What Are Recovery Audit Contractors & How Do They Work?

Recovery Audit Contractors (RACs) play a role in maintaining the financial integrity of government healthcare programs. These entities were established to identify and recover improper payments made to healthcare providers. The program became permanent and expanded nationwide following the Tax Relief and Health Care Act of 2006.

The primary goal of RACs is to reduce waste and abuse within Medicare and Medicaid by ensuring that payments align with program requirements. Providers interact with RACs through a structured process designed to identify and correct billing discrepancies.

Understanding Recovery Audit Contractors

Recovery Audit Contractors are private companies that contract with the Centers for Medicare & Medicaid Services (CMS) or state Medicaid agencies. Their function involves reviewing healthcare claims to pinpoint overpayments or underpayments made to providers. This scope includes Medicare Fee-for-Service, Medicaid, and Medicare Advantage/Part D plans.

These contractors operate on a contingency fee basis, receiving a percentage of the improper payments they identify and recover. This payment structure incentivizes RACs to actively seek out errors in billing and documentation. The fee is paid once money is recouped or refunded, and RACs must return the fee if an overpayment finding is overturned on appeal.

RACs identify various categories of improper payments. Overpayments occur when providers receive funds for services that were medically unnecessary, incorrectly coded, duplicated, or not allowable under program rules. For example, a claim might be an overpayment if it lacks sufficient documentation to support the medical necessity of a service provided.

Underpayments are also within the scope of RAC reviews, occurring when a provider is paid less than the amount legitimately due. While RACs identify both, their primary financial incentive is tied to the recovery of overpayments.

How Recovery Audits Work

Recovery Audit Contractors employ methodologies to scrutinize healthcare claims and identify potential improper payments. They conduct two main types of reviews: automated and complex. Automated reviews analyze claims data for clear errors not requiring medical record examination, such as duplicate payments or incorrect coding combinations. These reviews are based on clear policies outlined in law, regulations, or guidance.

Complex reviews necessitate a thorough examination of medical records by clinical professionals. These assess medical necessity, verify coding accuracy, and ensure billing compliance. This review type is often triggered when data analysis suggests a potential issue requiring clinical judgment.

RACs concentrate auditing efforts on areas with historically high error rates or significant financial impact. Common areas include inpatient hospital stays, where they might scrutinize the medical necessity of admission or the length of stay. Outpatient services and specific procedures or diagnoses are also frequently targeted for review.

Coding errors, such as upcoding (billing for a more complex service than performed) or incorrect use of modifiers, are another common area of attention. RACs utilize sophisticated data mining tools, analyzing large volumes of claims data to identify patterns and anomalies indicating potential improper payments. This may lead to a more in-depth review.

The Audit Process

A healthcare provider undergoes a structured process during a Recovery Audit Contractor (RAC) audit. The initial step involves notification, often via letter or portal, informing the provider a review is underway. This notification details the audit’s purpose and required documentation.

Following notification, the RAC requests medical records and other supporting documentation. Providers typically have 45 calendar days to submit the information. Failure to respond promptly can lead to an overpayment determination without the provider’s documentation being considered.

Upon receiving documentation, the RAC reviews it to determine if an improper payment occurred. The RAC has 30 to 60 days to conduct this review. If a potential overpayment is identified, a discussion period may be offered before a formal finding. During this period, providers can submit additional information or clarify records.

Subsequently, the provider receives a formal communication of findings, often called a Review Results Letter or Demand Letter. This letter outlines the identified overpayment amount, reasons for the determination, and instructions for repayment or appeal. The identified overpayment then becomes a debt owed to the federal government.

Recoupment of the identified overpayment typically begins shortly after the demand letter if no immediate action is taken. This involves offsetting future payments due to the provider by CMS or the state until the overpayment is recovered.

Responding to an Audit Finding

Upon receiving a formal overpayment demand from a Recovery Audit Contractor, healthcare providers have options. It is important to carefully review the RAC’s determination, including specific reasons and referenced documentation. Understanding the finding’s basis is the first step in formulating a response.

Providers can submit a rebuttal or request a redetermination, the first appeal level. This request is typically submitted to the Medicare Administrative Contractor (MAC) or relevant state agency within 120 days from the demand letter date. Providing additional documentation and clear arguments against the finding are crucial.

If the initial redetermination is unfavorable, providers have further appeal rights. These levels include reconsideration by a Qualified Independent Contractor (QIC) and a hearing before an Administrative Law Judge (ALJ). Each appeal level has its own deadlines and requirements.

Should an overpayment be upheld after exhausting appeal options, or if a provider chooses not to appeal, repayment options are available. These include a lump-sum payment or an extended repayment schedule. Interest may accrue if the overpayment is not repaid in full within 30 days of the initial demand letter. Providers can also request immediate recoupment, where future payments are offset to satisfy the debt.