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Medical Coding News Archives

RAC Program Identifies $371.5 Million in Improper Medicare Payments

March 11, 2008:
On February 28, the Centers for Medicare and Medicaid Services (CMS) announced that the Recovery Audit Contractor (RAC) program identified $371.5 million in improper Medicare payments in just three states in 2007.

The overpayments collected during fiscal 2007 were $124.6 million in Florida; $120.1 million in California; and $112.5 million in New York. Overpayments collected by error type:
$143.2 million due to incorrectly coded records
$111.5 million due to medically unnecessary services
$30.3 million due to no or insufficient documentation
$59.0 million due to other reasons (e.g., duplicate claims, double billing)

The RAC demonstration program has recovered a significant amount of improper Medicare payments. According to CMS, in fiscal 2007 the RAC program realized a 318 percent return on investment and spent only 22 cents per dollar collected. CMS intends to implement the nationwide RAC program after the end of the demonstration program in March 2008.

The three-year RAC demonstration program was mandated by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA), to find and correct improper Medicare payments paid to health care providers. The program started in California, Florida, and New York in 2005; these states have the largest number of Medicare claims. In 2007 the program expanded to include Massachusetts, South Carolina, and Arizona. The Tax Relief and Healthcare Act of 2006 made the RAC program permanent and required a nationwide RAC program by 2010.

Under the demonstration program, the RACs are paid based on the amount of the improper payments they collect. There is some concern that paying RACs a contingency fee may influence their judgment; however, CMS believes that the contingency-fee based payment system correctly aligns incentives between providers, CMS, and the RACs. Although information on the contingency fees is proprietary and is therefore not disclosed, CMS reports paying more than $71 million in RAC contingency fees for 2007.

The majority of the improper payments were a result of providers’ billing for incorrectly coded services such as miscoding principal diagnosis and DRG, or coding one procedure when the medical record indicates that a different procedure was provided; services that did not meet Medicare’s medical necessity criteria; and duplicate billing of services.

Overpayments by error type:
42% - Incorrectly coded
32% - Medically unnecessary service or setting
17% - Other
9% - No/insufficient documentation

More than 85 percent of the overpayment amounts in 2007 were collected from inpatient hospital providers. Because RACs are paid on a contingency fee basis, it is not surprising that their reviews would focus on inpatient hospital claims, which are high-dollar claims that offer the greatest return.

Service-specific improper payment examples:
  • Excisional debridement coded as 86.22 instead of as 82.26
  • Principal diagnosis on the claim not matching the principal diagnosis in the medical record
  • IRF services following joint replacement surgery medically unnecessary for the inpatient setting
  • Billing for multiple colonoscopies (45355, 45378, 45380, 45383, 45384, and 45385) for the same beneficiary the same day
RACs may not develop or apply their own coverage, coding, or billing policies but rather they must follow Medicare policies. RACs, like Medicare claims processing contractors, use medical personnel such as nurses, to review claims and each RAC has a physician medical director to oversee the medical record review process. Although certified coders were not required in the demonstration program; each RAC in the permanent program must have certified coders.

To ensure the RACs were making accurate claim determinations, CMS contracted with an independent third-party reviewer (RAC validation contractor), to review a random sample of overpayment claims from each RAC.

The RAC demonstration contracts expire in March 2008 and in the spring of 2008, CMS will announce the names of the companies chosen to be the permanent RACs for four regions.

Sarah A. Serling, CPC, CPC-H, CPC-I, CCS-P, CCS
Clinical/Technical Editor


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