Healthcare Compliance Quarterly Insights: RAC Readiness

The RAC program: are you ready?

Francine Machisko and Jane Snecinski

If you’re a healthcare provider in New York, California, Florida, Arizona, South Carolina or Massachusetts, you are probably well aware of the Centers for Medicare and Medicaid Services’ (CMS) Recovery Audit Contractors (RAC) demonstration program. For the rest of the nation, the RAC program may be a bit more of a mystery--but that will soon change.

Section 306 of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) directed the U.S. Department of Health and Human Services (HHS) to establish this three-year demonstration program to determine whether the use of independent auditors is a cost-effective way to identify Medicare underpayments and overpayments and recover Medicare overpayments made under Part A or Part B of Title XVIII of the Social Security Act.

The RAC program also was intended to provide information to Medicare claims processing contractors (e.g., quality improvement organizations and program safeguard contractors) to assist in preventing improper payments in the future. For their efforts, RACs are paid a percentage of the provider overpayments recovered, as well as an additional fee for underpayments identified.

The Committee on Ways and Means estimates that the RAC initiative could save Medicare as much as $10 billion over five years if it is expanded nationwide. But providers and legislators in states where the RAC program has been implemented have expressed concern regarding several aspects of the program, such as oversight of the RAC reviews; reporting of audit results; payment incentives for RACs; the financial burden of the program on providers; and more.

It’s time for providers in all states to become familiar with the RAC demonstration program--and how to prepare for an RAC review.

What Is the RAC Demonstration Program?

The RAC demonstration program represents the first time that Medicare has paid a contractor on a contingency fee basis for claim review work. To avoid potential conflicts of interest, current Medicare contractors have been prohibited from being named RACs. Nonetheless, in order to be named RACs, selected contractors are required to have experience performing recovery audit work for Medicaid state agencies, private insurers, healthcare providers, or plans.

Although providers are acutely familiar with the examination of claims by fiscal intermediaries (FIs) and other government contractors, the examination of claims data by RACs has added yet another layer of review. RACs have been given great latitude in determining both who and what will be examined, and it appears that the individual RACs in each of the demonstration states have focused on specific areas of care (“Demonstration to Work Toward Assuring Accurate Medicare Payments,” CMS press release, March 28, 2005).

The Reported Results To-Date

The three-year demonstration program began in March 2005 and initially focused on three high-Medicare utilization states: New York, California, and Florida. Together, these states account for 25 percent of all Medicare payments (“CMS RAC Status Document, FY 2006: Status on Use of Recovery Audit Contractors (RAC) in the Medicare Program,” CMS, Nov. 22, 2006). For each state, two RACs were hired--one to review claims (Claim RACs) and a second to assess the appropriateness of Medicare payments when the patient had other insurance coverage (Medicare Secondary Payer [MSP] RACs). 

In November 2006, CMS issued a report on the use of RACs during FY06 (October 2005 through September 2006). An updated report with the FY07 results was scheduled to be published by the end of 2007; information in this article was current as of mid-December 2007. 

As shown in the table LOCATION HERE, the overwhelming majority of improper payments that were identified were for overpayments, as opposed to underpayments. This may have been due in part to the project’s design, which rewarded RACs with payment incentives for identifying overpayments, but not underpayments, for the first half of FY06. The vast majority of overpayments were to inpatient hospitals, with the average overpayment totaling between $10,000 and $19,999.  

FY06 RAC Results 

 Source: “CMS RAC Status Document, FY 2006: Status on Use of Recovery Audit Contractors (RAC) in the Medicare Program,” Centers for Medicare and Medicaid Services, Nov. 22, 2006.

It is also worth noting that the RAC results in the initial three states varied substantially, primarily because the RACs in New York and California appeared to focus predominantly on inpatient acute and rehabilitation hospitals while the RACs in Florida focused on lower-dollar physician claims. Recent reports from Florida providers, however, indicate that inpatient rehabilitation providers have also started to receive the attention of the RACs in that state. In New York and California, the average overpayments per provider for inpatient claims were $164,372 and $75,856, respectively. After the roll-out to the initial three states, CMS mandated that an additional three states be added to the RAC project: Arizona, South Carolina, and Massachusetts. Like the initial three states, the additional states also have a significant Medicare population.

What Lies Ahead for RACs?

Many have expressed strong concern regarding the RAC demonstration program, including providers, associations, and legislators. Their concerns have generally focused on six areas:

• The credentials and/or oversight of the RAC reviews
• Improper and untimely reporting of audit results by the RACs
• Improper payment incentives to the RACs (i.e., the perception that payment incentives are driving audit determinations)
• Potentially unfair appeals processes
• Overlapping reviews by multiple agencies
• An inordinate number of claim reviews and/or denials for certain providers or categories of providers (e.g., acute rehabilitation)
• The overall financial burden of the initiative on providers
• The potentially adverse impact RACs on quality of patient care and access

Clearly, the RAC demonstration program has provided substantial monetary results for CMS. In fact, the Committee on Ways and Means estimates that if the RAC program were expanded nationwide, it could save Medicare as much as $10 billion over five years. Given the results thus far, it should come as no surprise that although the RAC demonstration project was slated to end in March 2008, section 302 of the Tax Relief and Healthcare Act of 2006 instructs CMS to implement RACs nationwide by January 2010. 

Before expanding the program nationally, CMS has attempted to address many of the perceived flaws in the RAC demonstration program by amending the statement of work (SOW) for the program. On Nov. 7, 2007, CMS issued an amended proposed SOW which, among other things:

• Extends the roll-out schedule of the RAC program
• Expands RAC reporting requirements to include detail on the number of medical records requested and reviewed from each provider, as well as the number of RAC record reviews that fell outside the 60-day required window for review
• Places limits on the number of medical record requests that may be made by the RAC depending upon the type and size of the provider
• Requires documentation, upon provider request, of the credentials of individual(s) making medical review determinations
• Specifies the contents and timing or RAC review finding letters
• Limits RAC reviews to claims with dates of service of Oct. 1, 2007, or later 

Preparing Your Organization for RAC Implementation

It is clear the RAC program is here to stay for the foreseeable future. As a result, providers should take these steps to prepare for the impact of implementation in their states.

Step one: Provide education. Education is key to survival under the RAC initiative. With a nationwide expansion of the RAC initiative mandated by January 2010, all providers must become fully educated on the basic infrastructure for the provision of care as well as the RAC initiative itself so that they are better prepared when the RACs begin reviewing their organizations.

Physicians as well as direct care staff should be fully educated and engaged in the provider’s compliance programs. Specifically, there should be a vigilant focus on ensuring that caregivers and staff are aware of, understand, and adhere to coverage and care documentation requirements as well as coding, billing, and payment rules. If not already in place, ongoing inservices and educational programs should be designed and routinely provided. Thus, the RAC education initiative should simply be an offshoot of the provider’s overall compliance program.

It is also important that the provider understand the RAC process as well as its obligations and rights during RAC review. Providers should know that RAC reviews are limited to incorrect payment amounts as well as payments for noncovered, incorrectly coded, or duplicate services. Further, the RACs are required to use data analysis, not random sampling, to identify potentially errant payments.  When required, RACs are permitted to come to the provider location for chart review.  If the medical records are requested by the RAC but not supplied by the provider within 45 days, the RAC may, by default, identify the claim as an overpayment. Identified overpayments are eligible for repayment over a 12-month period, but the RAC has no power to negotiate settlements. Finally, providers have the right to appeal RAC findings, at which time collection efforts cease until a resolution is determined (“Summary: Demonstration Project for Use of Recovery Audit Contractors,” American Physical Therapy Association, 2007).

Step two: Create compliance assessment tools and programs and conduct internal assessment. Many providers may already have a strong infrastructure in place to support their ongoing compliance programs. Components may include detailed policies and procedures, customized charting forms and tools, and computerized programs to identify potentially errant coding and billing. However,  policies and procedures often have not been reviewed annually and either do not reflect the processes in place or do not reflect the most current Medicare regulations. Additionally, programs to identify coding and billing issues often do not have measurable criteria established.

To the extent that such resources already exist, it is critical that the infrastructure to support compliance is effective and has been proven successful. Evaluation of a provider’s compliance program can be achieved through internal audits or reviews. However, many organizations have found that review by an external resource is extremely helpful in identifying issues that require attention. External review is often helpful in evaluating levels of care that may not be a primary expertise of the internal compliance program. For example, knowledge of inpatient rehabilitation, which has been significantly affected by the RAC program, may not be an area of expertise of the internal department. External review of this area may have significant benefits for the organization.

Nonetheless, any good compliance program should recognize that if a particular area is routinely problematic for similar providers, it may well be an issue worthy of a focused effort at home. For example, of the $68.6 million in overpayments collected when the 2006 Status Report was issued, $17.8 million (or 26.0 percent) were for improper coding or lack of supporting documentation related to wound debridement and skin grafts (diagnosis-related groups 217 and 263).  Another $2.4 million (or 3.5 percent) in overpayments were related to inappropriate coding for blood transfusion services (“CMS RAC Status Document, FY 2006: Status on Use of Recovery Audit Contractors (RAC) in the Medicare Program,” CMS, Nov. 22, 2006). It also appears that in California and Florida, inpatient rehabilitation is experiencing significant denials based on review of medical necessity. Providers should certainly not limit their efforts to these areas, though specific tools should be created and detailed reviews should be conducted in such areas to ensure compliance with Medicare regulations.

Step three: Develop and implement a corrective action plan based on findings from internal reviews. The effectiveness of any compliance program is often proven with the formation and implementation of corrective action plans when problematic areas are identified. Effective corrective action plans, then, should be no different when the problems emanate from RAC-inspired internal reviews. Detailed action plans should be developed that focus on the following areas:

• Educating caregivers and other staff on specific regulations related to deficiencies identified
• Creating and implementing appropriate policies and procedures that reflect current practice and regulations to ensure future compliance
• Developing documentation and other tools that facilitate demonstration of compliant methods and tell the compelling story of the delivery of care
• Training appropriate personnel on the new or revised policies and procedures, documentation forms, and other tools
• Establishing practices to ensure ongoing monitoring adherence to newly-administered practices, modification of corrective action plans, and implementation of additional plans

Although no internal activities can guarantee that a provider will be immune from a RAC review or an audit finding, adequate education and preparation should enhance the facility’s overall preparedness during an RAC review.

About the Authors:

Francine Machisko is a senior principal in the health division of Noblis, Norcross, Ga. (francine.machisko@noblis.org).

Jane Snecinski is a principal in the health division of Noblis, Norcross, Ga. (jane.snecinski@noblis.org).