Section 306 of the Medicare Modernization Act instructed the Centers for Medicare and Medicaid Services (CMS) to identify both Medicare overpayments and underpayments through the use of new agents called recovery audit contractors (RACs). Launched in March of 2005, the RAC pilot project only focused on New York, Florida and California health care providers and suppliers. Because of the enormous success experienced by the RACs in these states, the Tax Relief And Health Care Act of 2006 directed CMS to expand the RAC audits into all states by 2010. However, CMS recently announced that it would attempt to implement the RAC program nationwide beginning next spring.

Despite complaints and concerns raised by the medical community in the three states currently affected by the RAC reviews, particularly California, CMS remains very supportive of the results of the RAC audits. According to CMS, the RACs have identified more than $300 million of overpayments through fiscal year 2006. What CMS doesn’t say, because they don’t know yet, is how much of the $300 million will withstand administrative and judicial review. In our experience, RACs have been overly aggressive in identifying overpayments largely because, as mandated by Congress, the RACs are paid on a contingency fee basis. This means that the RACs will receive their compensation for each overpayment amount identified and upheld at the first level of the appeal process. In other words, the RACs will keep their fees even if their decisions are overturned at subsequent levels of the appeal process.

The Medicare claims appeal process, as revised in 2005, requires providers and suppliers to pursue a four-step administrative review process prior to appealing to a federal court. In particular, two points should be noted. First, although a provider or supplier may request that the RAC re-review its decision before filing the first-level appeal (redetermination by the carrier or fiscal intermediary), we do not recommend this in most cases because, in our experience, such re-reviews by the RACs have not been very fruitful. Second, the second-level appeal (reconsideration by the qualified independent contractor) is particularly important because the regulations require a full and complete presentation of the evidence at this stage. Therefore, providers and suppliers must ensure that the record is complete should there be a need for an administrative law judge (ALJ) hearing, the third-level appeal, or further administrative review before the Departmental Appeals Board.

The earliest of the RAC audits have recently reached the ALJ level of the appeals process and, despite the lack of success at the lower appeal levels, providers and suppliers have begun to see some relief from the ALJs. Regardless, providers and suppliers, not only in New York, Florida, and California but also across the country, should be proactive and attempt to prevent claims from being subject to the RAC through careful medical documentation and correct coding practices. Unfortunately, until Congress and/or CMS reacts to the outrage of the medical community, providers and suppliers need to brace themselves for allocating and expending sufficient resources to address these RAC attacks.