Recovery Audit Contracting: The Wave of the Future

By PJ Austin

WasteWatcher, June 2013

On the large list of sources of waste in Medicare, improper payments are near the top.  According to a February 27, 2013 Government Accountability Office (GAO) report, “In 2012, the Medicare program covered more than 49 million elderly and disabled beneficiaries at an estimated cost of $555 billion, and reported improper payments estimated to be more than $44 billion.”  Medicare’s high level of complexity and susceptibility to improper payments are among the reasons that the GAO designates Medicare as a high-risk area.  One method that has proven successful in reducing improper payments is the increased usage of recovery audit contractors (RACs).

While the use of RACs in government, in which private-sector auditors are paid a percentage of the improper payments recovered, has grown in the past decade, empirical evidence indicates that RACs should be utilized to an even greater extent.  According to the Centers for Medicare and Medicaid Services (CMS), “The national Recovery Audit program is the product of a successful demonstration program that utilized Recovery Auditors to identify Medicare overpayments and underpayments to healthcare providers and suppliers in randomly selected states.  The demonstration ran between 2005 and 2008 and resulted in over $900 million in overpayments being returned to the Medicare Trust Fund and nearly $38 million in underpayments returned to health care providers.” 

The early success of the demonstration led Congress to include a RAC provision in the Tax Relief and Health Care Act of 2006, which directed CMS to implement a national recovery audit program for the Medicare Fee for Service (Parts A & B) program.  Under the program, CMS competitively contracted with four RACs, each covering about a quarter of the United States.  The RACs are tasked with identifying overpayments and underpayments in Medicare Parts A and B and bringing those improper payments to the attention of CMS for correction and recovery.  Moreover, RACs are paid on a commission basis for all underpayments and overpayments that they identify.  Taxpayers bear none of the risk of investing in the systems and personnel to conduct the program.

Improper payments can occur by overcharging or undercharging patients for services, making payments to deceased individuals, sending fraudulent payments as a result of identity theft, billing for services never rendered, or processing incorrectly coded billings.  When providers submit claims for reimbursement of Part A and B services, those claims are processed by Medicare Administrative Contractors (MACs), which are fiscal intermediaries for CMS.  A MAC will typically review claims for basic accuracy and sufficiency; however, because they have a legal obligation to process and pay claims under relatively short deadlines, they have neither the time nor the resources to ensure claim accuracy.  RACs conduct post-payment reviews to identify improper payments and bring them to the attention of the MACs for corrective action.

A February 5, 2013 CMS report stated that, “ FY 2011, recovery auditors had identified and corrected 887,291 claims for improper payments, resulting in $939.3 million in improper payments being corrected.”  In a January 7, 2013 news release, Medicare RAC HealthDataInsights (HDI) announced that it had reached the milestone of $1 billion in corrections since the inception of the national RAC program in 2009.  Most impressively, HDI achieved the $1 billion in savings in a region which includes only 17 states and three territories.

Hospitals and other healthcare providers have expressed opposition to the widespread usage of RACs.  However, Medicare providers who disagree with the classification of certain payments as improper are allowed to appeal, and often win.  According to a February 18, 2013 Workers’ Compensation Institute article, “In FY 2011...Medicare providers appealed 60,717 claims, which constitute 6.7 percent of all claims with overpayment determinations.  Of those claims appealed, 26,469 claims were overturned (43.6 percent).”

Members of Congress are also beginning to call for greater use of RACs.  Reps. Peter Roskam (R-Ill.) and John Carney (D-Del.) will soon introduce the Preventing and Reducing Improper Medicare and Medicaid Expenditures (PRIME) Act, which includes a provision requiring CMS to address the systemic vulnerabilities that create improper payments, as opposed to simply identifying improper payments and recovering them at a later date.

In short, the RAC program works well and should be continued.  Considering their proven track record of recovering taxpayer money, it seems clear that broader implementation of RACs is warranted. 


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