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RACS Are Ready - Are You?

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Gary J. McRay
Foster Swift Health Care Law Report
February 2009


Medicare oversees a variety of payment systems and a network of contractors that process over 1.2 billion claims each year.  CMS Acting Administrator, Kerry Weems, has reported that CMS paid approximately $675 billion in 2008 to over one million providers.  When there is this much money involved, there are going to be honest mistakes and, worse, intentional cheating.  Recovery audit contractors ("RACs") were used in a three-year demonstration  program that identified Medicare overpayments and underpayments to health care providers and suppliers in California, Florida, New York, Massachusetts, South Carolina and Arizona.  This was so successful that it resulted in $1.03 billion being identified as improper payments, with only $37.8 million as underpayments.  The cost to CMS was reportedly less than twenty cents for every dollar recovered.

The Tax Relief and Health Care Act of 2006 mandated a permanent national RAC program to be in place by January 1, 2010.  In October of 2008, CMS announced the following four audit contractors for the permanent program:  (1) Diversified Collection Services, Inc. of Livermore, California in Region A (initially Maine, New Hampshire, Vermont, Massachusetts, Rhode Island and New York); (2) CGI Technologies and Solutions, Inc. of Fairfax, Virginia ("CGI") in Region B (initially Michigan, Indiana and Minnesota); (3) Connolly Consulting Associates, Inc. of Wilton, Connecticut in Region C (initially South Carolina, Florida, Colorado and New Mexico); and (4) HealthDataInsights, Inc. of Las Vegas, Nevada in Region D (initially Montana, Wyoming, North Dakota, South Dakota, Utah and Arizona).  Additional states will be added to each RAC region in 2009.  The new RACs were selected based upon a competitive process, that reviewed (i) the level and quality of claim analysis, (ii) detail to customer service, (iii) conflict of interest reviews and (iv) competitive and low contingency fees.  Before the RAC audits actually begin, the RACs propose to hold town hall type meetings with health care providers and CMS staff and representatives to discuss the program.

CMS originally imposed an automatic stay in the work of the RACs due to protests filed by two unsuccessful bidders.  These protests were settled on February 4, 2009, with the four RACs subcontracting with the two unsuccessful bidders.  PRG-Schultz, Inc. will serve as a subcontractor to CGI here in Michigan.  In addition to the four audit contractors, CMS announced its contract with Provider Resources, Inc. of Erie, Pennsylvania to work as the RAC Validation Contractor.  The RAC Validation Contractor will work with CMS and the RACs to approve any new issues the RACs want to pursue for improper payments and will perform accuracy reviews on a sample of randomly selected claims on which the RACs have already collected overpayments.  CMS expects the RAC program to be as successful in returning monies to the Medicare Trust Fund as was true with the demonstration program. 

Scope of the RAC Review

There are two types of review:  automated review and complex review.  An automated review is a review of claims data at the system level without a person actually reviewing the medical record and there is certainty that service is (i) not covered, (ii) incorrectly coded, (iii) a duplicate payment or (iv) some other claims-related overpayment.  A complex review consists of an individual review of medical records and it is used in situations where there is a high probability that a claim includes an overpayment.  Pursuant to the RAC Statement of Work, RACs are prohibited from selecting cases by a random review or sample.  Instead, their charge is to make a targeted review using proprietary data analysis techniques in order to determine claims that are likely to contain overpayments.

Limitations on the Audit

With the RAC demonstration program, RACs were permitted to reopen claims up to four years following the date of the initial payment.  Now RACs will be prohibited from reviewing claims more than three years past the date of initial payment and, more importantly, may only review claims on or after October 1, 2007. 

Under the demonstration program, RACs did not need to employ a physician medical director or coding expert.  Now RACs are required to have a medical director and (i) registered nurses or therapists to determine medical necessity and (ii) certified coders to make coding decisions.  The credentials of reviewers must be presented upon request by the provider.  If an audit results in a denial of a claim, the medical director must be available to discuss the denial if requested to do so.  If the denial is overturned at any level of appeal, the RAC must pay back the contingency fee.  When conducting reviews, RACs are bound to follow all National Coverage Decisions ("NCDs"), coverage provisions in Interpretive Manuals, national coverage, coding articles and Local Coverage Decisions ("LCDs"). 

What Subject Areas Will the RACs Focus Upon?

One piece of guidance might be the Work Plan published annually by the Office of Inspector General ("OIG") setting forth various projects and issues to be addressed during the upcoming fiscal year.  Also, CMS periodically makes announcements or its representatives give speeches highlighting where they will focus their resources.  For example, CMS Acting Administrator, Kerry Weems, in a recent presentation, mentioned rampant fraud in the home health and DME industries as areas of CMS concern.

In addition, the demonstration program focused on (i) incorrect coding, (ii) the failure to meet medical necessity, (iii) no or insufficient documentation and (iv) a variety of other reasons, such as duplicate claims and outdated fee schedules. 

The Appeal of RAC Denials

Claim denials or claims of overpayments will be subject to the normal Medicare Part A and Part B appeals process found at 42 C.F.R. § 405.900 et seq.  In a complex review where there is a RAC medical record request, the provider must respond within 45 days (unless there is an extension).  The claim is automatically denied if the provider does not respond timely.  Then the RAC has 60 days to make its determination.  Where there is a claim denial, either in a complex review or an automated review, there should be a demand letter and a request for repayment, which triggers the appeal process. 

The first level in the appeal process is the request for a redetermination, and this must be done in writing within 120 days of receiving the demand letter.  § 405.942.  There is a process for a party to request an extension of time for filing a redetermination with the RAC.

Any provider dissatisfied with the redetermination decision may then file a request to be reconsidered by a Qualified Independent Contractor ("QIC").  This second level of appeal must be filed within 180 days of receiving notice of the redetermination.  § 405.962.  Any request for reconsideration must be in writing and made on standard CMS forms with certain elements therein dictated by the regulations.  A reconsideration consists of an independent, on-the-record review of the initial determination.  The QIC will review the evidence and findings upon which the initial determination was based and any additional evidence the parties submit, or that the QIC obtains on its own.  § 405.968.  The QIC basically has 60 days upon receiving the request for reconsideration, plus any additional time provided for under the applicable regulations, to notify all the parties of its reconsideration or its inability to complete the reconsideration.  § 405.970.

The reconsideration is final and binding unless a provider requests an Administrative Law Judge ("ALJ") hearing (or expedited access to judicial review is allowed or there is a reopening) which is the third level of review.  § 405.978.  This request must be filed within 60 days following receipt of the QIC's reconsideration decision.  See § 405.1014.  ALJ hearings may be conducted by video-teleconference, telephone or in person.  The regulations favor hearings conducted by video-teleconference ("VTC").  If VTC is unavailable or if there are special or extraordinary circumstances, then the ALJ may conduct an in-person hearing.  §405.1020.  The regulations require that parties submit all written evidence they wish to have considered at the hearing with the request of the hearing or within ten days of receiving the notice of the hearing.  § 405.1018.  Within 90 days, beginning on the date when the request for a hearing is received (and unless the 90-day period is extended in accordance with the regulations), the ALJ will issue a written decision providing findings of fact, conclusions of law and the reasons for the decision.  The decision is based on the evidence offered at the hearing or otherwise admitted into the record.  § 405.1046. 

The fourth level of appeal is the Medicare Appeals Council ("MAC") Review.  The request for a MAC Review must be filed within 60 days following receipt of the ALJ's decision.  See § 405.1102.  The MAC will review the ALJ's decision de novo.  The party requesting the appeal does not have the right to a hearing before the MAC.  The MAC will consider all the evidence in the administrative record.  Upon completion of its review, the MAC may adopt, modify or reverse the ALJ's decision or remand the case to an ALJ for further proceedings.  § 405.1108. 

The last step in the appeals process involving a RAC decision is judicial review in federal district court.  A party has to file the action in federal district court within 60 days after the date it receives notice of the MAC decision.  See § 405.1130.  One notes that in federal court any findings of fact by HHS, if supported by substantial evidence, are conclusive.  § 450.1136.  If a federal district court remands a case to HHS for further consideration, the MAC, acting on behalf of the Secretary, may make a decision, or the MAC may remand the case to an ALJ with instructions to take action and either issue a decision, take other action or return the case to the MAC with a recommended decision.


There is no doubt that Medicare providers will receive additional audit activity because of the RAC Program.  Providers will need to follow the issues being identified by CMS and by the RAC contractors, and will need to engage in self-auditing and monitoring to improve the accuracy of their claim submissions to CMS, especially in targeted audit areas.  Many hospitals and other providers have done this assessment and are actively preparing for potential RAC audits.  In addition, providers will need to timely and comprehensively respond to any audit requests from an Audit Contractor.  It will be important to document each claim, proving the coding accuracy and the medical necessity for the services, plus keeping a photocopy for its own records.  Never change any chart or record.  If a handwritten note is illegible, a transcript may be typed but it has to be exact and any spelling mistakes and other errors have to stay.  Providers need to be especially careful when responding to medical record requests.  Failure to timely respond within 45 days of the request may trigger an automatic denial.  RAC audits will be similar to other CMS audits, with the exception that the Audit Contractor will be highly motivated since it is making money at the expense of the provider.  Unfortunately, hospitals and physicians are entering into a new, and less friendly, audit environment.