Recovery Audit Contractors and Medicare Audits: Successful Strategies for Defending Audits

The CMS Recovery Audit Contractor (RAC) program has been made permanent and is expanding nationwide, beginning this year. Radiology providers should act now to adopt and implement appropriate compliance programs. Radiology providers should make efforts to understand the Medicare appeals process and should know that many strategies exist that can be successfully employed in the appeals process to defend Medicare audits. Section 306 of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA) directed HHS to conduct a three-year demonstration program using RACs. The demonstration began in 2005 in the three states with the highest Medicare expenditures: California, Florida, and New York. The RACs were tasked with identifying and correcting Medicare overpayments and underpayments and were compensated on a contingency-fee basis. The purpose of the demonstration program was to determine whether the use of RACs would be a cost-effective way to identify and correct improper Medicare payments. The RAC demonstration program proved highly cost effective from the point of view of CMS. Over the course of the three-year demonstration, the RACs identified and collected $992.7 million in overpayments and repaid $37.8 million in underpayments to Medicare providers and suppliers. Based upon information compiled by CMS, the RAC demonstration program cost only $0.20 for each $1 returned to the Medicare Trust Funds.¹ Section 302 of the Tax Relief and Health Care Act of 2006 makes the RAC program permanent and requires the expansion of the RAC program nationwide by no later than 2010. CMS is actively moving forward with this expansion right now. During the final months of the demonstration program, RACs expanded into South Carolina, Massachusetts, and Arizona. CMS plans to expand to 19 states by the summer of 2008, four more states by the fall of 2008, and the remaining states by January 2009 or later.1 CMS plans to announce the names of the permanent RAC vendors sometime after July 31, 2008. Radiology providers in the first 19 states can expect the commencement of RAC auditing activity soon after the announcement of the permanent RAC vendors. Although RACs are responsible for correcting underpayments as well as overpayments, it is the process of recouping alleged overpayments that is of particular significance to Medicare providers.1 Approximately 96% of the alleged improper payments identified by RACs were overpayments, as opposed to underpayments. The RACs are permitted to attempt to identify improper payments resulting from incorrect payments, noncovered services (including services that are not reasonable and necessary), incorrectly coded services (including DRG miscoding), and duplicate services.2 During the course of the demonstration project, Medicare providers and suppliers raised concerns with certain aspects of the RAC program. CMS has made efforts to address these concerns and has adopted numerous changes to be implemented in the permanent program. Some of these changes follow. Under the RAC demonstration program, RACs were permitted to reopen claims up to four years following the date of initial payment. Amid arguments that this four-year look-back period violated the provider-without-fault provisions of the Social Security Act, under the permanent RAC program, RAC reviewers have a maximum three-year look-back period. In all states (regardless of expansion date), the permanent program will begin with a review of claims paid on or after October 1, 2007. As time passes, however, the RACs will be prohibited from reviewing claims more than three years past the date of initial payment.2 Under the RAC demonstration program, the RACs were not required to employ a physician medical director or coding experts. Under the permanent program, however, when performing coverage or coding reviews of medical records requested from a Medicare provider or supplier, registered nurses or therapists are required to make determinations regarding medical necessity and certified coders are required to make coding determinations. The RACs are not required to involve physicians in the medical-record review process; however, the RACs are required to employ a minimum of one FTE contractor medical director (CMD) who is a doctor of medicine or doctor of osteopathy and arrange for an alternate CMD in the event that the CMD is unavailable for an extended period. The CMD will provide services such as guiding RAC staff regarding interpretation of Medicare policy.2 Under the demonstration program, the RACs were entitled to keep their contingency fees if a denial was upheld at the first stage of appeal, regardless of whether a provider prevailed at a later stage of the appeals process. This fee arrangement provided an incentive to the RACs to review and deny claims aggressively, including claims alleged not to be medically necessary (an area containing much subjectivity, and a category of denial often highly disputed by the provider). In fact, 40% of the alleged overpayments identified during the demonstration program were denied for reasons of medical necessity. For their efforts, the RACs earned $187.2 million in contingency payments over the course of the demonstration (or approximately 14.4% of all alleged improper payments identified). In a significant change from the demonstration program, under the permanent RAC program, if a provider files an appeal disputing an overpayment determination and 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.1 Although providers cannot stop RAC audits from happening, they can implement appropriate compliance programs and make efforts to understand available audit defenses. Compliance Plan Medicare providers nationwide are well advised to begin preparing for the RACs and increased Medicare auditing activity now. Radiology providers can begin to prepare by dedicating resources to monitoring protocols internally that will identify and monitor better the areas that may be subject to review; to responding to record requests within the required timeframes; and to implementing compliance efforts, including (but not being limited to) documentation and coding education. In addition to claim denials resulting from medical necessity and improper documentation and coding, it also is possible to receive claim denials if services are not provided consistent with Medicare regulations. Therefore, radiology providers should ensure that services provided are appropriately documented and coded, and should also ensure that they comply with Stark laws, the anti-markup rule, the teleradiology rules, the corporate practice of medicine doctrine, and IDTF standards (where appropriate), among other rules. In addition, providers should ensure that they are working up appeals properly to challenge denials in the appeals process. With regard to medical necessity and similar denials, this will clearly entail physician involvement, which many nonphysician providers and suppliers find difficult to obtain. The Appeals Process If a Medicare provider or supplier receives a claim denial, or a finding of overpayment is made as a result of RAC review, the denial will be subject to the uniform Medicare Part A and Part B appeals process. The regulations governing this process are contained beginning at 42 CFR §405.900. The first level in the appeals process is redetermination. Providers must submit redetermination requests in writing within 120 calendar days of receiving notice of the initial determination. There is no amount-in-controversy requirement. Providers dissatisfied with a carrier’s redetermination decision may file a request for reconsideration to be conducted by a qualified independent contractor (QIC). This second level of appeal must be filed within 180 calendar days of receiving notice of the redetermination decision. There also is no amount-in-controversy requirement for this stage of appeal. Prior to the establishment of the new appeals process, Part B providers were afforded an in-person carrier hearing upon receiving an initial determination from the carrier. The QIC reconsideration replaces the carrier hearing. The QIC reconsideration is an on-the-record review, in contrast with an in-person hearing review. In conducting its review, the QIC will consider evidence and findings upon which the initial determination and redetermination were based, plus any additional evidence submitted by the parties or obtained by the QIC on its own. Providers must submit a full and early presentation of evidence in the reconsideration stage. When filing a reconsideration request, a provider must present evidence and allegations related to the dispute and explain the reasons for the disagreement with the initial determination and redetermination. Absent good cause, failure of a provider to submit evidence prior to the issuance of the notice of reconsideration precludes subsequent consideration of the evidence. Accordingly, providers may not be permitted to introduce evidence in later stages of the appeals process if such evidence was not presented at the reconsideration stage. The third level of appeal is the administrative law judge (ALJ) hearing. A provider dissatisfied with a reconsideration decision may request an ALJ hearing. The request must be filed within 60 days following receipt of the QIC’s reconsideration decision and must meet an amount-in-controversy requirement. ALJ hearings can be conducted by video teleconference (VTC), in person, or by telephone. The regulations require the hearing to be conducted by VTC if the technology is available; however, if VTC is unavailable, or in other extraordinary circumstances, the ALJ may hold an in-person hearing or may offer a telephone hearing. The fourth level of appeal is the Medicare Appeals Council (MAC) Review. The MAC is within the Departmental Appeals Board of HHS. MAC review requests must be filed within 60 days following receipt of the ALJ’s decision. Among other requirements, a request for MAC review must identify and explain the parts of the ALJ action with which the party disagrees. Unless the request is from an unrepresented beneficiary, the MAC will limit its review to the issues raised in the written request for review. Upon request, the MAC will grant the parties a reasonable opportunity to file briefs or written statements. In addition, a party may request an opportunity to present an oral argument. The MAC will grant this request if the case raises an important question of law, policy, or fact that cannot be readily decided based upon the written submissions. The final step in the appeals process is judicial review in federal district court. A request for review in district court must be filed within 60 days of receipt of the MAC’s decision. In a federal district court action, the findings of fact by the secretary of HHS are deemed conclusive if supported by substantial evidence. Defending Medicare Audits Medicare providers subject to RAC or other Medicare audits should understand that many strategies exist that can be employed successfully in the appeals process to effectuate meaningful results. These strategies involve effectively advocating the merits of the underlying services, as well as employing legal defenses. When advocating the merits of a claim, health care legal counsel assisting radiology providers often finds it useful to draft a position paper outlining the factual and legal arguments in support of payment for a disputed claim. In addition, in most cases it is advantageous to engage the services of a qualified expert. Appropriate use of an expert can prove very useful, particularly when the audit involves medical-necessity denials. Other strategies that can prove successful include the use of medical summaries, illustrations, and color-coded charts or graphs, depicting the claims at issue, that are user friendly for the decision maker. In addition to advocating the merits of a claim through various techniques, certain legal defenses are available. Defenses that have proven valuable for providers challenging Medicare audit determinations include invoking the treating-physician rule, arguing the waiver-of-liability defense, arguing that the provider is without fault, challenging the timeliness of the audit and/or claim denial, and challenging the statistical extrapolation (if one was involved). Treating-physician Rule It may be appropriate, in many audit settings, to assert the treating-physician rule. The rule involves the legal principle that the treating physician, who has examined the patient and is most familiar with the patient's condition, is in the best position to make medical-necessity determinations. The treating-physician rule, as adopted by some courts, reflects that the treating physician’s determination that a service is medically necessary is binding unless contradicted by substantial evidence, and is entitled to some extra weight, even if contradicted by substantial evidence, because the treating physician is inherently more familiar with the patient’s medical condition. Thus, providers should reference the treating-physician rule to demonstrate that the treating physician’s medical judgment as to the medical necessity of the services provided should prevail, absent substantial contradictory evidence. With reference to radiology providers specifically, it should be noted that the determination of whether a radiology service is reasonable and necessary is often initially made by a referring physician who orders radiology services rendered by a radiology provider. This is an important consideration that should be addressed in a discussion of the treating-physician rule. Waiver of Liability Pursuant to the Medicare waiver-of-liability defense, physicians may be entitled to payment for claims deemed not reasonable and necessary by the carrier during an audit. The statutory authority for waiver of liability is set forth in section 1879(a) of the Social Security Act.3 Under waiver of liability, even if a service is determined to be not reasonable and necessary, payment may nonetheless be rendered if the provider did not know, and could not reasonably have been expected to know, that payment would not be made. The relevant inquiry focuses on whether the provider knew, or could have reasonably been expected to know, that payment would not be made. Therefore, in defending an audit, a physician must have access to all relevant carrier communications with the provider community and communications with the particular provider. The waiver-of-liability provisions generally apply only to determinations that a service was not medically necessary. If a radiology service is denied as not reasonable and necessary, one potential argument that a radiology provider could make, under the theory of wavier of liability, is that it did not know, and could not reasonably have been expected to know, that payment would not be made on the claim, because the referring physician had specifically determined that the services would be reasonable and necessary for the care of the patient. Provider Without Fault In addition, the provider-without-fault defense may be employed in the case of post–payment-review denials. The Medicare provider-without-fault provision, section 1870 of the Social Security Act, states that payment will be made to a provider if the provider was without fault with regard to billing for, and accepting payment for, disputed services.3 As a general rule, a provider will be considered without fault if it exercised reasonable care in billing for and accepting payment (complied with all pertinent regulations; made full disclosure of all material facts; and on the basis of the information available, had a reasonable basis for assuming the payment was correct).4 Fault, for purposes of the provider-without-fault provision, is defined as an incorrect statement, made by the individual, that he or she knew, or should have known, to be incorrect; failure to furnish information that he or she knew, or should have known, to be material; or, with respect to the overpaid individual only, acceptance of a payment that he or she knew, or could have been expected to know, was incorrect.5 As with waiver of liability, if a radiology service is denied as not reasonable and necessary, one argument that a radiology provider could make under the provider-without-fault doctrine is that it did not know, and could not reasonably have been expected to know, that payment would not be made on the claim, because the referring physician had specifically determined that the services would be reasonable and necessary for the care of the patient. In addition, providers also will be deemed to be without fault in the absence of evidence to the contrary if the overpayment was discovered subsequent to the third calendar year after the year of payment.4 Reopening Regulations Medicare regulations recognize that, in the interest of equity, Medicare providers must be able to rely on coverage determinations. Accordingly, the Medicare regulations place restrictions upon the permissible timeframe for reopening determinations. According to the federal regulations governing the Medicare appeals process, once an initial determination to pay a claim has been made, the claim can only be reopened for review within a certain time period. Pursuant to 42 CFR §405.980(b), a contractor may reopen and revise its initial determination

• within one year from the date of the initial determination, for any reason;
• within four years of the date of the initial determination, for good cause;
• at any time, if there exists reliable evidence that the initial determination was procured by fraud or similar fault; or
• at any time, if the initial determination is unfavorable, in whole or in part, to the party thereto, but only for the purpose of correcting a clerical error on which that determination was based.

Pursuant to 42 CFR §405.986, good cause may be established when there is new and material evidence that was not available or known at the time of the determination or decision, and that may result in a different conclusion, or when the evidence that was considered in making the determination or decision clearly shows, on its face, that an obvious error was made at the time of the determination or decision.6 Further, according to the Medicare Financial Management Manual, “If an overpayment is determined based on a reopening outside of the above parameters, the FI or carrier will not recover the overpayment.”4 Although providers have experienced success challenging reopenings under these regulations, providers should be aware that a recent Medicare Appeals Council decision has found that CMS lacks jurisdiction to consider challenges to reopenings under the Medicare appeals process (see Critical Care of North Jacksonville v First Coast Service Options, Inc, decided February 29, 2008). Challenges to Statistics In many postpayment audits, CMS will audit a small sample of a provider’s records; if it finds an overpayment, CMS will extrapolate the overpayment to the provider’s entire patient population. The MMA sets limits regarding when statistical extrapolation may be used, and the Medicare manuals establish guidelines for CMS to follow when performing an audit based upon a statistical sample. If an extrapolation is flawed, it may be successfully challenged, bringing the total dollars at issue to the actual alleged overpayment, and not the extrapolated alleged overpayment. For example, in one recent case challenged by this law firm, CMS alleged an actual overpayment of approximately $28,000, which it then extrapolated to render its determination that the provider had been overpaid over $1.5 million. This firm was successful challenging the methodology of this statistical extrapolation and the extrapolation was overturned. Pursuant to section 935 of the MMA, a Medicare contractor may not use extrapolation to determine overpayment amounts to be recovered by recoupment, offset, or otherwise, unless the secretary determines that there is a sustained or high level of payment error or documented educational intervention has failed to correct the payment error. CMS also has established guidelines for statistical extrapolations, which are set forth in the Medicare Program Integrity Manual. The RACs are authorized to use extrapolation, provided that they adhere to statute and manual provisions.2 CMS and its contractors must follow these guidelines in conducting statistical extrapolations. If they fail to do so, a Medicare provider may have success in challenging the validity of the extrapolation. Conclusion Radiology providers should be ready for increased Medicare auditing activity as the RAC program expands nationwide. Radiology providers should make efforts now to evaluate their compliance with Medicare policies. Should a provider or supplier be subject to a RAC or other Medicare audit, effective strategies are available that can be successfully employed in the appeals process to defend Medicare audits.