Medicare expands its private contractor audits nationwide

Q: I heard there is a new audit program in Medicare. What is it?

A: Congress mandated a new type of audit demonstration program called Recovery Audit Contractors (RACs) as part of the 2003 Medicare Modernization Act that created Medicare Part D drug plans. In 2006, Congress passed legislation that expands this program throughout the U.S. by 2010. There will be four contracts for four areas of the country and RAC programs will be added to those regions on a rolling basis. Most states will have a RAC contractor in place by the fall of 2008.

Q: How are RACs different?

A: There are two common sources for documentation sent to physicians. One originates from the Medicare Part B carrier or Medicare Administrative Contractor. These audits are often targeted to specific providers or specific codes based on the experience of the contractors. Another originates from a contractor that creates Comprehensive Error Rate Testing reports for CMS. These audits prepare a report that reflects the national percentage of claims that are paid in error, with categories for different codes, types of providers and types of errors. The claims are selected at random, but if issues are identified, they may be forwarded to the Part B Carrier or Medicare Administrative Contractor to recoup funds from the physician.

The RAC program also runs through private contractors, but its payment mechanism differs. Comprehensive error rate testing contractors get a fixed fee for preparing reports and identifying errors. RAC contractors are paid on a contingency basis, keeping a percentage of the identified and collected overpayments. So RAC contractors have an incentive to perform targeted reviews on services that are most likely to identify overpayments.

Q: What services were targeted?

A: CMS concluded a three-state demonstration that showed that physician services were not a significant successful target of the RAC contractors. Of the overpayments found in the pilot program, only 3% came from physician services. The vast majority (88%) came from inpatient hospital and skilled nursing facility claims. This may reflect the larger dollar amount of these claims compared with many physician services, or it may reflect more errors on these claims. But the RAC contractors are not directed to target their audits other than to generate the most money.

Q: Can contractors review E/M claims?

A: CMS specifically prohibited contractors that participated in the demonstration program from reviewing E/M claims to determine if the appropriate level of service was coded. E/M services may be reviewed to determine if the service was medically necessary or actually took place, but the code levels were not allowed. CMS has not announced any plans to include E/M levels as an appropriate content area for review as the program goes nationwide.

Q: What will the RACs do if they identify an underpayment?

A: The RACs will be paid the same contingency fee for identifying underpayments as for identifying overpayments. If the RAC determines that not enough was paid for a service or if no payment was made for a service, it will initiate a process that will pay the physician or other health care provider for that service. However, the contractors seemed to focus far more attention on overpayments than underpayments in the demonstration program.

Q: Will the RAC review of claims be any different from other audits?

A: The RAC reviewers will be required to use the same rules as other auditors in determining whether or not a payment was appropriate using the coverage policies and editing rules in place when service was provided.

Q: What if I don't agree with the RAC's decision?

A: Physicians and other health care providers will be able to launch a series of appeals to challenge the rulings of the RACs. A detailed explanation can be found online.