Recovery Audit Contractors: Not Just an Experiment Anymore

May 12, 2008


The Medicare Modernization Act of 2003 requires the Centers for Medicare and Medicaid Services (CMS) to perform a pilot test of Recovery Audit Contractors (RACs), which helps recover what has been estimated as $10.8 billion in Medicare overpayments and underpayments each year. This initiative started as a three-year demonstration project in California, Florida, and New York–and, as a result of its success, the project is currently being expanded. Through the program, the contracting companies (i.e., RACs) are paid a contingency fee to detect both overpayments and underpayments.

The three-year demonstration project was a success:

$357.2 million in overpayments were collected

-$14.3 million in underpayments were corrected

-$17.8 million was overturned by appeal

-$77.7 million was paid out as overhead and contingency fees

Total $247.4 million returned to the Medicare Trust Fund*

An overwhelming majority of the overpayments found by RACs during the demonstration project were from hospitals: only 3% of overpayments came from physician practices. However, the demonstration project did not allow RACs to review Evaluation and Management (E/M) services, which may, in part, account for the tiny amount of physician overpayment found. Almost half of the improper payments were attributed to incorrect coding, 32% for medically unnecessary service or setting, and 9% to no or insufficient documentation.

Although CMS reports that only 5% of determinations were overturned on appeal, only 11.3% of the RAC determinations were appealed. Though the number of appeals was small, 44.2% of the appealed claims were decided in the provider's favor.

The project did not escape significant complaints from providers. The letters sent out to physician practices requesting records were initially vague and sometimes a bit threatening. Hopefully, through cooperation with the AMA, these letters have been corrected. Physicians sometimes find it difficult to associate the requested information with the original claim. CMS says that they are trying to correct this as well. The number of records requested has been burdensome to practices. Future RAC processes will include limits of records per period of time; however, those actual numbers are as yet unknown.

Due to the success of the demonstration project, the RAC program is being expanded nationally and will be phased in over two years. The first RACs started in March 2008 for:

New Hampshire
New Mexico
New York
North Dakota
Rhode Island
South Carolina
South Dakota

In addition, RACs have been instructed to begin reviewing E/M codes, though some are expected to delay this until the rest of their programs are up and running.

The AANPA is pleased to provide information about this initiative and is committed to assisting members to make compliance and participation as simple as possible. Suggestions for AANPA members include:

  • Be aware of the RACs in your area. Alert your office personnel to expect letters for record requests and be sure they are from your official contractor.
  • Strongly consider appealing any overpayments if you disagree with the determination! Though Medicare does not expect the high 44.2% of overturned determinations as in the demonstration project, by not appealing you might be leaving money at the table.
  • CMS will send notices when RACs find large numbers of errors in specific coding areas. The information about proper coding will be provided through the Medicare Learning Network. You can subscribe to announcements of these articles at the following link on the CMS website.
  • If you're having a particular problem with your RAC—or with the audit program in general—let us know. Contact Corinn Sagsveen at

Click here to view the complete CMS RAC Demonstration Project Report