Health Providers Concerned About Incentive Payments in Government Medicare Audit Program

With the Centers for Medicare & Medicaid Services (CMS) in the early stages of a nationwide rollout of its Recovery Audit Contractor (RAC) program, some health care providers worry that some recovery auditors may reopen claims to boost their own company’s revenues.

Critics say the program, which seeks to identify improper Medicare payments and potential fraud, incentivizes RACs to reopen claims because their contingency fee is paid from the recovered funds.  Don May, vice president of policy for the American Hospital Association, said auditors were paid as much as 20 percent per denied claim during a three-year RAC demonstration program that looked into claims in six states.

“That contingency fee will lead them to be more aggressive in denials than is sometimes appropriate,” May said, adding that hospitals will be the biggest targets of RAC reviews because they file larger claims. Although CMS determined hospitals account for 30 to 40 percent of improper Medicare payments, 95 percent of the claims the audit contractors determined improper during the demonstration program were against hospitals, he said.

“The contingency-based payment gives them (RACs) incentive to go after certain providers with disproportionate zeal,” May said.

Dr. Joseph M. Heyman, board chair for the American Medical Association, was less diplomatic in his assessment of the burden the program and incentive payment model will have on health care providers.

“Medicare’s RAC program is akin to the government hiring bounty hunters,” Heyman said. “Physicians are forced to take time away from their patients in order to validate their billing practices, and many physicians choose to simply repay Medicare even when they feel they are in the right because it is less onerous than spending the time and resources to pull and copy medical records.”

Heyman said instead of expanding the program, Medicare should invest in outreach to physicians to educate them on Medicare’s complex billing process and policies.

Melanie Combs-Dyer, CMS’ senior technical advisor for the Division of Recovery Audit Operations, said that CMS has added new features to the RAC program to allay health care providers’ concerns. An independent contractor also was hired to grade auditors’ performance.

Specifically, RACs can’t open a claim without the agency’s permission and they cannot open any claim paid before October 1, 2007.  RACs also must post the types of claims they plan to review on their websites before reviews begin, which will help health care providers prepare for the audits.

“We think these three keys to success will minimize provider burden,” Combs–Dyer said. 

Auditors will be held accountable in other ways, too.  Combs-Dyer said if a health care provider appeals a claim and wins, the RAC must pay back the contingency fee it earned from the claim. CMS also contracted with Provider Resources Inc. of Erie, Pa., to evaluate the RACs and generate public report card, she said.

“[Provider Resources] will look over the shoulder of the four RACs and produce an accuracy rate each year that CMS will include it its annual RAC report,” she said, adding that the report cards will be posted on CMS’ website.  Overall, a RAC’s accuracy will factor into CMS’ annual decision to renew the auditor’s contract.

Nonetheless, May said the hospital industry is concerned that CMS is implementing the program before some logistical issues have been resolved. And while CMS has limited the number of medical reviews RACs can request from a hospital or physician in a 45 day period, CMS has not limited the number of claims that can be denied in a given period, May said.

But perhaps the biggest concern hospitals have is the contractors’ ability to review “medical necessity” claims. May said CMS should postpone reviews into medical necessity claims until after the rulings have been made on thousands of denied medically necessary claim appeals filed during the RAC demonstration program.

May said the AHA doesn’t believe the RACs have the right incentives or staff to determine if a claim was medically appropriate or provided in the right setting. He added that AHA believes the vast majority of the 102,700 appeals for denied claims filed during the demonstration program are “medical necessity” claims.

“The concern here is when you look at a medical necessity case, there are lots of things that need to be considered and if there’s any gray area at all… there could be some Monday morning quarterbacking,” May said. “There are a lot of cases where the provider may not appeal because of the cost of doing the appeal.”

CMS has recovered over $1 billion in improper Medicare payments through its three-year RAC demonstration program in six states. That total includes nearly $38 million paid back to medical providers when Medicare underpayments were uncovered in the audit process.

Part 1 of the CMS RAC program series can be found here.