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October 11, 2012 Articles

Recent Developments in Recovery Audit Contracting

An update on new programs from the Centers for Medicare and Medicaid Services shows how agencies hope to recover over $1 billion in overpayment funds from health care providers.

By Nicholas M. Hudalla, Kelly McCloskey Cherf, and Limo T. Cherian

Following the three-year Recovery Audit Contractor (RAC) demonstration project, which the Centers for Medicare and Medicaid Services (CMS) completed on March 27, 2008, Congress mandated that Recovery Auditors be up and running nationwide by January 2010. CMS, The Medicare Recovery Audit Contractor Program: An Evaluation of the 3-Year Demonstration 3–4 (2008). Under the nationwide RAC program, Recovery Auditors have identified a total of more than $1.27 billion in overpayments. CMS, “Medicare Fee-for-Service Recovery Audit Program FY2012” (2012). Given the success of the RAC program, it is not surprising that the CMS has announced additional audit programs and projects while increasing its efforts to recover funds from providers.

This article will provide a summary of these new programs and efforts, and will also provide an update regarding the Recovery Audit Program.

The New Demonstration Projects
The Part A to Part B Rebilling Demonstration
On December 12, 2011, the CMS began open enrollment to allow up to 380 providers to take part in the Part A to Part B Rebilling Demonstration. See CMS Fact Sheet, “Part A to Part B Rebilling Demonstration” (Nov. 15, 2011). Enrollment in the Rebilling Demonstration was on a first-come, first-served basis, and was open to up to 380 facilities that do not receive interim payments from the CMS and are Medicare-participating hospitals as defined by section 1886(d) of the Social Security Act. CMS, “Part A to Part B Rebilling Demonstration: General Information.”

Although the enrollment deadline for the Rebilling Demonstration was December 22, 2011, the CMS is now accepting applications for interested providers to be placed on a waiting list for participation. By participating, providers automatically receive a 90 percent reimbursement under Medicare Part B for any Part A inpatient short-stay claim (two or fewer days) that is determined by a Medicare Administrative Contractor (MAC), Recovery Auditor, Zone Program Integrity Contractor (ZPIC), Comprehensive Error Rate Testing (CERT) program, or other CMS contractor audit as not medically necessary because the services were not provided in the appropriate setting.

In addition, the CMS will waive timely filing restrictions for demonstration participants for the rebilled claims. In return, however, participating providers agree to waive their appeal rights for all claims affected by the Rebilling Demonstration. This effectively results in an automatic waiver of the remaining 10 percent reimbursement that is potentially payable under Medicare Part B. Providers do not waive their right, however, to take part in the discussion period. This demonstration, which began January 1, 2012, is scheduled to take place over a three-year period, or until December 31, 2014.

One of the CMS’ main purposes behind the Rebilling Demonstration is to reduce the number of inpatient short-stay claim appeals. During the RAC Demonstration Project, providers were permitted to rebill any Medicare Part A denial based on inappropriate setting for the full amount payable under Part B. Outside of the Rebilling Demonstration, however, the CMS currently limits the Part B reimbursement to the ancillary services set forth in section 10, chapter 6 of the Medicare Benefit Policy Manual, and subjects such reimbursement to the timely filing requirements set forth in section 70, chapter 1 of the Medicare Claims Processing Manual.

Notwithstanding this limitation, providers have been successful in the appeals process and before the Departmental Appeals Board (DAB) in obtaining reimbursement under Medicare Part B for observation and underlying care originally billed under Part A. See generally In the case of O’Connor Hospital, DAB (Feb. 1, 2010). On July 13, 2012, however, the CMS issued a memorandum reiterating that absent a decision by an administrative law judge requiring reimbursement under Part B, providers that are not participating in the Rebilling Demonstration are not entitled to resubmit their claims under Part B for services that were originally billed under Part A. This position is consistent with the purposes underlying the Rebilling Demonstration, pursuant to which the CMS is attempting to reduce the number of appeals being filed on a Part A to Part B position. Over time, we will find out whether the participating providers find greater benefit in waiving the remaining 10 percent payable under Medicare Part B or in expending the costs associated with seeking 100 percent of the Part B reimbursement through the appeals process. A few hospitals thus far have dropped out of the Rebilling Demonstration, indicating potential disappointment with the program. The CMS, however, has indicated that its decision to accept applications for a waiting list was based on provider requests. CMS, “Part A to Part B Rebilling Demonstration,” supra.

The Recovery Audit Program Prepayment Review Demonstration
During the RAC demonstration project and currently under the Recovery Audit Program, Recovery Auditors have been working under the “pay and chase” method—they identify improper payments after claims have been paid. To limit more effectively the amount of improper payments made, the CMS proposed the Recovery Audit Program Prepayment Review Demonstration to allow Recovery Auditors to review medical records and issue a denial before the claim is ever paid. CMS Fact Sheet, “Recovery Audit Program Prepayment Review Demonstration” (Nov. 15, 2011). This demonstration, which was scheduled to begin on or after January 1, 2012, initially was postponed until June 1, 2012, and as of August 8, 2012, now is projected to begin on August 27, 2012. It will be conducted in 11 states. Seven of the states were selected based on their high level of fraudulent claims and fraudulent providers (Florida, California, Michigan, Texas, New York, Louisiana, and Illinois), and four were selected based on having high claim volumes for short inpatient stays (Pennsylvania, Ohio, North Carolina, and Missouri). The Prepayment Demonstration will be conducted over a three-year period, or until about August 26, 2015.

As part of the Prepayment Demonstration, Recovery Auditors will gradually phase in a limited number of diagnosis-related groups (DRGs) subject to prepayment review. As originally proposed, in the first phase, Recovery Auditors will begin prepayment review of syncope and collapse (MS-DRG 312). The second phase of review will include transient ischemia (MS-DRG 069) and gastrointestinal hemorrhage with MCC (MS-DRG 377). In the third phase, gastrointestinal hemorrhage with CC (MS-DRG 378) and G.I. hemorrhage without CC/MCC (MS-DRG 379) will be reviewed. Finally, in the fourth phase, review will include diabetes with MCC (MS-DRG 637), diabetes with CC (MS-DRG 638), and diabetes without CC/MCC (MS-DRG 639). See CMS, “Recovery Auditor Prepayment Review Demonstration: Provider Outreach and Education,” at 6 (2011). The inclusion of Syncope & Collapse and Transient Ischemia was foreseeable as these DRGs have been some of most common causes for medical necessity denials during the Recovery Audit Program. Pursuant to the originally proposed demonstration schedule, the Recovery Auditors were required to add a new phase every two months from January 1, 2012, through July 1, 2012. Although the CMS has not released updated timing or details regarding the phases, a similar or identical rolling inclusion of DRGs is likely.

Providers should be aware of the many concerns that accompany the Prepayment Demonstration. The first and most obvious concern is the impact that prepayment review will have on a provider’s cash flow. Once the Recovery Auditor makes a negative determination—which many providers have successfully shown to be an inaccurate determination—the provider is prohibited from receiving any reimbursement without first having the opportunity to challenge the denial through the appeals process. In addition, as under the post-payment Recovery Audit Program, Recovery Auditors are paid on a contingency fee basis under the Prepayment Demonstration.

While a Recovery Auditor who makes an improper prepayment denial that is overturned on appeal will not receive the contingency fee, there is no affirmative penalty against the Recovery Auditor for an erroneous denial. Thus, the Prepayment Demonstration offers an incentive for aggressive, rather than accurate, claims review. Providers must also be aware that there are new requirements for the submission of documentation under the Prepayment Demonstration.

Under the post-payment Recovery Audit Program, a provider has 45 days to submit the requested documentation. If the provider fails to submit the requested documentation in a timely manner, the Recovery Auditor is required to initiate one additional contact with the provider before issuing a denial. CMS, Statement of Work for the Recovery Audit Program 16 (2011). Under the Prepayment Demonstration, however, the provider is required to submit the requested documentation within 30 days of the request. If the provider does not submit the requested documentation within 45 days of the request, an automatic denial will be issued. CMS, “Special Open Door Forum: Medicare Fee-For-Service Recovery Auditor Prepayment Review Demonstration” (Dec. 21, 2011). Not only is this significant in that it requires a quicker response by the provider, but often the record will be incomplete as a provider’s written policy may allow a practitioner more than 30 days to complete certain records (such as a discharge summary).

Other auditors have already begun prepayment reviews. First Coast Service Options (FCSO), the MAC responsible for Florida, proposed to implement 100 percent prepayment review of inpatient hospital claims and related Part B services for 15 DRGs (11 of which were targeted at cardiac procedures), which was to begin January 1, 2012. Chris Anderson, “Caught in the Crosshairs,” Healthcare Fin. News (Mar. 5, 2012). In response, the Florida Chapter of the American College of Cardiology pushed back on the CMS, calling this prepayment process “unfair and unprecedented.” Carol Gentry, “Audits Chill FL Doctors,” Health News Fla. (Dec. 9, 2011).

On January 9, 2012, FCSO announced that it had delayed prepayment review until February 1, 2012, and that it would review only 30 percent of the claims in 14 DRGs and 50 percent of the claims in 1 DRG. Charles Fiegl, “Medicare Intensifying Reviews Before Payment,” Am. Med. News (Jan. 16, 2012). As of March 1, 2012, FCSO had implemented prepayment review for 19 DRGs. It then added six additional DRGs on March 21, 2012. As of July 19, 2012, 60 percent of the claims in 23 of the initial 25 DRGs were subject to prepayment review. On April 11, 2012, FCSO also began performing prepayment review on 10 percent of claims in DRGs with a one-day stay. First Coast Service Options, Inc., “Inpatient DRGs Subject to Prepayment Medical Review” (Aug. 14, 2012), available at

The Prepayment Review and Prior Authorization Demonstration Project for Power Mobility Devices
On November 15, 2011, the CMS proposed the Prepayment Review and Prior Authorization Demonstration for Power Mobility Devices (PMD), which was to begin January 1, 2012. After initially postponing the PMD Demonstration until June 1, 2012, as of August 8, 2012, this Demonstration is now projected to begin on September 1, 2012. As part of the PMD Demonstration, physicians and treating practitioners will be required to submit a prior authorization request for PMDs before a supplier can submit claims to Medicare. Nancy Aldrich & Bill Benson,“CMS Revises Power Mobility Device Demonstration,” The Sentinel(Feb. 2012). This demonstration is set to take place over a three-year period, or until about August 31, 2015, and will take place in California, Florida, Illinois, Michigan, New York, North Carolina, and Texas, as these states accounted for 43 percent of the $606 million total Medicare PMD expenditures in 2010. CMS Fact Sheet, “Medicare’s Prepayment Review and Prior Authorization Demonstration Project for Power Mobility Devices” (Nov. 15, 2011).

Concerns about the PMD Demonstration have been raised by specific stakeholders and prompted a letter by 24 members of Congress to CMS in December 2011, which noted a potential threat to businesses, jobs, and seniors’ access to care. Chuck Buck, “CMS Postpones Prepayment Review Demonstration,” RAC Monitor (Jan. 3, 2012). Others contend, however, that the demonstration is supported by greater justification. In April 2012, CMS reported that there is a 61 percent error rate associated with claims for durable medical equipment, which far surpasses the 7.9 percent error rate for inpatient hospital claims. CMS, “Competitive Bidding Update—One Year Implementation Update,” at 1 (2012). Further, although there are legitimate concerns about the delays associated with prior authorization, Medicare is required to conduct a medical review and communicate its coverage decision within 10 business days of receiving the prior authorization request.

In rare emergency situations, Medicare will complete the review and issue a decision within 48 hours of the request. CMS Fact Sheet, “Medicare’s Prepayment Review and Prior Authorization Demonstration Project for Power Mobility Devices,” supra. The CMS states that the demonstration does not place additional documentation requirements on providers. Rather, the CMS has indicated that, under the PMD Demonstration, providers and suppliers are merely required to submit information earlier in the claims process. Moreover, physicians and treating practitioners are permitted to resubmit prior authorization requests to Medicare an unlimited number of times. Medicare, however, is given 30 days to review and communicate its decision for resubmitted requests. Id.

Medicaid RACs

On October 1, 2010, in accordance with the Patient Protection and Affordable Care Act, the CMS released a letter to state Medicaid directors advising that, by December 31, 2010, they were required to (1) establish a Medicaid RAC program by submitting a State Plan Amendment to the CMS; (2) indicate that they are seeking an exemption from one or more provisions of the Medicaid RAC program; or (3) indicate that they are seeking an exemption from the entire Medicaid RAC program. “Medicaid Recovery Audit Contractors,” Am. Med. Ass’n (2011). In November 2010, the CMS published proposed rules that would require states to implement their Medicaid RAC program by April 2011. Michael Cook, Liles Parker PLLC, “Medicaid RAC Program Up and Running—26 States Award RAC Contracts” (Apr. 11, 2012).

After extending the implementation date on numerous occasions, on September 16, 2011, the CMS issued a final rule requiring each state to implement its Medicaid RAC program by January 1, 2012. To satisfy this requirement, states were required to have a signed contract in place with their selected Medicaid RAC vendor on or before January 1, 2012. Any state that failed to satisfy this requirement was required to request an exemption from the CMS by submitting a State Plan Amendment. CMS, “Frequently Asked Questions: Section 6411(a) of the Affordable Care Act,” at 1 (2011). As of August 7, 2012, 21 states have entered into a contract with a Medicaid RAC contractor. John Paul Spencer, “Medicaid RACs: Speed Bumps Along the Way,” RAC Monitor (Aug. 7, 2012).

The Federal Guidelines
Although the CMS issued guidelines to the states, each state was given flexibility to design its own Medicaid RAC program, unlike the uniform Medicare Recovery Audit Program. Among these guidelines, the CMS indicated an intention for Medicaid RACs to perform post-payment rather than prepayment review. Further, while states are required to set limits on medical record requests, states are given flexibility in determining the specific limits regarding the size and frequency of these requests. In addition, unless a state obtains an exception from the CMS and approves extending the look-back period for a particular claim, Medicaid RAC claim reviews are limited to a three-year look-back period from the date the claim was filed. CMS, “Frequently Asked Questions: Section 6411(a) of the Affordable Care Act,” supra,at 4, 15.

Like Medicare Recovery Auditors, states also are required to pay Medicaid RACs based on a contingency fee. Despite this requirement, a state may seek an exception if state law prohibits contingency fee contracts. Id. at 13. This contingency fee is generally capped based on the highest fee paid to a Medicare Recovery Auditor, which primarily ranges between 9 percent and 12.5 percent across the nation. Michael Silhol, “Then State Medicaid RAC Audits Begin . . . Now!,” PhysBizTech (Jan. 16, 2012). For durable medical equipment, however, CMS has authorized contingency fees of up to 17.5 percent. A state may pay a Medicaid RAC at a higher contingency fee by either requesting an exception from the CMS or by paying the excess fee with state-only funds. Further, states are permitted to vary the contingency fee for overpayments and for underpayments, but must ensure that the Medicaid RAC has an adequate incentive to detect underpayments. CMS, “Frequently Asked Questions: Section 6411(a) of the Affordable Care Act,” supra, at 14.

States also are required to provide an appeals process in accordance with state law or administrative procedures. Most states have elected to use their existing Medicaid appeals process, but they are permitted to submit an entirely new process for Medicaid RAC appeals. If a state elects to implement a new appeals process, the state is required to obtain pre-implementation approval from CMS. Id. at 10.

Provider Concerns 
During the initial five-year period, the Department of Health and Human Services has projected that the Medicaid RAC program will result in $2.13 billion in savings to the state and federal Medicaid programs. “Medicaid Program, Recovery Audit Contractors,” 76 Fed. Reg. 57,808 (Sep. 16, 2011). With these immense projected savings as a backdrop, a number of provider concerns have begun to surface. From the beginning, providers presented CMS with concerns regarding overlapping review by Medicaid RACs and other governmental auditors.

Initially, CMS responded by postponing the implementation date of the program to allow states time to ensure coordination among governmental auditing entities. Further, Medicaid RACs are required to coordinate their audit activity with other auditing entities. To the extent that another federal or state agency is already conducting an audit on a provider, the other agency’s audit will take precedence and the Medicaid RAC is required to yield further audit activity. CMS, “Frequently Asked Questions: Section 6411(a) of the Affordable Care Act,” supra, 12. Whether or not this mandated coordination will sufficiently curtail the potential for overlap is yet to be seen, but with contingency fees as an incentive and program variations between the states, there is reason to believe the providers’ concerns are well founded.

State flexibility also has led to a number of concerns among providers. Due to this flexibility, there is a more limited platform for guidance, as each state will have a unique program. Further, for multistate hospital systems, providers are responsible for knowing the program intricacies for each state in which they provide services. They must have familiarity with prior Medicaid rules and regulations, as Medicaid RACs have a three-year look-back period. Most important, they must keep up with the often frequent changes that arise under each state’s Medicaid program. Bob Herman, “3 Biggest Ways Medicaid RACs Will Affect Hospitals in 2012,” Becker’s Hosp. Rev. (Dec. 2, 2011). As it seems safe to assume that Medicaid RACs, like Medicare Recovery Auditors, will have a high error rate, the cost to providers to monitor the program and manage the appeals process will no doubt be significant.

Updates to the Medicare Recovery Audit Program 
Although the success of the Recovery Audit Program has helped CMS justify the proposal and implementation of the three new demonstration projects, notable changes have been made to the Recovery Audit Program.

Semi-Automated Review
In addition to performing complex and automated reviews, Recovery Auditors are now performing semi-automated review. Although new, semi-automated review functions as a hybrid between complex and automated review. When the Recovery Auditor identifies a high index of suspicion through the use of automated review, the Recovery Auditor issues a notification letter to the provider. Pursuant to the notification letter, the provider is given 45 days to provide additional information in support of the claim. CMS, “Statement of Work for the Recovery Audit Program,” 22 (2011). Within 60 days of the provider’s response, the Recovery Auditor must review the additional documentation and make a claim determination. Lori Brocato, “Semi-Automated RAC Reviews: An Oxymoron?,” Advance(Aug. 24, 2011).

Semi-automated review will likely result in an increased burden on providers both administratively and financially. As noted in the Statement of Work for the Recovery Audit Program, semi-automated review is designed to address claims for which a clear CMS policy does not exist, but in most instances, the services would be clinically unlikely or inconsistent with evidence-based medical literature.

Document Request Limitations
The CMS has also continued to expand the document request limitations. In January 2010, the group issued a notice pursuant to which Recovery Auditors were restricted to issuing one record request to a provider during a 45-day period. CMS, “Additional Documentation Limits for FY 2010 for Institutional Providers” (Jan. 28, 2010).

Although this restriction has not changed since January 2010, CMS has continually increased the number of medical records a Recovery Auditor may request during that time period. As of January 2010, the record request limit was set at 1 percent of the number of claims submitted by the provider in the previous calendar year divided by eight. The resulting figure was then restricted by a cap set at 200 records per provider within the 45-day period. Effective November 2, 2010, the CMS increased this cap from 200 records to 300 records. Further, starting in February 2011, the CMS began notifying individual providers with over $100 million in MS-DRG payments during the previous fiscal year that it had authorized an increase in that provider’s cap from 300 to 500 records. Effective August 22, 2011, the CMS also set a minimum of 35 permissible record requests for any provider during the 45-day period. CMS, Additional Documentation Limits for Medicare Providers (Except Suppliers and Physicians) (Aug. 22, 2011).

Recently, on March 15, 2012, the CMS issued a new notice pursuant to which the record request limit was increased to 2 percent of the number of claims submitted by the provider in the previous calendar year divided by eight. As part of this notice, CMS also increased the cap to 400 records per provider within a 45-day period. Further, all providers notified after February 2011 that they were subject to an increased cap of 500 records are now subject to a cap of 600 records. CMS, Additional Documentation Request Limits for Medicare Providers (Except Suppliers and Physicians) (Mar. 15, 2012). Through the fourth quarter of 2011, hospitals have reported more than 347,000 medical record requests. Am. Hosp. Ass’n, Quarterly Nationwide RACTrac Webinar (Mar. 28, 2012).

Keywords: litigation, health law, Recovery Audit Contractor, RAC, HIPAA, CMS, reimbursement, health care, Centers for Medicare and Medicaid Services, Rebilling Demonstration, Medicare Administrative Contractor, Zone Program Integrity Contractor, Comprehensive Error Rate Testing

Kelly McCloskey Cherf and Limo T. Cherian are partners and Nicholas M. Hudalla is an associate at Hogan Marren, Ltd., in Chicago, Illinois.

Copyright © 2012, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).