CMS Pilot Program Saves Nearly $700 Million in Improper Medicare Payments

On July 11, the Centers for Medicare and Medicaid Services (CMS) released a new report announcing the results of the recovery audit contractors (RACs) pilot program in identifying improper payments. The findings also will help the agency improve the program as it is expanded nationwide within 2 years, officials said.

The evaluation report showed that $693.6 million in improper Medicare payments was returned to the Medicare Trust Funds between 2005 and March 2008. The funds returned to the Medicare Trust Funds occurred after taking into account the dollars repaid to health care providers, the money overturned on appeal and the costs of operating the RAC demonstration program.

Of the overpayments, 85% were collected from inpatient hospital providers, and the other principal collections were 6% from inpatient rehabilitation facilities, and 4% from outpatient hospital providers.

The program, designed to protect the Medicare Trust Funds and beneficiaries from improper payments, began in California, Florida and New York in 2005 and in July 2007 expanded to Arizona, Massachusetts and South Carolina.

Expansion process

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CMS has begun the expansion process by initiating a competition for four permanent RACs after the pilot program ended in March 2008. CMS also has developed a strategy to ensure that the RAC program does not interfere with the transition from the existing Medicare claims processing contractors to the new claims processors, called Medicare Administrative Contractors (MACs). This will allow the new MACs to focus on claims processing activities before working with the RACs, according to a report evaluating the RAC pilot program issued by CMS.

When a new RAC begins to issue its first overpayment notification letters, it will be limited to “black-and-white” billing issues, such as duplicate claims and wrong fee schedule amounts.

“Because of the success of the recovery audit contractor pilot, Congress has made the program permanent and required its expansion throughout the country,” Kerry Weems, acting CMS administrator, said in a press release. “The RAC pilot helped us refine and plan the implementation of the future, permanent national program.”

The RACs corrected more than $1 billion of Medicare improper payments from 2005 through March 27. Roughly 96% of the improper payments ($992.7 million) were overpayments collected from providers, while the remaining 4 % ($37.8 million) were underpayments repaid to providers.

Of the $1 billion in improper payment determinations by the RACs, providers chose to appeal only 14% of the RAC decisions. Of all the RAC overpayment determinations, only 4.6% were overturned on appeal. Throughout the demonstration, the RAC program has cost only 20 cents for each dollar collected.

Financial impact

The evaluation report found that the RAC program has had a limited financial impact on most providers. For example, in fiscal years 2006-2008, more than 84% of hospitals in California, Florida and South Carolina had their Medicare revenue impacted by less than 2.5%, while in New York and Massachusetts more than 94% of hospitals had their Medicare revenue impacted by less than 2.5%.

“A key part of the future recovery audit contractor program will be to contract with a RAC validation contractor to conduct independent third-party reviews of RAC claim determinations;” Weems said. “Other changes will include limiting the claim review look-back period to 3 years, requiring each RAC to hire a medical director, and conducting significant outreach to providers. These and other program improvements are a direct result of lessons learned from the pilot program.”

Medicare processes more than 1.2 billion Medicare claims annually, submitted by more than one million health care providers. Errors in claims submitted by these health care providers for services provided to Medicare beneficiaries can account for billions of dollars in improper payments each year.

Most of the improper payments that the RACs identified occurred when health care providers submitted claims that did not comply with Medicare’s coverage or coding rules. The types of inadvertent errors leading to improper payments, found by the RACs include billing for a procedure multiple times, incorrectly coded procedures, and submission of duplicate claims resulting in two payments to a provider.

The permanent RAC demonstration is a key tool that CMS will use to ensure that payments to health care providers are accurate and proper and that the number of errors in Medicare claims continues to decline. Medicare calculates the error rate – the amount of incorrect claims submitted by health care providers – as part of the Comprehensive Error Rate Testing program.

Since CMS began the program, the error rate dropped from 14.2% in 1996 to 3.9% in 2007. This decline in improper payments reflects CMS’ efforts to target erroneous claims processing, inaccurate billing and errors by health care providers.

For more information, read the evaluation report and visit the Web site at

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