RACs: Medicare's bounty hunters on the prowl

Legally Speaking

Rob Portman

Rob Portman is a health care attorney with Powers Pyles Sutter & Verville in Washington, D.C., and serves as General Counsel for the AAD and AADA.

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Recovery Audit Contractors, or “RACs,” seek out Medicare overpayments and are paid a percentage of everything they collect. This gives them a powerful incentive to find as many overpayments as possible, and many have dubbed RACs the bounty hunters of the Medicare program. RACs have thus far focused primarily on institutional providers, such as hospitals, but they have begun to audit physicians too. The RAC program is a central component of the government’s drive to reduce Medicare expenditures, so a shift in focus to physicians is inevitable. Dermatologists should educate themselves about the program so they can respond appropriately if and when a RAC comes calling.

Overview of the RACs

RACs are private companies hired by the government to identify and correct past overpayments and underpayments made to healthcare providers. The RAC program began as a demonstration project in six states and is now nationwide. The RAC demonstration project was widely criticized based on some RACs mishandling audits, losing documentation, and misapplying Medicare payment policies.

The permanent program has been redesigned to avoid some of these issues. Now, all RACs must have a physician medical director, but, in practice, most claims will be reviewed by a non-physician. RACs must obtain approval from a centralized New Issue Review Board before targeting a particular issue. Although the Centers for Medicare and Medicaid Services (CMS) instituted limits on the number of records that a RAC may request, those limits are quite high. Permanent RACs are also paid to identify underpayments to providers, but, not surprisingly, most of their focus is on finding overpayments.

There are four RACs, each operating in a distinct geographic region. Region A is overseen by Diversified Collection Services (also known as DCS) and covers from Maryland north to Maine. Region B is under the jurisdiction of CGI Technologies and Solutions, Inc. (CGI) and includes the Midwestern states that border the Great Lakes, plus Kentucky. Connolly Consulting is the RAC for Region C, covering the area bounded on the east by West Virginia to Florida, on the north by Tennessee, Arkansas, and Oklahoma, on the west by Colorado and New Mexico, plus Puerto Rico, and the U.S. Virgin Islands. HealthDataInsights oversees RAC activities in Region D, which includes the remaining western and northern mountain states plus Alaska, Hawaii, and the Pacific territories.

The RAC program is self-funding — each RAC is paid a contingency fee for each improper payment identified. Contingency fees are paid to RACs both for recovering overpayments and underpayments. If a RAC’s overpayment determination is overturned at any level of appeal, the RAC must return the contingency fee. The contingency fees are quite high, ranging from 9.5 percent to 12.5 percent. If a RAC does not find improper payments, it does not get paid, and so RACs are incentivized, by design, to find as many incorrect payments as possible.[pagebreak]

RAC audit procedures

RACs have two audit methods: automated and complex. Automated review is designed to catch straightforward payment errors that can be identified solely by analyzing claims data. It does not involve human review of medical records. On the other hand, complex review requires manual review of medical records or related documentation to determine if a payment error exists. Under complex audits, the review is conducted by medical personnel such as nurses, therapists, and certified coders, with a physician medical director overseeing the process.

A complex review is initiated with an Additional Documentation Request (ADR), which is usually a request for medical records for one or more claims. CMS has instituted limits on the number of medical records that may be requested. For 2011, the limits summarized in the chart below were in place for physicians and non-physician practitioners.

The limits are based on the treating physician or non-physician practitioner’s billing Tax Identification Number (TIN), as well as the first three positions of the ZIP code where that physician/non-physician practitioner is physically located. Thus, if a physician group has a satellite office that shares the same TIN but is in a ZIP code that does not have the same first three digits as the main office, the satellite office will be subject to its own ADR limit. This is most likely to be the case for physician groups with offices near a state line, with a satellite office in the neighboring state. Revised limits have not yet been issued for 2012.

CMS has also limited the timeframe for auditing claims. RACs may only audit claims within the first three years following initial payment. This three-year period is commonly referred to as the “look-back period.”

Physicians and other health care providers must respond to an ADR by submitting the requested documents within 45 days. The RAC must issue a decision within 60 days after receipt of the medical records. The physician is notified of the results of a complex review through a review results letter, with any demand letter to follow. For automated reviews, the only notification will be a demand letter. As of January 2012, Medicare Administrative Contractors (“MACs,” which process and pay claims) will be responsible for sending demand letters and seeking repayment of overpayments identified by RACs. [pagebreak]

Physician/dermatologist issues

To date, all four RACs are conducting automated reviews of physician claims for the following issues: duplicate claims, untimed codes (meaning that for codes that are not billed by time, the unit “1” should be entered for a date of service), and add-on codes paid without the required primary procedure. In addition, multiple RACs are reviewing other issues that may affect physicians, such as place of service identifiers, global-vs.-separate technical/professional component billing, and claims for services to patients identified as “new” who are not actually new patients.

The Region D RAC has also been approved to review pathology services related to Mohs surgery, which has the potential to impact dermatologists. Frequently, the RACs have imitated each other, with one or two RACs getting the initial approval and opening the doors to “copy cat” issues from the other RACs. Therefore, it would not be unusual for the other three RACs to add the Mohs surgery pathology issue to their lists at some point in the future.

New issues for review are posted on each RAC’s website. (Contact information for each RAC is available at https://www.cms.gov/Recovery-Audit-Program/01_Overview.asp.) Dermatologists should periodically check for new issues that may impact their services and patients. Preparation is the key to handling RAC audits. Only through awareness of the RACs’ activities will physicians be able to prepare without over-committing resources.[pagebreak]

Appeals and 'discussion’

A physician is entitled to appeal a RAC denial. Upon receipt of a RAC demand letter, a provider has access to the full administrative appeals process that is available for any other claim denial. The appeal begins with a redetermination filed with the MAC within 120 days of receiving the RAC demand letter. If the MAC affirms the denial, a physician may appeal to a Qualified Independent Contractor, which includes review by a physician, and then to an Administrative Law Judge, the Medicare Appeals Council, and federal court.

The RAC program also provides a “discussion period” with the RAC within the first 40 days following receipt of either (1) the demand letter for automated reviews or (2) the review results letter for complex reviews. The discussion period is an opportunity to provide additional information to the RAC. It also permits the RAC to further explain the rationale for the overpayment decision. After reviewing any additional documentation submitted, the RAC could reverse its decision. A letter will go to the provider detailing the outcome of the discussion period.

It is critical for physicians and other providers to remember that the discussion period is not part of the formal appeal process. The discussion period runs concurrently with the time period for filing an appeal, and so a physician may have to appeal while the discussion period is still pending. A MAC will dismiss an appeal that is filed after the deadline has passed, even if the provider is still in discussions with the RAC.


The nationwide RAC program has been operating for more than a year, and it appears to be avoiding many of the pitfalls and difficulties of the demonstration project. Physicians were largely spared under the demonstration program but have since become more of a focus for the permanent RACs. Physicians will likely come under even more scrutiny as RACs cast their nets more widely in search of contingency fees.

One key to avoiding most RAC denials, as with Medicare audits generally, is documentation. Clearly, a physician must follow all Medicare payment and coding requirements. Beyond that, however, the services must be documented in a way that supports payment and can be understood by a third party. Medical records should be complete, legible, and explain the medical necessity of the services. Implementing strong documentation procedures before a RAC comes knocking is the best way to ensure a positive outcome from a RAC audit.

AADA RAC resources

In response to member needs, the American Academy of Dermatology Association has created the RAC Audit Survival Toolkit, which offers expert advice from the Coding and Reimbursement Task Force and practice management staff. It features information on the most frequently asked questions from dermatologists in an easily navigable Q and A format, a thorough background on the RAC audit process, and contact information for the Academy’s expert practice management staff.

The toolkit is available at www.aad.org/member-tools-and-benefits/practice-management-resources/coding-and-reimbursement/medicare-rac-audit-information-center/.



AADA RAC resources
AADA RAC resources