Senate Report Recommends Changing RAC Payment Structure, Streamlining Contractors

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By James Swann    

July 10 --A Senate committee report on Medicare audit procedures recommended paying Recovery Audit Contractors (RACs) based on their success in reducing the improper payment rate within their jurisdiction, as opposed to paying them based strictly on the amount of improper payments they recover.

The Senate Special Committee on Aging staff report, which also recommended streamlining the functions of program integrity contractors, was released prior to a round-table discussion assessing the effectiveness of Medicare program integrity contractors. The committee hosted the round table, which featured speakers representing contractors and providers.

In a statement at the beginning of the round table, committee Chairman Bill Nelson (D-Fla.) said, “in our zeal to take down those who would steal from the Medicare program,” it's important to remember that most Medicare providers are hardworking and honest.

“We need to find out how to reduce improper proper payments, how to cull out the bad from the good, while making sure doctors and nurses spend more time with their patients instead of the paperwork,” Nelson said.

Sen. Susan Collins (R-Maine), the committee's ranking member, also addressed the round table and said that an increase in Medicare audits over the past few years hasn't translated into a reduction in improper payments. She said hospitals and other Medicare stakeholders have complained to her about duplicative and poorly coordinated audits.

The Medicare RAC program is designed to detect and recover overpayments.

Section 6411(b) of the Affordable Care Act expanded the RAC concept from Medicare fee-for-service to include Medicare Part C and Part D, as well as the Medicaid program, although the round table and report focused strictly on the Medicare program.

Provider Push-Back

Melinda Hatton, senior vice president and general counsel for the American Hospital Association, said that although hospitals understand the importance of reducing improper payments, “redundant government auditors, unmanageable medical record requests, abundant inappropriate payment denials and now an Administrative Law Judge (ALJ) work stoppage are wasting hospital resources and contributing to growing health care costs.”

The CMS should levy penalties on RACs when their claims denials are later overturned on appeal “to provide a check on the strong financial incentive RACs have to improperly deny claims.”

--Melinda Hatton, American Hospital Association

Hatton also criticized the payment structure for RACs, noting they're the only government contractors paid on a contingency fee basis. She recommended that the Centers for Medicare & Medicaid Services levy penalties on RACs when their claims denials are later overturned on appeal, “to provide a check on the strong financial incentive RACs have to improperly deny claims.”

Margaret Hambleton, vice president of corporate compliance at Dignity Health, a 38-hospital health-care system headquartered in San Francisco, agreed with Hatton that RAC audits are imposing an undue burden on hospitals and providers.

Hambleton said Dignity has spent over $39 million in staff time responding to RAC requests since the RAC program began, and she recommended that the CMS change the contingency fee structure for RACs, withholding any payments until all appeals have been exhausted. The national RAC program was established in 2009.

RAC Response

RACs also were represented at the round table, chiefly in the presence of Chad Janak, a vice president with Connolly Healthcare, the RAC for Region C.

Janak said Connolly has served as a RAC since 2005, and it “has returned more than $3 billion to the Medicare Trust Fund and also returned more than $300 million to hospitals as the result of underpayments that we have identified.”

Overall, Janak said the RAC program has returned over $8 billion to the Medicare trust funds. Medicare is paid for through two trust fund accounts held by the U.S. Treasury.

As for provider concerns that RAC audits unfairly add to their administrative burden, Janak said RACs are “limited to reviewing only two percent of paid claims to ensure that providers who participate in the Medicare program comply with CMS policy.”

“Simply put, the RAC program works well, and we operate in a manner that's a model for program integrity,” Janak said.

In a statement after the round table, Becky Reeves, a spokeswoman for the American Coalition for Healthcare Claims Integrity (ACHCI), a group of health-care program integrity contractors, said the committee report confirmed that the RAC program has returned a significant amount of money to the Medicare trust funds.

“However, the report also notes that existing educational efforts overseen by MACs [Medicare Administrative Contractors] are insufficient, that Medicare appeals data is often inconsistent or incomplete and that the variance in CMS requirements for different types of contractors has led to provider confusion and inefficient program operations,” Reeves said.

She said, “In light of these findings, we agree with the committee's recommendations to improve provider education, streamline program requirements and enhance data and reporting mechanisms.”

Lack of Consistency

The bipartisan staff report was in part a reaction to the rise in the Medicare improper payments rate, which increased from 8.5 percent in fiscal year 2012 to 10.1 percent in FY 2013.

A lack of consistency and coordination is a problem with program integrity contractors.

--Kathleen M. King, GAO

The report said the rate rose this past fiscal year “despite multiple efforts by the CMS and its contractors to review claims both before and after payment, and to implement automatic payment rules, or edits, which deny claims that do not comply with Medicare requirements before payment occurs.”

One area of vulnerability identified by the report was a lack of consistency within Medicare prepayment reviews and audits.

For example, although the Comprehensive Error Rate Testing (CERT) program identifies Medicare issues associated with high improper payment rates, such as a lack of documentation or incorrect coding, Medicare contractors don't target these issues consistently.

“An overarching plan describing how the CMS's entire contracting apparatus will come together to focus on areas identified as problematic by CERT appears lacking,” the report said.

Kathleen M. King, director of health care at the Government Accountability Office, told the round table a lack of consistency and coordination is a problem with program integrity contractors.

King said the requirements for the various contractors differ, which impedes effectiveness. She said the GAO will release a report later in the summer that will evaluate how well program integrity contractors are coordinating with each other regarding post-payment review activities.

RAC Payments

In addition to a lack of consistency, the Senate committee report focused on the current RAC payment structure, which is based on identifying and recovering old improper payments, rather than reducing future improper payments.

The report said this structure “could be viewed as providing an incentive to keep improper payment rates high.”

To get around this, the CMS could “explore ways to incorporate a RAC's effectiveness at reducing improper payment rates over time into financial incentive structures, rather than relying solely on the amount of improper payments identified by a RAC,” the report said.

Additional Recommendations.

The committee report also said the CMS should:

• evaluate the accuracy of data housed by RACs and fix any errors;

• evaluate the effectiveness of prepayment reviews in reducing the Medicare improper payment rate;

• ensure that all contractors are targeting areas of the Medicare program that are susceptible to high improper payment rates;

• designate clear objectives to all prepayment audit contractors to ensure they work well with each other; and

• emphasize provider education as a way to reduce improper Medicare payments.


The report said the most effective approach to reducing the improper payment rate is to prevent improper payments from being made in the first place, rather than attempting to recover payments that have already been made.

However, the report said the committee's staff is “is concerned that the CMS's strategy to reduce improper payments is actually a strategy aimed more at identifying and recovering improper payments that have already occurred, rather than a proactive strategy to ensure that those errors are not made in the first place.”

Moving forward, committee staff will be asking the CMS for regular progress updates on oversight issues surrounding program integrity contractors.

To contact the reporter on this story: James Swann in Washington at  

To contact the editor responsible for this story: Ward Pimley at

The committee staff report is at Testimony from the round table is at