This could happen if the RAC extrapolated its findings to all your Medicare billings. It is crucial for Medicare providers to familiarize themselves with the extrapolation process so they can effectively appeal any extrapolated demands.

Extrapolation is the process that Medicare contractors use to estimate a total overpayment based on an audit of a relatively small subset of claims. This is what happened in the example above. If this was a large hospital with $20 million in annual Medicare billings, an audit of 100 claims that revealed a 50 percent error rate would result in a demand of $10 million. Each of the 50 denied claims, though individually worth only $10,000 to $20,000, becomes worth $200,000.

RACs have not extrapolated their findings yet, but they do have this authority. RACs have a clear financial incentive to extrapolate because they keep a percentage of their recoveries.  From a RAC’s perspective, it just makes good business sense to extrapolate those 50 claims and keep a percentage of $10 million rather than $100,000. So we very well may see RACs extrapolating in the future.

Extrapolation Explained

It is critical for providers to familiarize themselves with the extrapolation process and the challenges it presents. Another type of Medicare contractor, Program Safeguard Contractors (PSCs), soon to be known as Zone Program Integrity Contractors, or ZPICs, has been extrapolating audit findings for quite some time. PSCs and RACs both are subject to many of the same rules governing sampling and extrapolation, but one major difference is that, unlike PSCs, RACs will have to obtain approval from CMS before using extrapolation. Providers’ experiences with PSCs will be very useful in preparing for and challenging RAC extrapolations.

In many PSC extrapolations, the claims reviewed frequently span a 12- to 24-month period. In many instances, the review date or date of the medical record request occurred more than a year after the majority of claims in the sample were paid by Medicare. The PSC calculates an error rate and applies that error rate to all similar claims within the sample period to produce an overpayment estimate that can greatly exceed the combined value of the individually denied claims, sometimes by more than six times the actual amount.

By appealing denials on a claim-by-claim basis, the provider has an opportunity to get not only individual claims overturned, but also a corresponding percentage of the total extrapolation. Thus, for every claim overturned on appeal, the total extrapolation will be reduced proportionately. This raises the stakes considerably when a facility is deciding whether to appeal claims.

Providers also should challenge the extrapolation itself, when possible. PSCs are forced to adhere to statutory limitations in place for use of overpayment estimation, and to follow the guidelines established in the Medicare manuals when extrapolating overpayments. Failure to follow those laws and guidelines can invalidate an extrapolation. Thus, providers also may challenge the methods used in creating a review sample, calculating error rates and determining whether or not to apply overpayment estimation to a particular provider, all in addition to challenging the actual determinations of medical necessity made by the PSC.


There are a number of issues that arise during the course of dealing with extrapolated overpayments, both in the pre-appeal period and once the appeals process has begun. Providers have very little protection when dealing with PSCs during the review period. Unlike with RACs, there are no limits on the number of medical records that may be requested and no clear time frame in which reviews must be completed. For extrapolations performed by RACs, CMS has created boundaries by limiting the number of records contractors may request and setting time frames in which reviews must be concluded.


An issue that carries more uncertainty, both with respect to PSCs and RACs, is the question of reopening. Both types of contractors are bound by the rules outlined in regulations governing reopening. Typically, for a reopening to be undertaken more than a year after an initial payment, there must be “good cause” for it, which often generally represents “new and material evidence” indicating a payment error that was not available at the time of the initial determination. Unfortunately, the Medicare Appeals Council has taken the position that ALJs have no authority to review whether contractors have reopened claims lawfully, and inappropriate reopenings may continue unchecked for the foreseeable future. A federal court in San Diego, in the case of Palomar Medical Center v. Sebelius, however, currently is reviewing whether ALJs should have jurisdiction over these matters. In light of this case, it is important for providers to continue to challenge reopenings when a Medicare contractor does not show good cause for doing so.

Provider Error Rate

Another major issue is the calculation of a provider’s error rate, which is used to determine the extrapolated overpayment. Frequently, PSCs calculate error rates based on the number of claims denied. However, the Medicare manuals require that error rates be calculated based on the ratio of the dollar value of the claims to the dollar value of all claims reviewed.  Based on the language of the manuals, a PSC’s failure to calculate the error rate properly is an issue that may be challenged by providers in an appeal. Furthermore, Medicare statutes only permit extrapolation in cases in which a provider’s error rate is “high” or “sustained,” or when documented education has failed to correct the billing problem. By miscalculating the error rate, a PSC may fail to make a proper determination that the rate was in fact “high” or “sustained” as required by statute, giving rise to another potential avenue for challenging the extrapolation.

These two issues are key points in determining the validity of extrapolations undertaken by PSCs, and may have parallels when RACs use extrapolation to determine overpayments. In the next part of this series, we will address some of the strategic issues that should be considered during the appeals process, such as determining whether to enlist the assistance of independent experts.

About the Authors

Ronald Connelly is a principal of the firm Powers, Pyles, Sutter & Verville PC.  Mr. Connelly leads the firm’s RAC and coverage appeals practice and has successfully represented hospitals in hundreds of RAC appeals.  Mr. Connelly is lead counsel for Palomar Medical Center in a federal lawsuit challenging RAC reopening procedures that is currently pending before the U.S. District Court for the Southern District of California. Mr. Connelly’s practice also includes Medicare cost report appeals and advising clients regarding federal and state health care regulations.  He has tried numerous cases before the Provider Reimbursement Review Board and has litigated Medicare matters before federal courts across the country. Powers Pyles Sutter & Verville is a Washington, DC-based law firm that focuses on health care, education and the law of tax-exempt organizations.

Christina A. Hughes is an associate with Powers Pyles Sutter & Verville, PC. Ms. Hughes’s practice focuses on assisting healthcare organizations in complying with the federal Medicare and Medicaid programs, including issues related to reimbursement, fraud and abuse, and various business transactions. Over the past few years, Ms. Hughes has been centrally involved in orchestrating thousands of claims through the administrative appeals process, including issues raised by traditional Medicare contractors, Recovery Audit Contractors, and Program Safeguard Contractors.

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