January 12, 2005

CMS Announces Start of Recovery Audit Contractor Initiative

Holland & Knight Alert
Michael R. Manthei

CMS has posted a bulletin on its Recovery Audit Contract (RAC) Initiative demonstration project. RACs are private companies that will contract with CMS to conduct analyses and audits of claims beyond those conducted by the Medicare Administrative Contractors (MACs) (formerly, Carriers and Fiscal Intermediaries). The RAC initiative was authorized by s. 306 of the Medicare Prescription Drug, Improvement and Modernization Act [Pub. L. 108-173] (MMA) to demonstrate the use of RACs as a cost-effective means of identifying additional over/underpayments and recouping overpayments from providers, suppliers and physicians.

The demonstration project will start as a pilot program in California, Florida and New York, the states with the highest Medicare expenditures. CMS expects to award RAC contracts early this year, with audits anticipated to begin in May 2005. Each pilot state will have one RAC for non-Medicare Secondary Payer (MSP) overpayment audit/recovery and one RAC (potentially the same) for MSP overpayment recovery. Current MACs are not eligible to become RACs. RACs will not be permitted to determine cost report over/underpayments, only claims over/ underpayments.

The RAC audits are intended to supplement, not to supplant the traditional MAC audits. Accordingly, claims reviewed by RACs must have been submitted to the MAC at least a year before the audit to insure that the regular review process has been completed. RACs must follow established national coverage policies and local coverage determinations that have been approved by the MACs.

Notably, RACs will be paid based on a percentage of overpayments recovered. Providers will be permitted to appeal RAC determinations to their MAC and then through the normal overpayment appeals process. Recovery through a RAC audit does not preclude further investigation by OIG or other enforcement authorities of potential fraud and false claims. CMS indicates that identified underpayments will be processed by the MAC for payment to the providers.

The demonstration project is anticipated to last three years. CMS will evaluate the program before extending it to other states.

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