Rudy Braccili, Jr.

The demonstrations are over. This year, the Centers for Medicare & Medicaid Services (CMS) is rolling out its Recovery Audit Contractor (RAC) program nationwide.

At a Glance

  • Medicare's Recovery Audit Contractor (RAC) program is being rolled out nationwide in 2009.
  • To successfully manage the RAC appeals process, hospital revenue cycle leaders require accurate and timely tracking of all RAC-related events, deadlines, findings, and costs.
  • These leaders also need to take steps to avoid Medicare overpayments, including establishing mechanisms at the point of billing to prevent inappropriate claim submissions to Medicare.

Hospital revenue cycle leaders would be wise to anticipate the many questions that will come their way from hospital CFOs and others in their organizations as a result of the RAC program. For example:

  • What portion of this month's cash shortfall may be attributed to payment retractions resulting from Medicare's RAC program?
  • What percentage of our RAC audit denials has our institution appealed?
  • What has been our success rate in appealing RAC audit denials? Are we more successful at appealing particular audit finding categories than we are for others?
  • At which of the five levels of appeal have we been most successful?
  • What dollar amount should the organization reserve this month for yet-to-be-decided RAC accounts?
  • How many medical records are being requested by the RAC each month, and for which specific clinical areas of focus?
  • What is the overall profit and loss impact of the RAC program to the organization?
  • Which of the RAC's clinical areas of focus is costing us the most money?
  • Are our RAC denials trending positively or negatively over the past quarter?

By anticipating these and other important-and inevitable-RAC-related questions, hospital revenue cycle leaders can begin to ensure that necessary tracking and reporting systems are in place before the first wave of RAC review requests is received.

To establish effective tracking mechanisms, these financial leaders should familiarize themselves with how RACs must operate under CMS's current Statement of Work for the Recovery Audit Contractor Program, and which areas of focus are likely to be targeted by the RACs. The CMS document governs the actions RACs must perform when auditing provider accounts and establishes ground-rule requirements for the RACs. The document can be accessed at

Likely RAC Target Areas

Before initiating provider post-payment review audits, RACs are required to send a new issue review request to CMS. A CMS review panel, working in cooperation with a single, independent RAC validation contractor, will review the requested target area and approve or deny the request. CMS has identified Provider Resources, Inc., Erie, Pa., to serve as validation contractor. Provider Resources will be responsible for randomly auditing account-specific review results from each respective regional RAC and reporting findings to CMS.

Each RAC is then required to list all approved targeted areas of audit focus on a public web site. This requirement is referred to as RAC vulnerability reporting.

CMS recommends that providers reference the Office of Inspector General (OIG) work plan and Comprehensive Error Rate Testing (CERT) audit reports to get a sense of likely areas of focus in the future by the RACs.

Areas of focus for the three-year RAC demonstration program are listed in Exhibit 1.

View Exhibit 1


RAC Communications

RACs are required to advise providers of complex audit results (i.e., results of audits initiated when the RAC deemed that an over- or underpayment may have occurred) within 60 days of medical record receipt. The RAC delivers this notification to the provider in the form of a record results review letter followed shortly thereafter by a formal determination or demand letter that may list audit results for a single or multiple accounts. Over- or underpayment amounts, appeal rights, and specific instructions on how to file the appeal are all included in the determination or demand letter.

The RAC also assigns an audit number to each audit letter. It is important for hospitals to reference this audit number when recording and tracking related account-specific activity.

Hospitals should be on the alert for audit letters. As the RAC program is getting under way, the RAC will initially address these letters using whatever address it has on file for any given institutional provider. Given the tight response deadlines, the revenue cycle leader should notify personnel in his or her organization's mail room, business office, administration, health information management department, and compliance departments to be on watch for RAC audit letters.

CMS's statement of work does require that RACs enable providers to identify a specific address to which all future RAC correspondence should be sent; this option must be made available to providers via the Internet by 2010. Although the deadline for RACs' compliance with this provision is still some time off, hospitals should not wait to request that the RAC send all correspondence to a mailing address created specifically for such correspondence. At the RAC Summit held this past March in Washington, D.C., senior RAC representatives expressed a willingness to customize provider addresses in advance of the 2010 requirement. Hospitals should pursue this option by contacting their respective RAC representatives in advance of the rollout.

Possible Responses to Adverse Audit Findings

Upon receiving a RAC review determination or demand letter, a hospital has three possible courses of action, which will be specifically defined in the letter.

1. The hospital may agree with the determination made by the RAC. In such an instance, no action or response is required on the part of the hospital. For overpayment and underpayment audit findings, the RAC will notify the fiscal intermediary (FI) or  Medicare administrative contractor (MAC) to adjust the original payment made on the account from a future Medicare remittance. Medicare can begin to recoup overpayments on the 41st day from the date of the demand letter. The hospital also may proactively refund the overpayment amount prior to the remittance retraction. The hospital also must refund any corresponding overpayment made by the patient or patient's supplemental insurer.

All RAC-identified overpayments will be specifically identified by the FI or MAC on the Medicare remit with a remark code of N432. This remark code will appear as a note on the remittance prior to the actual payment retraction and is intended to be initiated at the same time the demand letter is generated. Identifying and recording these remark codes (preferably automatically) is critical to the hospital's ability to track and report the impact of the RAC audits on its cash flow.

The hospital does have the option of repaying any RAC-identified overpayments through installment plans up to 12 months or longer with approval. And a debtor may present the RAC with a settlement offer.

2. The hospital may discuss with RAC representatives  any proposed recoupment action by contacting the RAC directly by phone anytime after receipt of the medical record results review letter, but prior to the recoupment of any overpayment (recoupment occurs 41 days after the demand letter date). Although no strict time frame has been defined or published in this regard, CMS representatives have advised providers at recent RAC "Meet & Greet" sessions that the demand letter will be issued approximately two weeks after the medical record results review letter. This "discussion period" applies only to audits in which the medical record was reviewed by the RAC and gives the hospital a vehicle to indicate why the proposed recoupment should not take place. The discussion period is intended to give the hospital time to dispute any possible mathematical or computational errors or oversights made by the RAC. The RAC may change the overpayment determination as published in the results review letter based on the outcome of discussions with the provider during this period. In such an instance, no demand letter will be issued for the case.  

3. The hospital may disagree with the RAC's determination and file an appeal. Providers have the right to appeal any RAC audit finding.

Appealing a RAC Audit Finding

There are five levels of appeal available for disputing overpayment RAC audit findings-as is the case when disputing any non-RAC-related Medicare claim denial (see Exhibit 2) .

View Exhibit 2


Level I reconsideration appeals are submitted to and decided by the FI or MAC and must be received within 120 days of the original RAC determination or demand letter. The FI or MAC then has 60 days to communicate its findings to the provider.

Level II redetermination appeals are submitted to and decided by a qualified independent contractor (QIC) and must be received within 180 days of the Level I appeal determination letter. The QIC then has 60 days to communicate its findings to the provider.

It is important to include all documentation and appeal arguments in the initial two levels of appeal as no additional documents or arguments may be included at subsequent appeal levels unless already filed at Levels I or II.

Level III appeals are submitted to and decided by an administrative law judge (ALJ) and must be received within 60 days of the Level II appeal determination letter. The ALJ then has 90 days to communicate its findings to the provider.

Level IV appeals are submitted to and decided by the Medicare Appeals Council and must be received within 60 days of the Level III appeal determination letter. The council then has 90 days to communicate its findings to the provider.

Level V appeals are submitted to and decided by a federal district court and must be received within 60 days of the Level IV appeal determination letter. 

Deferring RAC-Related Medicare Payment Retractions During the Appeal Process

Although providers have 120 days from the date of the initial determination or demand letter during which to file a Level I appeal, any Level I appeal filed within the first 30 days will defer at least temporarily any possible Medicare payment retraction pending the outcome of the Level I appeal. (Note: Interest accrues and must be paid if the provider's appeal is ultimately unsuccessful. The interest rate charged is 11.375 percent.)  Level I appeals filed more than 30 days from the initial demand letter date are subject to a prompt retraction (i.e., any time after the 41st day from the date of the demand letter) of the original Medicare payment amount-pending the outcome of all appeals. This retracted amount will be repaid to the provider with interest if the denial is overturned at any subsequent level of appeal.

Payment retractions will occur as described above except in any of the following instances:

  • The provider has already proactively refunded the overpayment amount.
  • An acceptable request for an extended repayment schedule has been received.
  • A valid Level I appeal is not date stamped in the Medicare contractor's mail room by day 30 from the date of the demand letter.

Providers may further defer any potential overpayment  retraction by subsequently filing a Level II appeal within 60 days of the Level I appeal determination letter. Level II appeals filed after the 60th day will result in a payment retraction pending the outcome of all appeals. (Note: Providers do, however, have a total of 180 days to file the Level II appeal.)

Payment retractions will occur at subsequent appeal levels (III through V) regardless of the appeal filing time frames-unless and until the provider wins the appeal argument.

RACs are required to pay back any contingency fees received from CMS if initial audit determinations are overturned on appeal.

Preventing Future Medicare Overpayments

If a hospital has been subjected to an unfavorable RAC audit finding, the organization's revenue cycle leaders would do well to consider the issue-specific root cause within the organization's patient care and/or revenue cycle processes that led to the finding and work to address breakdown points. Costly process breakdowns may occur at the points of patient status assignment, documentation, or charge entry.

It is therefore critical that hospitals have in place safety net mechanisms at the point of billing to prevent any inappropriate claim submissions to Medicare. These mechanisms include establishing data field edits within the patient registration, patient accounting, and claims processing systems to ensure new claims going out the door are free from error.

Among the best process improvements a hospital can make to eliminate costly adverse inpatient medical necessity findings is to hold all Medicare inpatient claims from billing until appropriate clinical professionals have had a chance to review each case from an inpatient medical necessity standpoint. Typically, due to staffing and other constraints, a hospital's case managers are not always able to consistently evaluate every after-hours inpatient admission-particularly short-stay admissions ranging from one to three days-for a medical necessity determination. Yet claims for these short-stay cases were a primary focus of RAC auditors during the demonstration program, so such claims, in particular, should be held in the billing system and submitted to Medicare only after a medical necessity review.

It is generally recognized by clinical quality professionals that cases failing InterQual, Milliman, or other medical necessity screening guidelines upon initial review should have a second-level medical necessity review performed by a qualified physician adviser (PA) for a final medical necessity determination prior to billing.

Once a final determination of inpatient medical necessity has been made and documented, the patient financial services (PFS) department can be cleared to release the appropriate claim for billing to CMS. Medicare inpatients whose admission was not medically justified may then be billed on the "Inpatient Part-B Only" claim form (UB form locator #4 -TYPE OF BILL = 12x) for ancillary reimbursement only.

It is important that hospitals include case management and PA documentation and notes from the medical necessity review within the appeal package sent to the RAC for any case denied by the RAC due to medical necessity issues. (Note: Such documentation may not be generally present within the medical record, but is likely housed elsewhere within the institution, such as within the utilization review or case management online systems.)

Another key to preventing future RAC denials is to establish specific edits for Medicare claims within the provider's billing system. Examples of claims where billing might be prohibited include:

  • Claims where the units of service exceed the maximum allowable in a single day (e.g., colonoscopies, limited to no more than one per day)
  • Outpatient claims having a related inpatient visit within three days after the outpatient service (a violation of Medicare's three-day rule)
  • Two related inpatient claims where the patient was readmitted to the same provider on the same day they were discharged (a violation of Medicare's same day re-admit rule)

Upon receipt of each new adverse RAC review finding, hospital revenue cycle leaders should assess the possibility of inserting new edits to prevent recurring issues.

The Role of PFS Is Key to Success

Much will be required from provider business office leaders to minimize any negative financial impact brought on by the RAC program. Specifically, PFS departments should be prepared to:

  • Monitor patient account specific RAC activity
  • Ensure timely response to RAC requests for records
  • Invoice and collect medical record copy and postage costs from the RAC
  • Monitor and report RAC-related Medicare payment retractions
  • Refund patient and supplemental insurers appropriately when a Medicare overpayment has been validated
  • Initiate the appeals process in cooperation with clinical professionals
  • Correct claims and resubmit them to Medicare for appropriate repayment when available on RAC denied accounts
  • Input claims processing and patient accounting system edits to prevent the repeated future submission of inappropriate claims
  • Provide hospital financial leaders with RAC financial impact reports
  • Provide hospital clinical quality leaders with reports of RAC targeted areas of focus and related audit findings

Accurate and timely tracking of all RAC-related events, deadlines, findings, and costs is essential to successful management of the process. Hospitals will need to ensure that certain patient-specific data elements-many of which are not traditionally present in legacy patient accounting systems-are being accurately recorded and updated daily. (See Exhibit 3 for a list of these essential data elements.)

View Exhibit 3


Revenue cycle personnel should work with their peers in IT to automatically populate as many of the above data elements as is possible rather than having to manually enter them into the hospital's information system. Sources to consider for interface to any RAC tracking tool include the hospital's registration, patient accounting, and claims processing systems; Medicare's direct data entry system and remittance advice files; and any currently used denials management system.

Several revenue cycle vendors are beginning to develop and offer RAC tracking and reporting systems as well. These systems should be seriously investigated and considered as tools for managing RAC and other governmental postpayment audit activities. The systems should be evaluated based on cost, robustness of features, ability to interface/auto-populate data fields from other systems, and reports package. Remember that the Medicaid Integrity Program (MIP) is ramping up nationwide this year and will require similar tracking and reporting tools.

Receivables Management Considerations

Hospital revenue cycle leaders should create a unique financial class within the patient accounting system to identify reopened accounts resulting from RAC-related Medicare payment retractions. This step is necessary to isolate and categorize these accounts from the remaining accounts receivable (A/R). It is particularly important given that most RAC-related payment retractions will occur on aged A/R accounts, which, of course, will have negative financial reserve implications. These aged debit balances are likely to remain in A/R for as long as two years, which is the maximum time necessary to exhaust all five levels of appeal options.

Creation of a unique financial class also facilitates the tracking of cash shortfalls resulting from RAC-related Medicare payment retractions.

With such tracking systems in place, revenue cycle leaders can begin to answer those anticipated RAC impact questions discussed at beginning of this article. The hospital should also be able to readily generate reports, as needed. Examples include reports showing RAC accounts identified to date by status, RAC accounts pending final outcome, RAC payment retractions to date, total number and dollar amounts of RAC accounts rebutted by audit finding, and Level 1 appeals outcomes. See sample reports

As a final point, hospitals also should not hesitate to contact CMS with any RAC-related questions. CMS has provided an e-mail address for this purpose:

Rudy Braccili, Jr., CPAM, is senior director, National Medicare & Medicaid Center, Conifer Revenue Cycle Solutions, Dallas, and a member of HFMA's Florida Chapter (

More on RAC Regulations

The Medicare recoupment,rebuttal and appeals regulations were revised by CMS in September 2008 and are fully discussed in an article published by CMS's Medicare Learning Network (see MLN Matters, Number MM6183, accessible at and in CMS's CR [Change Request] 6183: Limitation on Recoupment (available at

Publication Date: Wednesday, July 01, 2009

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