The Centers for Medicare and Medicaid Services (CMS) released its most recent analysis of improper payments in the Medicare program on November 17, 2008.  The good news is that vigorous cost recovery programs have helped whittle the percentage of improper payments in the Medicare fee-for-service program from 3.9 percent in FY 2007 to 3.6 percent this year. 

But that still means that Medicare bled $10.4 billion in improper payments in FY 2008.  Improper payments are any incorrect payment made to a service provider.  Not surprisingly, the majority tend to be overpayments. 

Improper payments occur as a result of incorrect coding for medical procedures or claims for services that are medically unnecessary.  In its November 17 release, CMS’ acting administrator Kerry Weems stated that "One of the best tools we have to lower the amount of improper payments is education.” 

That may be true, but there are other reasons for the reduction.  The CMS just wrapped up a three-year demonstration project in which they used private-sector recovery audit contractors (RACs) to identify and recapture improper Medicare payments.  The program focused on three states, California, Florida, and New York, and looked at only medical claims from inpatient hospital providers.  As of March 27, 2008, RACs had corrected more than $1.03 billion in improper payments, approximately 96 percent ($992.7 million) of which were overpayments collected from providers.  That effort returned $693.6 million to the Medicare Trust Funds. 

Hospital officials complained that the auditors were overly zealous and that the percentage that auditors took as a fee was too high, creating an incentive to err against the providers for their own financial benefit.  It turned out, however, that not only were the recovery fees well within industry standards (recovery auditing is commonly used in the private sector, as well as in other federal agencies), only 4 percent of the hospitals’ appeals were completely or partially overturned.   

Medicare officials are poised to roll out the recovery auditing program nationwide.  But a November 17 Washington Post article stated that President-elect Obama had sent letters to unionized federal workers prior to the election containing a list of promises, including a proposal to scale back on private contractors doing “government work.”  There is nothing inherently “governmental” about conducting financial program audits.  The RAC demonstration cost was only 20 cents for each dollar collected.  It more than paid for itself.  It works.  Considering how much taxpayer money federal employees completely failed to detect, let along recover, it seems clear that private-sector contracting in this area has been a smashing success and should be continued.