Recovery Audit Contractors: Coming Soon to a Provider Near You

Medicare providers and suppliers nationwide have been preparing for increased Medicare audit activity in anticipation of the nationwide rollout of the permanent Recovery Audit Contractor (RAC) Program. CMS suspended implementation of the permanent RAC program in late 2008, but the stay was lifted in February 2009. The RAC project is back on track, with the expansion of the program beginning in Minnesota in March 2009. The updated expansion schedule was published as part of the CMS evaluation report on the RAC demonstration.¹

Providers and suppliers 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.

Kelly Nueske, RN, CPA Section 306 of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 directed the DHHS 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 purpose of the RAC demonstration program was to determine whether the use of RACs would be a cost-effective way to identify and correct improper Medicare payments. 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. The 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. The costs and fees associated with the RAC demonstration program totaled $201.3 million, constituting approximately $0.20 for each $1 returned to the Medicare trust funds. Approximately 96% of the alleged improper payments identified were overpayments, not underpayments. Providers and suppliers should be ready for increased audit activity, as the RACs are tasked with identifying and correcting Medicare overpayments and underpayments and have the incentive of being compensated on a contingency-fee basis. As a result, it is the process of identifying and recouping alleged overpayments that is of particular significance to Medicare providers and suppliers. There are also significant costs incurred by providers and suppliers in developing processes and preparing for the RAC audits, as well as potential costs for defending and appealing against RAC findings. Audit Target Areas Reviewing the claims-denial data from the CMS RAC report1 is helpful for Medicare providers and suppliers focusing on identifying RAC target areas for the permanent program. The vast majority (85%) of claim denials in the RAC demonstration program involved inpatient hospital claims; 6% involved inpatient rehabilitation facilities; 4% involved outpatient hospitals; and the remaining denials involved the claims of physicians, skilled nursing facilities, durable medical equipment suppliers, ambulance companies, laboratories, and other providers. Of the improper payments identified, 35% were the result of incorrect coding; 40% were denied because the claims did not meet Medicare’s medical-necessity criteria; and 8% were denied for having no/insufficient documentation (meaning that the RAC requested the information, but the entity did not respond in a timely or complete manner). The remaining 17% were denied for other reasons, which could include submitting duplicate claims, billing separately for services already included in other payments, and incorrectly following fee schedules. In addition to reviewing claims-denial data from the RAC demonstration project, providers and suppliers should monitor their own denial patterns and the OIG work plan (which addresses the target areas of DRG validation, discharge disposition, medical necessity, and one-day stays, all of which were areas of scrutiny for the RACs during the demonstration). The Program to Evaluate Payment Patterns Electronic Report, or PEPPER, information from the local quality-review organization is also valuable in determining potential areas of vulnerability. Together with internal auditing, using a combination of these resources is a great starting point for prioritizing target areas to be monitored first. Medicare providers and suppliers are well advised to avoid selecting too many compliance areas on which to focus at one time. They should begin monitoring just a few risk areas and then slowly expand the project to ensure the quality of the review, rather than simply increasing the quantity of the entity’s identified risks. It is difficult for Medicare providers and suppliers to avoid an audit, or the claim denials and repayments that will result from an audit. Organizations may, however, limit exposure by ensuring that appropriate systems are in place to address key areas where improper payments were identified in the demonstration project: noncovered services (including services that are not reasonable and medically necessary), incorrectly coded services (including DRG miscoding), duplicate services, and services with insufficient documentation. Strategies to Consider The RACs have compliance, audit, and legal components that are unique. Compliance and legal professionals assisting organizations from the RAC demonstration states have shared valuable lessons learned and offered advice regarding ways to prepare for the nationwide RAC rollout. It is best to meet the challenge of the RACs head-on, and sooner rather than later, by developing a cross-functional RAC response team, but auditing and monitoring target areas, by creating an effective process to respond to record requests, and by implementing an effective appeal strategy. A cross-functional RAC response team should include representatives from compliance, utilization review, health information management, patient financial services, coding, and care management, as well as a physician champion. This team would be responsible for overall readiness activities and would respond to requests as received. A number of the errors identified in the demonstration project were related to incomplete medical records being submitted to the RAC. Providers and suppliers will have 45 days to reply to a request. An effective record request process would include:

• logging the RAC’s request and tracking key milestone dates within the 45 day timeframe,
• ensuring that a complete copy of the medical record is submitted,
• conducting a self-assessment of the claim and the medical record prior to submitting the documentation, and
• tracking the outcome of the review.

Medicare providers and suppliers subject to RAC or other Medicare audits and claim denials should understand that many strategies exist that can be employed successfully in the appeals process to obtain meaningful results. These strategies involve effectively advocating the merits of the underlying services, as well as employing legal defenses. It is important to recognize that if a Medicare provider or supplier receives a claim denial or a finding of overpayment that is made as a result of a RAC review, the denial will be subject to the uniform Medicare Part A and Part B appeals process.² In addition to advocating the merits of a claim through various techniques, certain legal defenses are available. Defenses that have proven valuable for providers and suppliers 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). Medicare providers and suppliers should be prepared for increased Medicare auditing activity as the RAC program expands nationwide. Providers and suppliers 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 it against Medicare audits. In addition to the strategies described here, Medicare providers and suppliers should consider networking with others in their communities to see what creative ideas and strategies others are using. The sooner an entity dedicates resources to reviewing data, targeting risk areas, and educating its providers, the better off it will be when the first RAC request lands on the doorstep and a 45-day response time is triggered.