RAC’ing in the Cash: Controversy Over Medicare’s Recovery Audit Contractor Program

In 2006, Congress passed the Tax Relief and Health Care Act, which authorized the implementation of a nationwide Recovery Audit Contractor (“RAC”) program. [1] The RAC program has been in full effect nationwide since 2010, and governs over reimbursement procedures related to Medicare Parts A and B. [2] The goal of this program is to fight fraud, waste, and abuse by identifying improper payments made on claims for services provided by Medicare beneficiaries. [3] Improper payments are deemed primarily to be overpayments or underpayments. [4] For example, an overpayment occurs when healthcare providers submit claims that do not meet the Center for Medicare and Medicaid Services (“CMS”) coding policies, which leads to over-reimbursement for the services actually rendered. [5] An underpayment occurs when healthcare providers submit a claim for a simple procedure but medical records reveal a more complex procedure was actually preformed. [6] The idea behind implementing the RAC program is that healthcare providers must be diligent in their coding and billing practices or risk potentially expensive RAC audits.

The process for RAC audits is relatively straightforward. The CMS must approve specific Medicare Severity Diagnosis Related Groups (“MS-DRGs”), which the RACs are then authorized to audit. [7] The RAC then uses self-designed proprietary software to identify companies or individuals whose billing for Medicare services trend higher than the majority of providers and suppliers in their area. [8] Once these providers have been identified, RACs request medical records from those providers and begin a complex review of their reimbursement claims. [9] If medical records and other auditing procedures identify an incorrect payment, the RAC will request refunds with accrued interest. [10] Healthcare providers are typically allowed to resubmit a new claim for services rendered under the correct CMS code, but they must do so within a year of the care being provided. [11] When RACs successfully recoup Medicare payments from healthcare providers, they keep some of the money (paid on a contingency fee basis) and the rest they submit to the CMS who forwards the money to a specially created Medicare Trust Fund. [12]

Not surprisingly, the RAC program has been met with fierce opposition, particularly from healthcare providers. Healthcare providers' concerns may be well founded, as they have advanced a number of compelling arguments. First, RACs are paid on a contingency fee basis meaning they get paid based on how much money they recoup from healthcare providers. [13] This gives RACs a huge incentive to be zealous in their auditing efforts. This is particularly problematic when considering inpatient versus outpatient classifications. Because the definitions of inpatient and outpatient categories overlap somewhat, it is tempting for RACs to deny reimbursement by saying the classification made by healthcare providers was incorrect, when in fact significant uncertainty exists over the “proper” classification. [14] Second, CMS coding standards are extremely complex and constantly changing, and not every medical condition has a specific CMS code. [15] Physicians who make a good faith effort to navigate this CMS coding conundrum may still be penalized if the RAC auditor concludes coding was inaccurate. Third, even underpayments result in fines! [16] For example, a healthcare provider might perform what they believe is a simple procedure and bill accordingly for $200. A RAC auditor might review this claim and decide that it was actually a more complex procedure that should have been billed at $1000. Although the provider “under-coded” and received only a $200 reimbursement for a $1000 procedure, the RACs would still fine the healthcare provider for billing fraud. Fourth, because RACs can audit healthcare providers for up to three years, the provider may not be able to re-submit a new claim if their original claim was deemed improper. [17] For example, say a patient is in the hospital and admitted as an inpatient. The hospital submits the claim and is paid for inpatient care. If a later audit finds that inpatient status was medically unnecessary, the hospital can only submit the claim for outpatient reimbursement if the claim was paid within the preceding year. [18] If the claim was paid over a year ago, then the provider cannot resubmit the claim for outpatient care and is left with no recourse for reimbursement.

As it stands today, RACs are authorized to audit over 500 of 746 possible MS-DRGs, and that number is growing. [19] Lawmakers have also expanded the total number of documents that auditors can request from healthcare providers. [20] Further, the RAC program has moved forward with an expansion to include parts C and D of Medicare, and the Medicaid program. [21] With these considerations in mind, it is clear that the RAC program will be an increasingly significant hurdle for healthcare providers to navigate.

Table 1: Recovery Audit Program Corrections (in Millions)


FY 2010

FY 2011

FY 2012

FY 2013 Through June 30, 2013

Overpayments Collected





Underpayments Returned





Total Correction





Source: CMS



[1] Recovery Audit Contractor (RAC) FAQs, Am. Coll. of Emergency Physicians,http://www.acep.org/Clinical---Practice-Management/Recovery-Audit-Contractor-(RAC)-FAQs/ (last visited Mar. 25, 2014). [Hereinafter RAC FAQs]

[2] Id.

[3] Id.

[4] Id.

[5] Id.

[6] Id.

[7] Richard Lewis, RAC Attack: How Can Hospitals Guard Against Medicare Reimbursement Loss?, Moss-Adams MAnow Health Care (Oct. 2010),http://www.mossadams.com/mossadams/media/Documents/Publications/Health%20Care/MA-Now_HCG_Oct10.pdf?ext=.pdf.

[8] RAC FAQs, supra.

[9] Id.

[10] Id.

[11] Jillian Bower, CMS RAC Audits: Complex Review Issues, Strategic Management Services (Sept. 2010), http://www.compliance.com/government-auditors/rac-complex-review-target-audit-issues/.

[12] Lewis, supra.

[13] Id.

[14] Jessica L. Gustafson, Billing For and Appealing Denials of Inpatient Hospital Services, American Bar Association Health Law Section (Dec. 2013), at 1.   

[15] Bower, supra.

[16] RAC FAQs, supra.

[17] Emily Egan, Primer: Recovery Audit Contractor Program and the “Two Midnight” Rule, American Action Forum (Dec. 11, 2013),http://americanactionforum.org/research/primer-recovery-audit-contractor-program-and-the-two-midnight-rule

[18] Id. 

[19] Lewis, supra.

[20] Id.

[21] Abby Pendleton & Jessica L. Gustafson, The Future of the Recovery Audit Contractor Program, American Bar Association Health Law Section, (Aug. 2011),http://www.americanbar.org/newsletter/publications/aba_health_esource_home/aba_health_law_esource_1108_pendleton.html.