Recovery Audit Contractors: What Do They Do & More

One letter, sent out of the blue, can impact your hospital’s revenue, processes and compliance practices. It’s not a pleasant thought but a reality for healthcare providers. They must deal with Recovery Audit Contractors’ (RACs) audit requests.

While these audits can feel like unwelcome intrusions, they serve a critical purpose. They identify and correct improper Medicare and Medicaid payments. Whether you’re new to the RAC program or want to improve your response strategies, it’s essential to understand what RACs do. You should also know the types of audits they conduct and how to turn the process into an opportunity to improve your organization’s revenue cycle.

What is a Recovery Audit Contractor?

A Recovery Audit Contractor is a third-party entity working on behalf of the US Centers for Medicare and Medicaid Services (CMS). They identify and recover improper payments in Medicare transactions between providers and payers. These improper payments are identified via audits, commonly called RAC audits.

RACs were established under the Medicare Modernization Act of 2003. The program later expanded under the Tax Relief and Health Care Act of 2006. It became a permanent part of Medicare and Medicaid’s program integrity efforts.

Note that RACs work specifically within Medicare audits. Some third-party audit organizations perform audits for insurance companies. Those are not referred to as RAC audits.

What Does a Recovery Audit Contractor Do?

These contractors focus on identifying and correcting overpayments, which need to be refunded to CMS. They also target underpayments, which should be reimbursed to providers. Their overarching goal is to reduce waste, fraud and abuse within these government-funded programs.

CMS defines improper payments as “payments that do not meet program requirements.” This may conjure up images of nefarious fraud or system abuse. Yet, most improper payments stem from everyday human error or insufficient documentation.

It’s common knowledge that RACs tend to find more overpayments than underpayments. In 2020, RACs found $265 million in overpayments granted to providers from CMS. In the same year, they found just $19 million in underpayments. Such is life. This statistic hammers home the importance of conducting proper audits with all necessary documentation to avoid errors in the first place. 

How Does the Current RAC Model Cover the Country?

The RAC program is divided into four regions across the United States, each assigned to a specific contractor. These contractors review Medicare Part A and B claims to ensure compliance and proper payment. The program also includes specialized audits for Medicaid claims, focusing on state-specific issues.

There is also a “fifth” region. It covers the entire nation and conducts audits for specific categories of claims. These include Medicare Durable Medical Equipment, Prosthetics, Orthotics and Supplies (DMEPOS), Home Health Agency (HHA) and Hospice.

Auditors bid to conduct business in a specific region. If they are successful, they receive the right to conduct Medicare Part A and B claim reviews within that region. There is only one RAC for each region, but one RAC may “own” more than one region (i.e., operate in Regions 2 and 3 concurrently).  

What Types of Audits Do RACs Conduct? Automated vs. Complex

RACs conduct two primary types of audits: automated and complex. Automated audits are typically faster and more cost-effective. Complex audits need more in-depth analysis and provider interaction.

• Automated Audits: These involve data analysis to identify obvious errors. They look for duplicate claims or billing inconsistencies without medical record review. Disputes are often based on noncompliance with legal guidelines and public policy. 
• Complex Audits: These audits almost always involve a detailed review of medical records. The aim is to validate the appropriateness of claims, such as verifying medical necessity or coding accuracy. 

What Do Recovery Audit Contractors Look For?

RACs identify improper payments by scrutinizing claims data, billing practices, and provider documentation for errors. The number of mistakes varies year over year. In 2014, RACs flagged 12.7% of payments as improper; in 2021, that number dropped to 6.26%.

Common Errors Detected

RACs frequently uncover the following errors:

• Incorrect coding: Claims submitted with incorrect procedure or diagnosis codes. 
• Medical necessity errors: Claims for services that were not medically necessary.
• Duplicate claims: Claims submitted multiple times for the same service.
• Insufficient documentation: Missing or incomplete records to support billed services.

Focus Areas

RACs do not generally audit at random. Instead, they usually focus their investigations where improper payments are more likely to occur, such as:

• Durable Medical Equipment (DME) claims.
• High-cost services and procedures.
• Short inpatient stays.
• Outpatient therapy services.

CMS requires RACs to submit their areas of focus for approval. Once approved, RACs

post their areas of focus on their website for all providers to view. Audit response teams must stay updated on RAC audit focus areas, as these priorities may shift over time based on CMS directives.

A History of Recovery Audit Contractors

The RAC program is relatively new, having only started up in 2005. Since then, it has changed but is considered an overall success by CMS, which keeps the program running today.  

The Origins of Recovery Audit Contractors: 2005-2010

In March 2005, CMS kicked off a three-year demo period for RAC, then called the Medicare Fee-For-Service Recovery Audit program. Initially, only three states with large Medicare populations participated in the program. These initial states were California, Florida and Texas. Within a year, RACs identified over $50 million in overpayments to return to CMS.

The program was widely considered a success. It soon expanded to other states before becoming permanent in 2006, including all 50 states in 2010.

2010-2018: A Slow-Down on RAC Audits

Compared to the 2000s, CMS became much less aggressive in conducting RAC audits in the 2010s. There are conflicting anecdotes and explanations as to why. Yet, an answer may lie in the inherent conflict between the Affordable Care Act and the audit process.

On one hand, the ACA puts money into the system, giving people insurance and access to care. On the other hand, aggressive RAC audits turned around and took money out of the health system. CMS needed to rebalance the role of audits. They've become inconsistent with larger healthcare goals and the government's role in the healthcare process.

This is one of several theories in the healthcare space. But whatever the case, CMS noticeably backed down on RAC audit frequency and document requests between 2010 and 2018.

The New Era of RAC Audits: 2018-Present Day

CMS relaunched the RAC audit program in 2018 with new rules and guidelines for audits. The biggest change was to reduce the number of documents a Recovery Audit Contractor could request in a certain time frame. This meant fewer audits with fewer document requests per audit.

Another significant change was the increase in CMS’s willingness to engage in mass settlements. The backlog in the appeals process became overwhelming. CMS began to settle appeals without ALJ (Administrative Law Judge) involvement. Without a clear time frame on when their appeal would even be examined, many hospitals took the settlement. This helped clear the clogged backlog.

With these key changes in place, RAC audits started back up with less chaos than in the years leading up to 2010. These audits ran business as usual before pausing in March 2020 due to the COVID-19 pandemic. After a brief break, RAC audits began again in August 2020 and continue today.

How Can Office Ally’s Solutions Help with RACs

Unfortunately, many providers still rely on paper records and faxes to submit audit responses. These methods  are ripe for human error and invite RACs to intervene. Providers must establish a clearly defined audit management process. It should ensure they meet all the auditor’s requirements for documentation and control their appeal rights. 

Moving forward, smart hospitals and audit response teams should turn to high-tech software solutions to make it happen.

Office Ally’s Audit & Denial Tracker is designed to support hospitals and practices. We help manage their revenue cycle and prepare for potential audits. Here are just a few of the ways Audit & Denial Tracker can enhance your audit response process:

• Analytics and Reporting: Advanced analytics in Audit & Denial Tracker can identify patterns and potential vulnerabilities in billing practices. This allows providers to address issues proactively before they escalate.
• Compliance Support: Audit & Denial Tracker is designed with CMS guidelines in mind. We help providers adhere to regulations and reduce audit risk. Our team of experts consistently updates the software to meet new requirements.
• Workflow Optimization: By automating routine processes and flagging potential issues, Audit & Denial Tracker saves time and resources. We allow staff to focus on patient care instead of administrative burdens.

Recovery Audit Contractors may seem like just another hurdle in healthcare billing. Still, they are critical in ensuring fairness and accuracy within the Medicare and Medicaid systems. Think of RACs as financial wellness checks for your practice. They may not always be fun, but they’re necessary to keep your revenue cycle healthy and compliant. 

Leveraging Audit & Denial Tracker can reduce the financial and operational impact of RAC audits. By going digital, your team can stay ahead of audits, reduce errors and turn potential headaches into seamless workflows. 

Contact Office Ally to learn more about Audit & Denial Tracker to help manage RACs with ease.