CMS also noted that RACs had undertaken actions to recoup those overpayments and prevent future improper payment but conceded that it would be “difficult” to prevent all improper payments since over one billion claims are processed annually.

CMS also reported that about 85 percent of the overpayments collected by RACs were from inpatient hospitals and that based on a random sample of claims, 45.4 percent of the improper payments in Medicare were made to inpatient hospitals.

In explaining the relatively high rate of improper payments to inpatient hospitals, CMS acknowledged that since RACs were paid on a contingency fee basis, their claims review strategy focused on high dollar improper payments such as inpatient hospital claims, giving them the “highest return” relative to expenses associated with reviewing claims and medical records.

CMS also said that during the demonstration, RACs were prohibited from reviewing certain types of claims like physician visits. Other claims excluded for the review process were those previously reviewed by other Medicare contractors and claims under review for potential fraud. Hospice and home health services claims were also excluded.


By the end of FY 2007, RACs had been given $239.6 billion in claims that were originally paid between 2002 and 2006. These were claims that were originally paid by Medicare claims processing contractors between October 1, 2002 and September 30, 2006 and for which the RAC corrected the overpayment or underpayment between October 1, 2006 and September 30, 2007.

In the end, RACs turned over $1 billion to the Medicare Trust Funds, less money repaid to providers for underpayment and operating costs for the RAC program during the demonstration project.


Selecting Claims for Review

CMS said it did not instruct RACs as to which claims should be reviewed, reporting instead that claims selection methodology was left up to individual RACs. CMS did say that RACs used reports from the OIG and GAO that highlighted Medicare services that were vulnerable to improper payments.


Incorrect Coding

CMS reported that almost 50 percent of the improper payments were the result of incorrect coding such as a provider submitting a claim for a procedure but the medical record indicated that a different procedure was actually performed.

Approximately one-third of improper payments were related to medical necessity. CMS said payments were made for services that were not medically necessary or did not meet Medicare’s medical necessity criteria for the setting where the service took place; for example, a claim from a hospital for three colonoscopies for the same beneficiary on the same date of service when only one colonoscopy per day is medically necessary.

Other errors were identified as not having or not providing medical records as requested by RACs, billing separately for services already included in other payments, submitting duplicate claims, using outdated fee schedules or being paid twice because duplicate claims were submitted.

Lessons from the Past, Moving Forward

Based on past performance, CMS plans to make the following improvements when the RAC program becomes permanent:

  • Then: CMS did not provide a maximum look back date in the demonstration.
    Now: It will now be changed from four to three years. In the permanent program, the RACs will not be able to look for any improper payments on claims paid before October 1, 2007.
  • Then: RACs were prohibited from reviewing claims during the current fiscal years.
    Now: In the permanent program they can.
  • Then: The RACs only had to pay back the contingency fee if they lost at the first level of appeal during the demonstration.
    Now: In the permanent program this has been changed to all levels of appeal.
  • Then: RACs were not required to have certified coders.
    Now: certified coders will be mandatory.
  • Then: Individual RACs were able to set an optional medical record limit in the demonstration.
    Now: In the permanent program CMS will set mandatory limits.
  • Then: RACs did not offer a Web-based application, allowing providers to customize addresses and contact information or see the status of cases during the demonstration.
    Now: Each RAC must have this Web-based application by January 1, 2010.
  • Then: A request by the provider to discuss a denied claim between the RAC and the medical record director was at the option of the RAC. Now: it will be mandatory.
    Then: The demonstration called for limited reporting by the RACs on problem areas they had identified.
  • Now: Frequent problem area reporting will be mandatory.
  • Then: During the demonstration an external validation process was optional and varied by state.
    Now: An external and uniform validation process will be mandatory for the permanent program.


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