iProtean—Inaccuracies, Skewed Incentives in RAC Program

The Recovery Audit Contractor (RAC) program, established in 2003 through the Medicare Modernization Act and implemented in 2010, has had wide ranging effects for both hospitals and patients. Its purpose is to identify and recover improper Medicare payments paid to healthcare providers under fee-for-service Medicare plans. But claims of skewed incentives—RACs are paid on a contingency fee basis on the overpayments and underpayments they identify—and of independent contractors’ opportunism, broad sweeps of data requests and inaccuracies have resulted in provider appeals. The American Hospital Association (AHA) has challenged the program, and efforts are underway to revise the legislation.


An example of the program’s effect on patients made the news recently: an elderly patient had been in the hospital four days and was then transferred to a nursing home. During the transfer process, the caseworker told the patient’s daughter that her mother had been on “observation status” in the hospital. It didn’t register with the woman at the time, but she subsequently found out she had to pay for the nursing home stay. Medicare doesn’t cover follow-up treatment unless someone has been an inpatient for at least three days. These incidents occur with increasing frequency, and the financial consequences for patients and their families can be significant.


Increasingly, hospitals are placing older patients on “observation status,” and justify this practice because of RACs. Since the program’s inception, audit contractors have cited hospitals time and time again for what they consider improper inpatient classification, and hospitals have had to return the funding they received up to three years earlier. They often get little or no reimbursement for these cases, “even though there is no dispute whatsoever that the care the patient received was reasonable and necessary,” said an executive from AHA.


Two Studies with Conflicting Results

The Office of the Inspector General (OIG) released a report in early September on recovery audit contractors. While it didn’t dispute hospitals concerns that the auditors are usually inaccurate, it did report lower claims and appeals rates than an ongoing AHA study of the contractors. (HFMA Weekly News, September 6, 2013)


The OIG study covered the early years of the program (2010 and 2011) and reported that providers appealed only six percent of the 1.1 million claims in which recovery audit contractors found they overbilled Medicare. Forty-four (44) percent of those appeals resulted in overturning the audit findings. The AHA’s survey of 2,300 hospitals (RACTrac reports—ongoing through 2013) has found that hospitals appeal about 41 percent of all Medicare claims denied by a RAC and that hospitals were successful in overturning 72 percent of challenged RAC denials.


The discrepancies in the two reports may be attributed to differing timeframes, providers and treatments involved. AHA stands by its appeals numbers; the implication is that the RAC program is not achieving its waste control goals.
Others note that the sheer numbers of claims denials suggests little discrimination on the part of the contractors who, it is said, have nothing to lose by denying claims arbitrarily. Hospitals bear the cost burden of appeals of these questionable denials, and the appeals process is lengthy.


HFMA weighed in on the OIG report; its vice president of healthcare financial practices noted, “The Centers for Medicare & Medicaid Services needs to address the fundamentally flawed incentives in the RAC program’s design. It costs RAC auditors little to request and review medical records from providers and to subsequently deny claims. The cost burden of questionable denials will continue to be borne by providers.” (HFMA Weekly News, September 6, 2013)


Hospital representatives have urged passage of the Medicare Audit Improvement Act, which would establish a limit on medical record requests, impose financial penalties on RACs that fail to comply with program requirements and require the public release of RAC performance evaluations. Others are calling for a moratorium to allow time to clear a huge backlog of hospital appeals.



iProtean subscribers, a new advanced Finance course—Making Difficult Decisions about Programs and Services, Part One—will be published in your course library in October. Marian Jennings, Lisa Goldstein and Nathan Kaufman discuss an objective process for evaluating program viability.


For a complete list of iProtean courses, click here.


iProtean Symposium & Workshop

Mark the Date!! October 2 – 4, 2013 at The Lodge at Torrey Pines, La Jolla, CA. Faculty: Michael Irwin (Citigroup), Todd Sagin, M.D., J.D. (Sagin Healthcare Consulting), Dan Grauman (DGA Partners), Pam Knecht (ACCORD LIMITED), Brian Wong, M.D. (The Bedside Project), Doug Mancino, Esq. (Hutton & Williams, LLC)  For more information, click here.


For more information about iProtean, click here.