The WasteWatcher: The Staff Blog of Citizens Against Government Waste

Recovery Auditors and the Administrative Law Backlog: More "Fake News" Debunked

The WasteWatcher is the staff blog of Citizens Against Government Waste (CAGW) and the Council for Citizens Against Government Waste (CCAGW). For questions, contact blog@cagw.org.


News junkies have been inundated lately with commentary on the ubiquity of “fake news” and its viral spread online.  On December 12, 2016, The New York Times President and Chief Executive Officer Mark Thompson gave a thought-provoking speech before the Detroit Economic Club in which he made some incisive observations about the epidemic of junk news, including the fact that in this new anything-goes, free-for-all information environment, it is easy to forget that “fake news is not new.  The spreading of false rumors for political advantage, for pure malice, or just for entertainment, is as old as the hills….Until something is proven to be false, it’ll remain a story.  …Though it often seems like it to partisans, this is not a battle between Left and Right.  …It’s a battle between facts and lies.”

Even though the debate over “fake news” is currently roiling the waters over the outcome of the presidential election, it is worth pointing out that, even in the much less sensational world of policymaking and legislation, accurately identifying public policy problems and crafting appropriate legislative and regulatory fixes relies upon having the facts.  In the absence of data and facts, it is all too easy for other narratives to take hold and difficult to root them out once they gain traction. 

Such is the case with one such public policy problem, the recovery audit contracting (RAC) program at the Centers for Medicare and Medicaid Services (CMS), the agency that oversees two of the nation’s largest, most important, and most costly entitlement programs, Medicare and Medicaid.  They are also the two biggest drivers of the federal government’s record $137 billion in improper payments in 2015.     

CMS reviews and pays more than one billion Medicare Fee-For-Service (FFS) claims annually, while also striving to maintain the financial integrity of the program.  It enlists the services of outside contractors to help ensure that providers comply with CMS’s rules and to root out wasteful spending, improper payments, and fraud.

The RAC program has identified and returned the most improper overpayments to the Medicare Trust Fund of any post-payment claims auditors.  It is the most controversial, both because it has the authority to recover overpayments on behalf of the Trust Fund and the least costly to taxpayers, and because RAC auditors are paid on a contingency fee basis.  The fee is a percentage of the improper payments recovered from, or reimbursed to, providers and ranges from 9 to 12.5 percent.  The law mandates that RACs must reimburse their contingency fees if an improper payment determination is overturned at any level of appeal.

Since the RAC program rolled out nationwide on January 1, 2010, it has returned $11.7 billion to the Medicare Trust Fund and taxpayers.  And, in fiscal year (FY) 2015, all of the recovery auditing contractors had an accuracy rating of 95 percent or above.    

From its inception, the program has been unpopular with several provider groups, particularly large for-profit hospitals and their allies in Congress.  The hospitals have lobbied aggressively to have the program scaled back or eliminated completely. Although CMS employs a dizzying array of post-payment auditors charged with reviewing Medicare FFS claims (including Medicare Administrative Contractors, Zone Program Integrity Contractors, Supplemental Medical Review Contractors, Comprehensive Error Rate Testing Contractors , and Quality Improvement Organizations), a favorite tactic of providers has been to attack the RAC program specifically because the auditors operate on a contingency payment compensation model and have the most robust legal ability to recover improper overpayments.  Providers have alleged that RACs are “bounty hunters” that have over-aggressively applied CMS regulations. 

Following the launch of the RAC program in 2010, hospitals began to routinely flood Medicare’s appeals system over claims that had been denied by RACs over medical necessity.  These same providers also vociferously complained that RAC denials were frequently being overturned at the third level of appeal, CMS’s Office of Medicare Hearings and Appeals (OMHA), the administrative law judge level, a clear indication, they claimed, that RAC claim denials were themselves sloppy and error-ridden.  The “appeal everything” strategy quickly brought OMHA activities to a screeching halt, jamming the system with an 800,000 claims appeals backlog, the adjudication of which would require two years and hundreds of millions of additional tax dollars. RACs became the sole target of the providers' frustration over increased oversight.

Once the “fake news” storyline had been allowed to set in, it was effectively used to justify a slow-down and degradation of the RAC program.  Much of this has occurred in a data vacuum, since OMHA data on the origins of the claims denials has not been readily available.   

On November 7, 2016, data on the OMHA backlog was included in a brief HHS filed before the federal D.C. District Court related to a case initiated by the American Hospital Association, which was seeking release from HHS over the backlog of Medicare appeals.  In the brief, HHS stated that the RAC program “simply was not, and is not, the primary source of the backlog,” since RAC claim denials comprised only 9.5 percent all appeals filed with the OMHA in FY 2016 and only 14.1 percent in FY 2015.

Unfortunately, the anti-RAC “fake news” narrative has resulted in some very negative and costly consequences for taxpayers and the Medicare Trust Fund. 

In the short run, the manufactured appeals crisis led to a scramble to beef up OMHA’s adjudication infrastructure, at a cost of hundreds of millions in new spending for additional judges and magistrates to handle the inflow of appeals.  In its FY 2016 budget request to Congress, OMHA asked for $270 million, which represented an increase of $183 million, or 125 percent more than its FY 2015 enacted budget of $87 million.   

The manufactured appeal crisis also resulted in an HHS-devised scheme to simply pay hospitals whose claims had already been denied twice 68 cents on every dollar in denied claims pending at the ALJ level, in exchange for a promise to drop the claims.  Initially touted as one-time opportunity, CMS has already extended the settlements twice, reaching into the Medicare Trust Fund at a cost of $1.47 billion so far to pay off more than 2,000 hospitals.  And the providers have received these settlements without any review of their claims to determine if the appeals they filed had merit. 

More importantly, the false narrative that RACs have been unfairly targeting hospitals and that their audits have been sloppy and error-ridden has allowed anti-RAC forces, both inside CMS and in Congress, to dramatically scale back the program’s reach and effectiveness without ever having to go through Congress to change the program’s enabling statute.  That bodes poorly for future efforts to tamp down or eliminate billions in Medicare improper payments.

Ironically, for all the allegations of errors in claims denials made by hospitals against recovery auditors, CMS data shows that it is the hospitals that persist in sloppy billing, stating that “the most common cause of improper payments (accounting for 65.4 percent of total improper payments) was a lack of documentation to support the services or supplies billed to Medicare. In other words … reviewers could not conclude that the billed services were actually provided, were provided at the level billed, and/or were medically necessary.” In addition, “63 percent of overpayments collected … continued to come from inpatient hospital claims.”

On December 7, 2016 HHS released its Recovery Auditing in Medicare Fee-For-Service for FY 2015 Report to Congress and unsurprisingly, cash recoveries to the Medicare Trust Fund have dropped dramatically since the RAC program has come under increased attack.  RACs uncovered 618,966 claims with improper payments and recovered $360 million in overpayments, a far cry from the $1 billion per quarter the RAC program was bringing back to the Trust Fund when it was operating on all cylinders.  According to the report, Medicare recoveries dropped by 91 percent because RACs have been sidelined. 

In 2017, a new administration truly dedicated to the eradication of wasteful spending needs to start with the second largest entitlement program, Medicare.  RACs collected less than 1 percent of the $43 billion in improper Medicare FFS payments identified by CMS in FY 2015 and less than 0.1 percent of the $369 billion that Medicare paid in benefits in FY 2015.  In other words, RACs are only scratching the surface of the scourge of waste plaguing Medicare. 

With the program due to be bankrupt by 2028, two years earlier than predicted last year, Congress and executive branch officials can move quickly to stem the massive tide of improper payments by putting the RACs back to work.  That would be “real” good news.

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