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Legislation Puts Recovery Auditing, and Taxpayers, at Risk

By Leslie K. Paige
WasteWatcher, October 2013


Government waste, fraud, and abuse are a scourge on American taxpayers and a multi-billion dollar insult to the federal budget, but preventing improper payments, particularly in Medicare, is now running into roadblocks despite being a rare example of success.  Medicare providers, particularly hospitals, which have for years received billions in improper overpayments, now fully appreciate that new auditing and recovery techniques dramatically inhibit the flow of those overpayments.  More importantly, officials managing an actuarially and fiscally compromised Medicare program now have the ability, motivation, and authority to demand that providers repay those funds.


With the introduction of S. 1012 and H.R. 1250, Congress may be poised to accede to the providers’ demands and eviscerate an effective auditing program that has already recovered $4.5 billion since 2009 in erroneous Medicare payments on behalf of taxpayers.


Government-wide improper payments totaled approximately $108 billion in fiscal year (FY) 2012, with 60 percent of that total, or $68.8 billion, coming from the Department of Health and Human Services (HHS).  The Medicare fee-for-service (FFS) program accounted for $32.4 billion by itself.


The persistence of improper payments in Medicare FFS payments prompted Congress to include language calling for the use of recovery audit contractors (RACs) in the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, the Tax Relief and Health Care Act of 2006, and, most recently, in Patient Protection and Affordable Care Act (PPACA).  RACs not only identify improper payments, they also expose billing system vulnerabilities and patterns that suggest systematic fraud, and help CMS recover the funds to replenish the Medicare Trust Fund.


In FY 2010 and 2011, RACs reviewed 2.6 million claims from 292,000 providers and identified improper payments in half of the claims, or 1.3 million.  The total amount of improper payments was $1.3 billion, and $903 million was either recovered and returned to the Medicare Trust Fund or returned to Medicare providers in the small number of cases where they had under billed for services.


According to the HHS OIG, in FY 2010 and 2011, “Over half (57 percent) of all recovered or returned improper payments resulted from medical services being delivered in inappropriate facilities (32 percent) or providers billing incorrect codes on Medicare claims (25 percent).  Improper payments also resulted from other sources, such as providers billing Medicare for services for deceased beneficiaries.  These improper payments represented less than one-half of one percent of total improper payments recovered or returned in FYs 2010 and 2011.”


Over the years, CMS has instituted various layers of program integrity protections.  There are four types of post-payment review contractors:  Medicare Administrative Contractors, which process and pay claims as quickly as possible and reduce payment errors to the extent possible; Zone Program Integrity Contractors, which investigate potential fraud cases (which are then referred to law enforcement officials for further investigation and prosecution, when appropriate); RACs, which identify improper payments on a post-payment basis and claw the money back; and Comprehensive Error Rate Testing contractors that draw on and analyze a sample of claims nationwide to calculate a national Medicare FFS improper payment rate.


All of the contractors are charged with identifying improper payments, but only RACs are specifically charged with recovery those funds.  RACs are compensated on a contingency basis, based upon the percentage of funds recovered.  RACs conducted five times as many audits as the other three combined.


This cross-section of post-payment claims reviewers operate under different governing rules and regulations and varying deadlines for claims reviews.


Perhaps unsurprisingly, the success of recovery auditors in particular has raised hackles among providers, particularly hospitals, whose claims constituted the vast majority (88 percent) of the overpayments identified by the RACs.  Even though the hospitals were not entitled to the money in the first place, they have called RACs “bounty hunters,” complaining that their contingency fee compensation model pushes them to be exceedingly aggressive in challenging claims.


The hospitals also complain that the documentation and verification required of the hospitals after a claim has been identified as improper are onerous.  Hospital administrators, the American Hospital Association, and rural hospitals have been using enormous resources to conduct an aggressive media and legislative campaign to stifle and gut the RAC program by alleging abuses and overzealous practices.  The anti-RAC coalition has been firmly behind the introduction of S. 1012 and H.R. 1250. Hospitals have falsely and repeatedly claimed that RACs have a very high rate of cases being overturned on appeal.


In fact, RACs have a very low percentage of such cases.   In an August 2013 HHS OIG report, entitled “Medicare Recovery Audit Contractors and CMS’s Action to Address Improper Payments, Referrals of Potential Fraud, and Performance,” the OIG documented that 65,198, or 6 percent of the 1,067,011 claims that were determined to be overpayments were appealed.  Of those 65,198 cases, 44 percent were overturned, which means that the overall rate in comparison to the 1,067,011 total overpayment cases was 3 percent overall for FY 20110 and 2011.  In addition, the four RACs that are currently retained by CMS to perform the work have an accuracy rating of between 90.7 and a 97.4 percent, according to CMS.


Ironically, while RACs are held to rigorous accountability and transparency standards, hospitals and Medicare providers have been much more reluctant historically to publicize their own medical errors.  Dr. Marty Makary, a surgeon at Johns Hopkins Hospital and a developer of the surgical checklists adopted by the World Health Organization wrote in his 2012 book, Unaccountable: What Hospitals Won’t Tell You and How Transparency Can Revolutionize Health Care, that hospitals, by and large, “tend to escape accountability, with excessive complication rates even at institutions that the public trusts as top-notch.”  Makary describes a system in which very few hospitals publish statistics on their performance, even though 98,000 patients die each year in the U.S. as a result of medical errors, according the Institute of Medicine.


RACs have been deemed by Congress to be so critical to the long-term financial health of Medicare programs that the PPACA extended recovery auditing to Medicare Parts C (Medicare Advantage) and D (Prescription Drugs).  The new healthcare law also requires states to implement recovery auditing for Medicaid, which is plagued with the second highest estimated improper payment rate of any federal program currently reporting, making the mandate one of the extremely few worthwhile provisions of the PPACA.  In 2012, CMS estimated that Medicaid made $19.2 billion in improper payments, and the program will be massively expanded under the PPACA.


Many of the providers’ objections to the implementation of recovery auditing were rolled out and fully remediated during the program’s initial two-year demonstration project in six states that lasted from March 2005 to March 2008.  The program was made permanent in the Tax Relief and Health Care Act of 2006 and went nationwide in January 2010.


During the six-state pilot test, RACs uncovered more than $900 million in overpayments and nearly $38 million in underpayments.  CMS tweaked and refined the RAC program to address providers’ concerns related to the appeals process, the timeliness of document requests, and the RACs’ compensation model among other reforms.  CMS also imposed specific regulations on RACs that other post-payment auditors are not required to comply with.


This stricter treatment has been documented by both GAO and the HHS OIG, which agree that RACs are by far the most regulated, transparent, and accountable of any Medicare program integrity contractors.  According to the GAO, “CMS places more limits on the RACs in its requirements for reviews conducted by them than by other contractors.”


RACs are required to limit the number of additional record requests they can make when reviewing a claim, while other CMS contractors have no such limits.  RACs must obtain pre-approval from CMS for every billing issue they want to review and explain their rationale for the analysis, both to CMS and the provider community.  RACs are required to post notifications on their websites of all billing issues they are reviewing and reimburse the providers for any additional records they request (which calls into question providers’ complaints about the onerous administrative burdens they experience when providing the RACs with supplementary medical records).  RACs also must have a registered nurse on staff to oversee claims under review (all other post-payment auditors are required to have a licensed practical nurse).


GAO has recognized that Medicare FFS providers operate within a billing labyrinth that features a dizzying array of statutory deadlines, mandates, and benchmarks which govern CMS’ billing, oversight, and appeals system.  These administrative mandates are especially troublesome to rural hospitals, which operate on thinner margins. GAO concluded that “greater consistency in the claims review requirements across contractors may improve the efficiency of post-payment reviews by strengthening the control environment, lessening providers’ confusion, and reducing administrative burdens… It could also help reduce claims payment error determinations based on providers’ inability or failure to provide documentation in a timely manner.  It might also reduce any inconsistencies in making determinations, which can lead to unneeded appeals, and might increase providers’ confidence that reviews will also be consistent and correct.”


Yet, instead of tightening its own shoddy billing practices and pressuring its regulator, CMS, to modernize, streamline, and clarify its billing practices and appeals procedures, the hospital industry has galvanized its grassroots network across the country to misrepresent, target, and demonize RACs and pressure members of Congress to weaken an effective and successful oversight program.


The Senate recovery audit “reform” bill, S. 1012, was introduced by Sens. Roy Blunt (R-Mo.) and Mark Pryor (D-Ark.).  In the House, Reps. Sam Graves (R-Mo.) and Adam Schiff (D-Calif.) have introduced H.R. 1250, the Medicare Audit Improvement Act of 2013.  The bills’ authors claim that their legislation means to correct glitches in the RAC program, but, if enacted, the bills would have the effect of crippling one of the taxpayers’ most potent and successful tools for squeezing billions in wasteful spending out of Medicare and lengthening the life of the Medicare Trust Fund, which is headed for insolvency by 2024.


Both bills impose additional, unnecessary reporting requirements and penalties on RACs, even though the contractors are already required to be the more transparent and accountable than CMS’s other post-payment auditors.  The bills would also penalize the RACs for overturned determinations.  Yet, since RACs are compensated on a contingency basis, operate at no cost to the taxpayers, and therefore receive no compensation for any decisions that are overturned on appeal, the system is already constructed to self-regulate and minimize errors that could be overturned on appeal.


In response to complaints that the program is burdensome on hospitals, the legislation includes a cap on the number of medical records a RAC may request from a healthcare provider.  However, RACs are the only program integrity contractor already subject to such a cap, which is a mere 2 percent of a hospital’s Medicare claims volume, and the bill would consolidate this 2 percent cap collectively across the other three CMS post-payment audit programs.


Finally, the bills include a provision that would only allow audits when there is an estimated billing error rate of more than 40 percent.  It is difficult to believe that members of Congress would support legislation that allows Medicare providers to continue to bill improperly, so long as they do not exceed a 40 percent error rate.  And, it is highly unlikely that taxpayers would agree to sanction a 60 percent “success” rate, which elsewhere would be considered a failing grade, especially when the government has at its disposal robust tools with a proven track record of tamping down improper payments and preventing Medicare from needlessly hemorrhaging billions of dollars.


Taxpayers can and should expect a higher standard of performance from Medicare providers.  Indeed, there should be no minimum error rate before Medicare auditors are allowed to investigate potential waste, fraud, and abuse.  However well-intended the bills’ sponsors may be in responding to their constituents’ concerns, they are promoting the wrong solution to a problem that does not exist.  Rather than restricting RACs, they should be simplifying and streamlining Medicare’s billing process.  That would lead to fewer improper payments, better healthcare for Medicare patients, and less wasteful spending.

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