What Is a Recovery Audit Contractor?

Recovery Audit Contractors (RACs) are third-party entities contracted by the Centers for Medicare & Medicaid Services (CMS). Their primary function involves identifying and recovering improper payments, which can include both overpayments made to healthcare providers and underpayments. This program helps maintain the financial integrity of the Medicare and Medicaid Trust Funds by ensuring payments align with established rules and guidelines.

Understanding Recovery Audit Contractors

Recovery Audit Contractors are private companies operating under agreements with CMS. The RAC program was established by legislation to identify improper payments, becoming a permanent component of Medicare’s integrity efforts. It later expanded to include Medicaid and Medicare Parts C and D.

The objective of the RAC program is to protect the Medicare Trust Fund by identifying and correcting improper payments. Improper payments encompass a range of issues, not solely fraud, often resulting from human error or insufficient documentation. Overpayments occur when healthcare providers receive funds for services that were not medically necessary, were incorrectly coded, or were duplicated. Conversely, underpayments happen when providers are reimbursed less than they should have been due to billing or clerical errors, or when a more complex procedure was performed than initially billed.

RACs operate as independent contractors. While their primary focus is often on recovering overpayments, they are also tasked with identifying underpayments to ensure providers receive appropriate compensation.

Areas of Audit Focus

Recovery Audit Contractors focus their reviews on specific types of errors and claims to identify improper payments. They scrutinize claims data, billing practices, and provider documentation for various discrepancies. Three primary categories of improper payments are the focus of RAC audits.

Medical necessity errors involve services not deemed necessary according to Medicare guidelines. RACs assess whether the billed services met the criteria for medical necessity based on the patient’s condition. Services that are not reasonably necessary or are for non-covered services can trigger an audit.

Coding errors involve incorrect medical coding leading to overpayment or underpayment. This can include “upcoding,” which is billing for a more expensive service than performed, or “unbundling,” which involves billing separately for services that should be grouped together. RACs also look for duplicate payments, which occur when claims are submitted multiple times for the same service.

Billing errors encompass administrative mistakes, such as incorrect patient responsibility or other payment discrepancies. Insufficient documentation is a common issue, where missing or incomplete records fail to support the billed services. These errors, while often unintentional, can still result in improper payments.

RAC audits encompass a wide array of healthcare providers and claim types. Hospitals, physician practices, skilled nursing facilities, home health agencies, and durable medical equipment suppliers are all subject to these reviews. RACs review both inpatient and outpatient claims.

The Recovery Audit Process

The Recovery Audit Contractor process involves a structured approach to identifying improper payments. RACs employ a two-pronged review method: automated and complex reviews. This systematic process helps ensure consistent compliance with billing requirements and documentation rules.

Automated reviews occur at the system level and involve data analysis to identify potential improper payments without requiring medical records. RACs use proprietary software and algorithms to detect clear policy violations or unusual billing patterns. These reviews are typically based on clear policies outlined in law, regulations, or guidance. If an automated review identifies an improper payment, a demand letter may be issued directly to the provider.

If an automated review flags an issue, or if the RAC identifies a complex issue, they may initiate a complex review. This stage requires a qualified individual, such as a licensed medical professional or certified coding specialist, to evaluate medical records. The RAC will issue an Additional Documentation Request (ADR) to the provider, asking for the necessary medical records and supporting documentation. Providers typically have 45 days to respond to these requests, though extensions can be sought.

Upon receiving the requested documentation, the RAC reviews the submitted medical records. This review determines whether an overpayment or underpayment occurred, assessing medical necessity and proper documentation. The RAC’s findings are then communicated to the provider. If an overpayment is identified, this communication includes a demand for repayment.

How Recovery Audit Contractors are Paid

Recovery Audit Contractors operate on a contingency fee basis, meaning their compensation is directly linked to the improper payments they identify and correct. They receive a percentage of the overpayments they successfully identify and collect from providers.

While the primary focus is on overpayments, RACs also receive a percentage for underpayments they identify, ensuring providers are reimbursed correctly. The specific contingency fee rates are negotiated when CMS awards the contracts. These base contingency fees have historically ranged from approximately 9.0% to 12.5% for most claim types, with higher rates for durable medical equipment claims.