Beware! Recovery Audit Contractors Poised for Permanent Status

A little-noticed provision in the Medicare Modernization Act of 2003 could result in the recovery of a sizeable portion of overpayments by Medicare and has healthcare providers concerned that overzealous bounty hunters may come knocking on their door.

The provision raising some hackles in healthcare provider circles is Section 306 of the 2003 legislation, which called for a demonstration project to show the use of recovery audit contractors (RACs)—outsourced private companies—in identifying Medicare payment errors.

Medicare overpayments are an area that the federal government believes can be vigorously addressed by outsourcing its recovery audits to independent contractors. According to Timothy B. Hill, director of the Office of Financial Management at the Centers for Medicare & Medicaid Services (CMS), Medicare overpayments totaled $12.8 billion last year.

The RAC demonstration program was conducted from March 2005 through March 2008, expanding beyond the three initial states of California, New York, and Florida to include Arizona, Massachusetts, and South Carolina in July 2007, although no claims were ultimately reviewed in Arizona. California, New York and Florida were chosen as they represent three of the largest Medicare utilization states, according to Hill.

“The demonstration corrected a total of more than $1 billion in improper payments during its three-year run,” Hill said. “This amount includes both overpayments collected from providers and underpayments refunded to providers. The RAC demonstration program has cost only 20 cents for every dollar collected.”

Hill stated that of the $980 million collected by the RACs, only $12.8 million, or 1 percent, were overpayments that had been made to physicians over the three-year period. 

“In fact, the vast majority of overpayments [more than 84 percent] were collected from inpatient hospitals,” he said.

Drilling down the demo

At first blush, these data provide a compelling endorsement for the role of RACs, as healthcare practitioners and CMS are acutely aware of the damage overpayments cause to the healthcare system: fewer dollars to provide care for patients.

However, drilling down into the numbers and experience of the RAC demonstration project has left many healthcare providers uneasy with the prospect of a nationwide, permanent RAC rollout scheduled to begin in October this year.

“CMS compensates the RACs on a contingency fee basis, based upon the principal amount of collection [or the amount paid back to] a provider,” said Andrew B. Wachler, a healthcare attorney with Wachler and Associates of Royal Oak, Mich.

“This fee arrangement provides incentives to the RACs to aggressively review and deny claims. In FY 2007, the RACs identified and collected $357.2 million in overpayments, and repaid just $14.3 million in identified underpayments to Medicare providers and suppliers. Thus, approximately 96 percent of the alleged improper payments identified [and collected or returned as appropriate] were overpayments, as opposed to underpayments.”

A hotly contested issue during the demonstration project was that RACs retained their contingency fees, even if the claim denial was overturned at the Administrative Law Judge level or above. Wachler noted that CMS has addressed this oversight in its outline for the permanent RAC program.

“In a significant change from the demonstration program, under the permanent RAC program, if a provider files an appeal disputing the overpayment determination, and the provider wins this appeal at any level, the RAC is not entitled to keep its contingency fee, and must repay CMS the amount it received for the recovery,” he said.

This action by CMS may help reign in some of the problems that California providers experienced during the demonstration project in that state. According to Patricia Blaisdell, vice president of medical rehabilitation services and continuing care for the California Hospital Association, members of that organization did not believe they were treated fairly and professionally by the RAC firm, PRG Schultz International, during the demonstration program.

The RAC in California did not comply with Medicare policy governing the determination of medical necessity for inpatient care, she says. “For example, they used InterQual Criteria [by McKesson] to make determinations regarding short inpatient stays vs. observation, which is not compliant with Medicare policy,” Blaisdell noted. “In addition, they did not use appropriately qualified personnel for the reviews of patients admitted for inpatient rehabilitation services and made thousands of inaccurate determinations, as evidenced by the results of the validation review and the high turnover rate of appeals.”

According to Wachler, CMS “paused” PRG Schultz’s authority to review these claims and commissioned a different and independent contractor to review a sampling of claims previously reviewed by the RAC. “That contractor disagreed with approximately 40 percent of the determinations made by PRG Schultz.”

In response to outcries from California healthcare providers, Representative Lois Capps (D-Calif.) of Santa Barbara introduced legislation (HR 4105, currently in committee) last November with 96 co-sponsors, seeking to place a one-year moratorium on all RAC activities.

“As increasing numbers of [recovery audit contractors’] denials are overturned on appeal in favor of the healthcare providers, we are finding a program that is wasting perhaps as much taxpayer money as it is purportedly saving,” Capps stated. “Even worse, this whole process of denying payment for legitimately provided services is placing an enormous financial burden on healthcare providers that jeopardizes their ability to care for their patients.”

As a result of the mistakes that occurred in the California demonstration project, Wachler noted that CMS will require RACs to seek CMS approval before beginning medical necessity reviews of provider claims.

“CMS has acknowledged that medical necessity reviews sometimes involve gray areas of Medicare policy,” he said. “The CMS oversight is intended to ensure that providers are not unduly burdened or second-guessed by the RACs.”

According to W. Kenneth Davis, Jr., partner in the Chicago-based Katten Muchin Rosenman law firm, all healthcare providers regardless of their area of specialization, are subject to RAC scrutiny.

“There really is no ‘RAC defense’ per se,” he says. “The best thing to do is what physicians and suppliers have been told to do for a long time: code and bill accurately, don’t perform procedures that are of questionable medical necessity, and certainly never bill for a procedure that you didn’t perform.”