Under the Patient Protection and Affordable Care Act, all states are required to contract with recovery audit contractors (RACs) by December 31, 2010. This program is being expanded to Medicaid, as well as to Medicare Parts C and D. Federal regulations to carry out the expanded RAC program will be created by the Secretary of Health and Human Services.
RACs have been used since 2006 (following a three year demonstration project) to conduct audits of Medicare providers to determine whether an overpayment was made in Medicare Parts A and B claims. RACs typically review a small sample of claims from a health care provider for a specific review period and calculate an error rate, based on the RAC’s determination as to whether claims were improperly paid.
The RACs then extrapolate the error rate in the sample to the universe of all claims during the audit period to determine an alleged overpayment amount purported to be owed by the provider. The amount sought to be recouped by CMS based on the extrapolation from a relatively small sample of claims billed can be large. The RACs are paid a contingency fee based on the overpayment amount, which may provide their auditors with an incentive to find claims they contend should have been denied.
Medicaid providers will now also be subject to these audits to see if an overpayment was made in their Medicaid billing. States must develop an appeals process for the provider to challenge the RAC audit findings and the overpayment amount. For Medicare providers, the appeal process consists of two levels of additional review before an administrative law hearing is held. The hearing is before an administrative law judge, and parties can present documentary evidence and witnesses. Additional appeal options are available, if necessary or desired, after the administrative hearing. Presumably, the states will set up a similar appeals process for Medicaid providers subjected to RAC audits.