Anatomy of a RAC Audit

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By Miki Fairley
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Originally launched in accordance with provisions of the Medicare Modernization Act of 2003, Recovery Audit Contractors (RACs) are having an increasingly significant impact throughout the U.S. healthcare industry, including the O&P profession, amidst a political climate of intense scrutiny on identifying payment errors, waste, and fraud in federal programs through legislation such as the Improper Payments Elimination and Recover Improvement Act of 2012. (Author's note: RACs are now known as Recovery Auditors (RAs); however, this article refers to them as RACs since it is the more familiar term.) Although other entities focus on fraud detection, RACs focus primarily on identifying improper Medicare payments resulting from billing and coding errors and on educating providers in correct claims submission processes. A demonstration program conducted from 2005-2008 resulted in more than $900 million in overpayments being returned to the Medicare Trust Fund and nearly $38 million in underpayments returned to healthcare providers. The program was then launched and has continued to grow in collections.

"A recovery audit contractor system...went from collecting $800 million in overpayments in fiscal [year] 2011 to nearly $2.3 billion a year later," points out John Morrissey in an article, "Understanding and Managing RAC" (Trustee magazine, digital edition, March 2013).

"RACs don't do random audits; they must have specific issues that have been reviewed and approved by [Centers for Medicare & Medicaid Services] CMS, such as higher function level claims," explains Wayne van Halem, AHFI, CFE, president, The van Halem Group, Atlanta, Georgia. (Author's note: CMS-approved audit issues are posted on each RAC's website.) The van Halem Group is partnering with Orthotic & Prosthetic Group of America (OPGA), Waterloo, Iowa, to assist OPGA members with audits, appeals, compliance, and related issues.

"RACs can come back and re-audit and sometimes there are audits by other entities as well, so providers want to be very proactive in preparing for these," van Halem adds.

For the O&P profession, one of the key issues involved in RAC audits has been a change in the O&P claims processing triggered by the CMS "Dear Physician" letter, which states that "Since the prosthetist is a supplier, the prosthetist's records must be corroborated by the information in your patient's medical record. It is the treating physician's records, not the prosthetist's, which are used to justify payment."

RAC auditors are paid on a contingency basis, and they are paid on the same percentage basis, but that percentage varies among the RACs depending on their specific contract, whether the claim errors are overpayments to be recouped or underpayments to be returned to providers. On paper, this sounds fair; however, as some in the O&P profession note, there is an inherent pressure on RACs to bring money in. Underpayment totals have been far less than overpayments. As one observer says, "Contractors who give away too much of the government's money aren't too likely to get contracts renewed."


RACs use three types of review processes to identify improper payments: automated, semi-automated, and complex. Automated reviews use claims data analysis to identify improper payments. In fiscal year (FY) 2011, CMS introduced semi-automated reviews to avoid unnecessary administrative costs associated with appeals. Like automated reviews, these reviews are made through data analysis; however, they allow the provider to see the initial claim determination and, if possible, provide supporting claim documentation. This process does not demand the provider to give information. The provider decides what information or documentation, if any, to give.

Complex reviews require a review of the supporting medical records to determine whether there is an improper payment. The reviewer must be a qualified healthcare coder or clinician based on the type of review being undertaken.

RACs do not develop or apply their own coverage, payment, or billing policies, according to CMS. When performing these reviews, RACs follow Medicare regulations, billing instructions, national coverage determinations (NCDs), coverage provisions, and their respective Affiliated Contractor's/Medicare Administrative Contractor's (AC's/MAC's) local coverage determinations (LCDs). According to information from CMS, RACs do not generally review a claim previously reviewed by another entity. RACs analyze claims data using their proprietary software to identify claims that clearly (or likely) contain improper payments. If a RAC finds an improper payment, it sends a file to the AC/MAC to adjust the claim and recoup payment. In the case of claims that likely contain improper payments, the RAC requests the medical record from the provider, reviews the claim and medical record, and makes a determination as to whether the claim contains an overpayment, an underpayment, or a correct payment.

After an improper payment is identified, the next step is notifying the provider of the overpayment or underpayment. If the records review indicates a denial or adjustment, providers will receive an overpayment or underpayment notification letter. In the case of an underpayment, the provider is notified via letter of the underpayment and the repayment process. In the case of an overpayment, the provider receives a demand letter requesting repayment of the specific amount. The demand letter includes the rationale for the determination and instructs providers on how to proceed for additional adjudication or appeal.


CMS points out that RACs offer providers an opportunity to discuss the improper payment determination outside the normal appeals process. "However, if you disagree with the RAC determination, do not stop with sending a discussion letter," CMS informational material urges. "File an appeal before the 120th day after the demand letter." RAC processes and appeals have stringent deadlines, so it's imperative for providers to be aware of and follow them.

"If at any point you miss a deadline, you're done. It doesn't matter if you're right or wrong; the government gets to recoup the money and keep it," says Larry Hegland, MD, system medical director for recovery audit and appeal services for the 15-hospital Ministry Health Care system in central Wisconsin, as quoted in the Trustee article by John Morrissey. "That goes for submitting requested records in the audit stages as well as adhering to an appeals timeline," Morrissey adds. Quoting Hegland, he continues, "There are rules in terms of how you submit documentation. If you don't follow all of the rules, they won't accept the record. And if that causes you to miss a deadline, well, that's just too bad."

There are five levels in the claim appeal process under the traditional fee-for-service Medicare:

  1. Redetermination by a CMS contractor (carrier, fiscal intermediary, or MAC).
  2. Reconsideration by a Qualified Independent Contractor (QIC).
  3. Hearing before an Administrative Law Judge (ALJ) within the Office of Medicare Hearings and Appeals in the U.S. Department of Health and Human Services (HHS).
  4. Review by the Appeals Council within the HHS Departmental Appeals Board.
  5. Judicial review in federal district court.

The recoupment of an overpayment may be offset against future payments made by the claims processing contractor if payment is not received within the specified timeframe, according to CMS. The provider may also apply for an extended repayment plan. Typically, recoupment from future repayments begins 41 days after the adjustment and date of the demand letter. In addition, the receipt of a valid appeal may also delay recoupment.


Appeals continue to be successful for providers who choose this route, notes a February 27 online article, "Annual Report Shows Meteoric Rise in RAC Activity," by Ameena Ashfaq, JD, and B. Scott McBride, JD, of the national law firm BakerHostetler ( shows-meteoric-rise-in-rac-70561).

Nearly 44 percent of appealed claims by Medicare providers were overturned in FY 2011, the article notes. "Percentages of favorable decisions varied by contractor and by issue.... Reversed appeals totaled $37.9 million."

However, CMS has been encouraging RACs to be further involved in the appeals process, especially at the ALJ level, the article observes, noting a November 2012 report by the HHS Office of Inspector General that found ALJ decisions were less favorable to appellants when CMS participated in the appeals.

The National Association for the Advancement of Orthotics and Prosthetics (NAAOP) General Counsel Peter Thomas, JD, says, "Since CMS says that medical necessity is determined by the physician's files only, some ALJs are saying, 'Your points are valid, and I would approve this claim, but the government says that your files are not part of determining medical necessity, and the physician has not provided sufficient documentation. Thus, I am not at liberty to make my own judgment; I have to follow the law.'" Thomas adds, "In my and my firm's experience with our O&P clients, most of the cases that are being lost at the ALJ level are being lost for this reason."


Providers also are in the crosshairs for prepayment audits. In 2012, CMS introduced the Recovery Audit (RA) Prepayment Review Demonstration, which allows RACs to conduct prepayment reviews on certain types of claims that historically result in high rates of improper payments. The demonstration focuses on 11 states: California, Florida, Illinois, Louisiana, Michigan, Missouri, New York, North Carolina, Ohio, Pennsylvania, and Texas.


CMS announced in May that it has begun the procurement process for new Medicare Fee for Service RA Program contracts and has implemented a transition plan to minimize the amount of outstanding work that will transition to the new contracts. The RA program will continue during the transition, although there will be some decline in activity. The agency notes that Additional Documentation Requests (ADRs) may begin to decline this summer and that all prepayment reviews will continue without decline. CMS advises providers to contact for questions concerning the transition.

CMS must follow a very strict contracting process, van Halem notes, and unsuccessful bidders may contest the awards because of mistakes made throughout the process. Thus, CMS is unable to provide a definite timeline when new or renewed RACs will be operational.


Although O&P providers have no control over physicians' documentation or the willingness of physicians to provide documentation to support their claims, O&P providers can try to ensure that they are submitting correct claims. Respondents to the American Orthotic & Prosthetic Association (AOPA) 2013 RAC audit survey show that a significant number of prosthetists and orthotists are taking action to improve their processes. Answers to the survey question, "In the past 12 months, did any of the following changes take place at your O&P clinic due to RAC audits?" revealed the following:


Although RAC audits continue to impact the O&P profession, a better understanding of the audit process and careful attention to billing and documentation procedures can help mitigate the effects of RAC audits as national leadership and involved individuals continue advocating with CMS and Congress for what the profession feels is a more equitable process for O&P providers.

Miki Fairley is a freelance writer based in southwest Colorado. She can be contacted via e-mail at