currently operational in all 50 states, and hospitals continue to bear the brunt of the audit activity although RACs are moving aggressively to other supplier and provider types. RACs not only identify overpayments, but report underpayments to a lesser degree. RACs posted a total correction amount of $92.3 million for fiscal year 2010, which covered October 2009 through September 2010. A total of $75.4 million of that was identified as overpayments, the rest underpayments. The RACs identified $499.8 million in overpayments, and only $92.7 million in underpayments to providers and suppliers through the third quarter of FY 2011, covering October 2010 through June 2011.

    The four RACs differed in what top issues were found in their audit results. One RAC in FY 2011 listed medical necessity as a top issue, keying in on renal and urinary tract disorders in the inpatient hospital setting. Another RAC posted incorrect coding as a top issue, saying that providers billing for an incorrect principal diagnosis or secondary diagnosis resulted in an incorrect DRG assignment. Another RAC reported incorrect durable medical equipment payments made on behalf of beneficiaries during a covered inpatient stay as a top issue. Medical necessity reared its head again when another RAC identified minor surgery and other treatments being submitted as an inpatient instead of an outpatient encounter.

    CMS published two high-risk “vulnerabilities” for physician claims found in RAC reviews in 2010; units billed exceeded the number of units per day based on CPT code descriptor, local or national policy, or reporting instructions, and duplicate claim billing. The amount and type of RAC approved issues for review that affect the physician-provider type continues to grow within all four Medicare RACs as the program continues.

    Self-Assessment Key

    It makes sense to develop a program that reviews a physician group's claims for a specific period of time to identify potential outlier situations in much the same fashion that RAC contractors assess claims. Physician groups can use that information to determine the nature and extent of potential problems, and begin working to mitigate them before a RAC investigation is launched. It also pays to analyze the RAC top issues consistently and collect data on RAC activity so risk areas can be monitored more closely.

    According to CMS, groups can take other steps to prepare for the RAC rollout:

    • Identify where improper payments have been persistent by reviewing the RACs' websites, ensuring, for instance, appropriate use of the -25 modifier and compliance with Medicare's Global Surgical Package requirements.
    • Keep track of denied claims and corrections of previous errors.
    • Track appeals and findings from impartial administrative agencies such as the administrative law judge.
    • Determine what corrective actions need to be taken to ensure compliance, and avoid submitting incorrect claims in the future.

    Aggressive Appeals Strategy

    RAC investigative results will be subject to the existing Medicare appeals process, so it is important that organizations be ready and willing to pursue timely appeals through the five-stage Medicare process if an investigation finds for recovery against the physician group.

    Only 12.7 percent of providers appealed adverse RAC findings during the demonstration program, according to CMS data, and 66 percent of appeals were decided for the provider. A provider win in the appeal process reduces the RAC contractor contingency payment to zero. A win also prevents the RAC from coming back at a later date to scrutinize the same set of claims. An aggressive appeals stance by providers is recommended as a significant deterrent against marginal investigations as the program matures.

    The Second RAC Attack

    Building on the Medicare RAC program, a final Medicaid RAC rule was issued by the Department of Health and Human Services on Sept. 14, 2011. The vice president, in a speech to cabinet members, unveiled the new Medicaid initiative to fight waste, which is estimated to save more than $2 billion. The Medicaid RAC program, initiated by the Affordable Care Act, projects savings of $2.1 billion over the next five years with $900 million of that going back to the states. The Medicaid RAC contractors will be paid contingency fees that vary from state to state, but a cap of 12.5 percent will be imposed on any state's contingency fee percentage.

    The new rule also instructs the states on funding for the startup, operation, and maintenance costs of the program, and advises them to ensure proper appeal processes are in place for providers to dispute adverse determinations from the contractors. The Medicaid RAC programs will be better defined as time goes on, and specifics of the program will become more evident, but these contractors likely will move ahead as aggressively as the Medicare RACs.

    Note several important differences between the Medicare and the Medicaid RACs:

    • No express mandate has been issued that Medicaid RACs focus on underpayments versus Medicare RACs' to identify and collect underpayments and overpayments.
    • The Medicaid RAC appeal processes must be “adequate,” though the factors that make the appeal process “adequate” are not specified as is the five-step well defined Medicare RAC appeal process.
    • The Medicaid RACs are not limited by CMS on look-back timeframes while the Medicare look-backs are limited to claims on or after Oct. 1, 2007.
    • Medicaid RACs are not limited in the number of records or charts they may review while Medicare RACs are.

    Semi-Automated Reviews

    The Medicare RAC program has evolved over time. CMS previously had two types of reviews: an automated one that occurs when a recovery auditor made a claim determination at the system level without human review of the medical record and a complex review that occurs when a claim determination is made utilizing human review of the medical record.

    CMS is now unveiling a new type of a review called a semi-automated review. This two-step process identifies billing aberrations through an automated review using claims data, and includes a notification letter to the provider that a potential billing error has been identified.

    The provider has 45 days to submit documentation to support the original billing. This type of review is a hybrid of the existing reviews, and can expose providers to even more scrutiny. It typically will be used where clear CMS policy does not exist.

    A Brave New World

    Creation of the RAC mechanism introduces a wild card into the Medicare and now Medicaid enforcement mix. Given the financial incentives that exist for RAC contractors to identify and recover improper payments, the question is not whether a provider group will be subject to RAC review but when that review will occur. Physician groups should waste little time preparing for the changes to come.

    It is essential for provider organizations to conduct self-assessments to gauge areas of potential vulnerability, and then implement policies to reduce or eliminate that risk. Providers must also create policies to ensure that all inquiries from RAC contractors are immediately acknowledged and addressed, and they must be ready to fight adverse claims aggressively through the Medicare and eventually the Medicaid appeals process to reduce potential financial exposure and to limit the likelihood of repeat investigations.


    Mr. Gainesis the vice president and chief compliance officer of Medical Management Professionals. He is also a founder and member of the board of directors and executive committee of the Emergency Department Practice Management Association (EDPMA), and serves on the board of directors of the Council of Ethical Organizations. Mr. Gaines is a member of the North Carolina State Bar, North Carolina Bar Association's Health Law Section and the Bar of the United States Supreme Court. He received the North Carolina College of Emergency Physicians Outstanding Emergency Medicine Advocate Award in 2006, and EDPMA highest honor, the Founders Award, in 2008.

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