Section 306 of the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003 authorized a demonstration project to pay
a contingency fee to Recovery Audit Contractors, or RACs, for
reviewing and identifying improper payments in the Medicare
The demonstration project took place from March 2005 to March
2008. The RACs were provided with claim information from 2001 to
2007, which covered approximately $317 billion in claims. They were
free to review any claims that they felt were most likely to
contain improper payments, with some minor exceptions. RACS were
excluded from looking at claims for incorrect level of physician
evaluation and management codes; hospice and home health services
claims; payments made to providers under a CMS conducted
demonstration; claims previously reviewed by another Medicare
contractor; and claims involved in a potential fraud
In the demonstration, the RACs conducted two types of reviews:
automated and complex. An automated review occurs when a RAC has
identified a payment that is clearly in violation of Medicare
policy. In such cases, an automatic adjustment is made and the
payment corrected. In a complex review, the RAC identifies what is
likely a payment error and requests medical records from the
provider to conduct a full review. A provider has 45 calendar days
to respond to the RAC request for medical records.
In the demonstration project, providers were concerned that the
RACs were not correctly interpreting CMS policies and procedures.
To address this problem, CMS instituted a “new issue
review” process and contracted with AdvanceMed to be the RAC
Validation Contractor, or RVC. For each set of claims a RAC wanted
to pursue, it was required to submit information to CMS including
the provider type, error type, policy violated and potential
improper payment amount per claim.
CMS staff would review the information and determine whether the
RAC should proceed with its review, or whether the set of claims
needed to be reviewed by the RVC. If so, the RAC sent a small
sample of claims (and medical records if complex review was
required) to the RVC, which would then review the sample and
forward a recommendation to CMS on whether the RAC should continue
to pursue the set of claims. This process will continue in the
permanent RAC program.
As of March 2008, the RACs had identified $1.03 billion in
inappropriate payments. Of this figure, $378 million were
underpayments and $992.7 million were overpayments.
In the demonstration, four main reasons accounted for the
overpayments identified by the RACs: a finding that the services
were medically unnecessary (40 percent); incorrect coding (35
percent); insufficient documentation (8 percent); and other reasons
In accordance with Section 302 of the Tax Relief and Health Care
Act of 2006, a permanent RAC program has been rolled out and was
scheduled to be fully operational by Jan. 1, 2010.
Perhaps the biggest change implemented in the permanent program
is the limit on the number of records that can be requested, which
varies by provider type. Another change is that the review period
has been shortened from four years to three years and, initially,
the RACs will not be able to look at any claims prior to Oct. 1,
2007. Another difference is that in the demonstration, the RACs
were not allowed to review claims from the current fiscal year.
However, this is not a limitation in the permanent program.
During the demonstration, it was optional for the RAC to have a
medical director or certified coder on staff. Both positions are
mandatory in the permanent program. In the permanent program, the
RACs also are required to return phone calls within 24 hours.
Providers have a right to speak with the individual who reviewed
their claim, and they have a right to speak with the RAC medical
Last, in the final program, the RAC will be required to pay back
its fee if the denial is overturned at any level of the appeal.
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Jeffrey S. Baird, Esq. is chairman of the Health Care Group
at Brown &
Fortunato, P.C., a law firm based in Amarillo, Texas. He
represents pharmacies, infusion companies, home medical equipment
companies and other health care providers throughout the United
States. Baird is board-certified in health law by the Texas Board
of Legal Specialization. He can be reached at 806/345-6320 or