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RAC: The Good, The Bad and The Ugly


The Good. Despite a lot of complaints, there are actually some good things about The Recovery Audit Contractor (RAC) program.

The RAC program was designed to help the Centers for Medicare and Medicaid Services (CMS) fight fraud, abuse and waste, and to put money back into the Medicare system. This is money that is desperately needed in the face of faltering finances and a growing number of beneficiaries. In that regard, the program seems to be working. To date, it has returned more than $8.9 billion to the Medicare Trust Fund.

Here’s a brief history of how RAC came to be:

  • 1986: The False Claims Act (aka “The Lincoln Law,” which was enacted during the Civil War era to combat fraud against the government) was revived and amended to include stiff penalties for submitting false or incorrect Medicare and Medicaid claims.
  • 1996: HIPAA was enacted. The legislation, which included Medicare-specific fraud and abuse funding, set up the Heath Care Fraud and Abuse Control Account (HCFAC).
  • 2003: RAC program was created through The Medicare Modernization Act
  • 2005-March 2008: RAC pilot program began in Florida, California and New York, expanding to Arizona, Massachusetts and South Carolina in July 2007. During the pilot period, RACs reportedly corrected more than $1 billion in improper Medicare payments (approximately 96% overpayments and 4% underpayments).
  • 2009: RAC program was made permanent for all 50 states.

The Bad. Congress created the RAC program to help CMS identify improper payments made by Medicare and Medicaid. Under the program, contractors are charged with auditing Medicare claims data for proper billing practices.

A key complaint, however, is that RACs are paid a commission for every overpayment or underpayment they correct. Critics of the program are opposed to this contingency fee structure, saying it incentivizes auditors to focus more on identifying alleged overpayments (which are collected from providers) than underpayments (which are repaid to providers).

To make matters worse, the auditors seem to be making mistakes. A survey of hospitals found that 40% of claims denials were appealed—and that hospitals prevailed 72% of the time. Too often, contractors are forcing hospitals to go through audits and appeals, only to determine that no improper payments were made.

Today, many hospitals are taking proactive steps to prepare for RAC audits.

The Ugly. To determine whether overpayments or underpayments have occurred, the RACs will typically request medical records from the provider. And payments can be deemed improper for a range of reasons, including the following:

  • Paid claims for Medicare Part A or B providers do not meet statutory, regulatory and policy requirements or regulations
  • Payments were made for services that are incorrectly coded
  • Upon request from RAC, providers fail to submit medical records and documentation within the allotted time period (45-days or request for extension)
  • Providers fail to submit enough documentation to support the claim

Hospital leaders are frustrated with the burdensome investment of resources the RAC program demands. Indeed, complying with auditors’ requests for data and documentation requires an enormous output of staff, time and money—putting a drain on already scarce resources that could be better directed to patient care.

Ready or not, here they come! Today, many hospitals are taking proactive steps to prepare for RAC audits. If your organization is planning to implement an RAC readiness program—whether internally or by bringing in expert consultants—here are five key steps you may wish to include:

  • Review your hospital’s coding, billing and documentation practices to assure CMS compliance
  • Analyze a sampling of your claims to ensure it supports the billed E/M (evaluation and management) coding, services billed, medical necessity and services or tests ordered
  • Work with physicians, case managers and RNs to develop plans to avoid denials
  • Determine industry best practices to address areas of concern and opportunity
  • Develop a plan to integrate physician practice data into your systems

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