Legal Speak

Medicare Audits: Recovery Audit Contractor Programs

Providers in California, New York and Florida may be facing the challenges of dealing with a new type of Medicare audit. Legislation passed by Congress last year guarantees them company. The Tax Relief and Health Care Act of 2006, known informally as the “physician fix” legislation, provides an expansion of the Medicare recovery audit contractor (RAC) program. RACs are private entities that contract with the Medicare program to supplement the audits performed by the traditional Medicare Administrative Contractors (MACs). Note: RAC audits are in addition to, not in place of, the audits performed by the MACs or the Program Safeguard Contractors (PSCs).

The purpose of the RACs is to find overpayments and underpayments that have not been identified by the MACs. Consequently, the claims audited by the RACs must be claims that were processed by a MAC at least a year ago. In most cases, providers are seeing audits on claims that were processed by a Durable Medical Equipment Regional Contractor (DMERC) two or more years ago. RACs are bound by local and national coverage policies. Congress initially approved the pilot program using RAC audits under the Medicare Modernization Act of 2003 (MMA). At the program’s conclusion in 2008, the MMA requires the Centers for Medicare & Medicaid Services (CMS) to report to Congress on the program’s impact on Medicare savings and to recommend whether to expand or withdraw the program nationally.

What is surprising about the RACs is that they are paid based on a percentage of the overpayments they recover. In the past, CMS strived to reassure providers that the contractors performing audits did not have an incentive to find overpayments. Medicare contractors were paid to process claims accurately the first time — there was no “bonus” for finding and recouping overpayments. A number of CMS initiatives, such as the “CERT” audits, were directed at ensuring that contractors did not overpay or underpay claims. While this is still the case for the MACs, Congress explicitly authorized the RACs to receive payment based on a contingency, or a percentage of the amount of overpayments they recover.

Overpayments identified by the RACs are subject to the same appeals processes as other claims. The MACs have no authority to automatically uphold or reverse an overpayment identified by an RAC. The companies awarded the RAC contracts typically do not have experience in DMEPOS claims processing. Given this lack of experience and considering that the claims they review are older claims, providers who have experienced these audits report significant inaccuracies in the RAC’s determinations.

Last year, the Office of Inspector General (OIG) for the Department of Health and Human Services issued a report on the performance of one RAC’s audits of in-patient hospital claims. The OIG recommended that CMS consider the RAC’s performance before making its final recommendations to Congress. CMS, in turn, agreed with the OIG’s recommendation. However, CMS’ comments make it clear that it believes the RAC program is working satisfactorily.

In light of the OIG’s review and provider’s experience with the RAC audits to date, it may be that Congress was premature in expanding the program last year.

The RACs are still on the DMEPOS claims processing learning curve. Even so, providers must be prepared to respond to these audits with the same diligence with which they respond to a MAC or PSC audit. Importantly, providers should be ready to appeal RAC overpayment determinations.

This article originally appeared in the Respiratory Management March/April 2007 issue of HME Business.

About the Author

Asela M. Cuervo, Esq., specializes in legal/regulatory cases and issues concerning the HME industry, and is a member of CMS' Program Advisory and Oversite Committee regarding national competitive bidding. The Law Office of Asela M. Cuervo, located in Washington, D.C., can be reached at (202) 496-1281 or


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