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Recovery Audit Contractors are Coming: Are You Prepared?

April 20, 2009

Healthcare entities in the Midwest have watched from the sidelines as the Centers for Medicare & Medicaid Services ("CMS") Recovery Audit Contractor ("RAC") program has unfolded over the last few years. No more. Healthcare entities need to be prepared to handle upcoming RAC reviews and the inevitable repayment/recoupment demand letters that will surely follow.

Started in 2005 as a demonstration project by CMS, the RAC program targeted the three (3) states with the greatest Medicare expenditures: California, Florida and New York. The RAC demonstration project was authorized by the Medicare Prescription Drug, Improvement and Modernization Act of 2003. The goal of the RAC demonstration project was to test a new method for recovery of Medicare improper payments, namely the utilization of private companies operating on a contingent fee basis to indentify and recoup Medicare overpayments and underpayments. The RAC demonstration project concluded on March 27, 2008, and was declared a success by CMS that resulted in identification of $1.03 billion dollars in improper payments (96% of that amount being overpayments) over a three (3) year period.

As a result of the RAC demonstration project, the Tax Relief and Healthcare Act made the RAC program permanent and required it to be fully implemented nationwide by January 10, 2010. A gradual implementation plan has been developed by CMS. It has already begun in several Upper Midwest states, including Minnesota, Michigan, Indiana, and the Dakotas, and will begin implementation August 1 in Wisconsin, Illinois, Iowa, and the remaining states not already in the program.

Who is the RAC for the Upper Midwest States?
CMS has selected four (4) contractors to fulfill the RAC duties nationwide. Region "B" includes Wisconsin, Illinois, Michigan, Minnesota, Indiana, Ohio and Kentucky. The designated RAC for Region B is CGI Technologies and Solutions, Inc. ("CGI"), located in Fairfax, Virginia. The following description of CGI can be obtained from their website

"About CGI-Founded in 1976, CGI Group Inc. is one of the largest independent information technology and business process services firms in the world. CGI and its affiliated companies employ approximately 27,000 professionals in over 100 offices across 16 countries. CGI provides end-to-end IT and business process services to clients worldwide from offices in Canada, the United States, Europe, and Asia Pacific as well as from centers of excellence in North America, Europe and India."

The contact information for CGI is listed as 1-877-316-7222 or

How is the RAC paid for its audit services?
Each RAC is paid on a contingent fee basis for identified overpayments, thus receiving a percentage of the identified overpayment. For Region B, the contingency fee is 12.5% of the indentified overpayment. For underpayments, however, the RAC receives an amount designated by CMS for the recovery.

Under the RAC demonstration project, each RAC retained the contingency fee regardless of whether the healthcare entity prevailed on appeal. The permanent RAC program requires the RAC to return any fee if the healthcare entity prevails on appeal of the alleged improper payments.

Who is the subject to the RAC program?
Medicare providers and suppliers that bill Fee-For-Service programs will be subject to RAC review. The RAC demonstration project identified improper payments related to the following services: inpatient hospital, inpatient rehabilitation, outpatient hospital, skilled nursing facility, physician, ambulance and DME.

How far back can the RAC review claims?
The permanent RAC program limits claim review to a maximum of a three (3) year look back period. In no case may claims paid prior to October 1, 2007 be reviewed.

What is the RAC review process?
The RAC review is based upon claims post-payment. The RAC uses the same payment policies as fiscal intermediaries, carriers and Medicare administrative contractors. RACs are prohibited from selecting claims at random for review. They must instead use proprietary data techniques to identify improper payments. Two (2) types of reviews may be conducted by the RAC: (1) automated (no medical record review needed); and (2) complex (medical record required).

An automated review is triggered when there is certainty that the claim is not covered and there is a Medicare policy, article, or coding guideline that applies to the claim. Other automated reviews include situations involving duplicate claims or pricing errors.

A complex review is trigged when the proprietary data technique identifies the situation where the probability of an improper payment is high, but must be confirmed by review of medical records. RACs may review the records on-site or request the healthcare entity to mail or transmit the requested records. Records must be provided to the RAC within forty-five (45) days of request by the RAC, or a determination may be made without the records.

Under the permanent RAC program, each RAC is required to employ a medical director. Further, each RAC is to employ registered nurses, therapists and professional coders. These individuals review the claims and make both coverage and coding determinations. Upon request, the medical director will meet with a healthcare entity following any claims denials.

In most cases, the RAC review process must be completed within sixty (60) days of the receipt of the requested medical records. Following review, the RAC will determine whether an improper payment has occurred and will issue a demand letter to the healthcare entity.

What are the medical record limits for a RAC complex review?
The CMS limitation on RAC records requests for fiscal year 2009 depends upon the provider/supplier type as shown below. Failure to timely provide records will permit the RAC to deny claims for insufficient documentation and may mean the loss of appeal rights for those claims.

Inpatient hospitals, inpatient rehabilitation facilities, skilled nursing facilities and hospices: Up to 10% of the average monthly Medicare claims per 45 days, but no greater than 200.
Outpatient hospitals, home health and other Medicare Part A billers: 1% of the average monthly Medicare services per 45 days, but no greater than 200.
Physicians: Solo Practitioner: 10 medical records per 45 days; Partnership of 2-5 individuals: 20 medical records per 45 days; Group of 6-15 individuals: 30 medical records per 45 days; Large Group (16+ individuals): 50 medical records per 45 days.
Other Part B Billers (DME, Lab): 1% of average monthly Medicare services per 45 days, but no greater than 200.
What options do providers and suppliers have when the RAC indentifies improper payments?
Upon receipt of a demand letter from RAC, healthcare entities must immediately assess whether to challenge (informally, formally, or both) the determination. A decision not to appeal simply requires a determination of whether to pay and avoid interest, or to permit recoupment with interest. An informal appeal, which does not preserve any rights under the formal appeal procedures while it is pending, consists of a request to meet the RAC Medical Director. The formal appeal is governed by the Medicare Part A and Part B appeals process, as set forth below.

The timelines for challenge are short, particularly if the healthcare entity wants to prevent recoupment pending an appeal. Strategies for appealing prior to recoupment, or appealing following a recoupment are critical questions to be addressed with legal counsel, and the accrual of interest may prove to be a significant factor in such a decision. In any case, to avoid recoupment, a healthcare entity must file an appeal within thirty (30) days of the demand letter from the RAC. To preserve the right to appeal, the healthcare entity must appeal within one hundred and twenty (120) days.

Can a RAC determination of improper payments be challenged?
Yes. As discussed in the previous question, healthcare entities may appeal an RAC determination through the Medicare Part A and Part B appeals process ("Appeal"). An Appeal has five distinct stages: (1) redetermination; (2) reconsideration; (3) administrative law judge hearing; (4) Medicare Appeals Council review; and (5) federal district court review. Depending upon the facts surrounding the claims, certain defenses (e.g., waiver of liability, provider without fault) may be utilized. Legal counsel should be consulted before filing an Appeal.

How can healthcare entities prepare for the RAC program?
Preparation for the RAC program starts with an effective corporate compliance plan. An effective corporate compliance plan will identify areas of key concern to the Office of Inspector General ("OIG"), including those identified in the annual OIG Work Plan. Further, a corporate compliance plan should call for internal assessments and require corrective actions to avoid RAC overpayment determinations.

Each healthcare entity should develop an RAC policy, procedure or plan. It should designate the healthcare entity's RAC contact person to ensure that the right individual within your entity is notified of any medical record requests by the RAC. The policy or procedure should identify other immediate contacts, such as key administrators and legal counsel. Timelines for response to RAC medical record requests should also be outlined for easy reference. In short, each healthcare entity should have a plan to reference for the inevitable RAC review.

What should our Board of Directors know about the RAC program?
Effective corporate compliance begins with the Board of Directors. Boards should be made aware of how the healthcare entity is ensuring compliance with state and federal law, including but not limited to the RAC program. It is advisable for each healthcare entity to have a routine training with the Board regarding compliance issues, and how the healthcare entity maintains compliance with all requirements. As part of such a training, the Board should be educated regarding the RAC policy, procedure or plan, as well as how the healthcare entity will respond publicly should such a review become public. This training can be conducted with legal counsel so Board members understand the seriousness and complexity of compliance issues within healthcare entities.

If you have any questions regarding the RAC program, or need assistance with development of an appropriate RAC policy, procedure or plan, or with Board of Director compliance training, please contact Thomas N. Shorter ( or 608-284-2239) or another member of the Godfrey & Kahn Healthcare Team.

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