The agency responsible for administering Medicare is the Centers for Medicare and Medicaid Services (CMS) at the Department of Health and Human Services (HHS). Recovery Audit Contractors (RACs) in Medicare

In the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA, P.L. The legislation also granted CMS the authority to reimburse RACs using contingency fees. A contingency fee is a negotiated payment, typically a percentage, of every overpayment recovered. CMS conducted the demonstration in five states (California, Florida, Massachusetts, New York, and South Carolina) between March 2005 and March 2008. Over the course of three years, the RACs returned $693.6 million in overpayments to the Medicare Trust Funds and corrected a total of $1 billion in improper payments (overpayments and underpayments) at a cost of only 20 cents for every dollar collected, a return of 5 to 1. Prior to the conclusion of the demonstration, Congress passed the Tax Relief and Health Care Act of 2006 (TRHCA, P.L. 109-432 ), which made RACs permanent and mandated their expansion nationwide by January 1, 2010. The legislation was passed in December 2006; one month after a preliminary status report on the demonstration was released. Beginning in March 2009, the four RACs began reviewing claims for select states in approximately one-fourth of the country. Although this was not a requirement for the RACs during the demonstration program, it has been mandated for the permanent program. Medicare's other administrative contractors will still be allowed to look-back four years. Concerns Related to the RAC Program

		Payment

The RAC legislation provided CMS with the authority to pay RACs differently than it pays other administrative contractors. They receive no additional funding as part of the contract. Opponents of the program charge that paying contractors on a contingent basis creates an incentive for RACs to aggressively audit and deny claims. Provider groups such as the American Hospital Association (AHA) and the American Medical Association (AMA) have requested that CMS remove the contingency fee payment structure and compensate RACs as they do other Medicare contractors—by paying them a fixed annual amount for a defined scope of work. CMS subsequently changed this in the permanent program. Trust Fund Recoveries

Throughout the three-year demonstration, RACs returned $693.6 million to the Medicare Trust Funds and corrected more than $1.03 billion in improper payments. Historically, CMS has relied on its claims administration contractors to reduce improper payments in the Medicare program.
Recovery Audit Contractors, or RACs, are private organizations that contract with the Centers for Medicare and Medicaid Services (CMS) to identify and collect improper payments made in Medicare's fee-for-service (FFS) program. CMS projects improper FFS payments to amount to approximately $10.4 billion or 3.6% of all paid Medicare claims in 2008. Congress originally required the Secretary of the Department of Health and Human Services to conduct a three-year demonstration program using RACs in the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA, P.L. 108-173). In December 2006, Congress passed the Tax Relief and Health Care Act of 2006 (TRHCA, P.L. 109-432), which made the program permanent and mandated the expansion of RACs nationwide by 2010. CMS began the national rollout of the permanent program in 19 states in March 2009.
CMS initiated the RAC demonstration in March 2005 in three states—California, Florida, and New York. After a preliminary status report revealed that the three participating RACs had returned $54.1 million to the Medicare Trust Funds during its first year of operation, CMS expanded the demonstration to two additional states—Massachusetts and South Carolina. The agency concluded the pilot in March 2008. According to the final evaluation of the demonstration, the RACs returned $693.6 million in overpayments to the Medicare Trust Funds over the course of three years.
Throughout the demonstration, CMS continuously highlighted the success of the RAC initiative in protecting the fiscal integrity of Medicare. However, the demonstration and subsequent permanent program have raised concerns among policymakers and industry groups because Medicare pays RACs differently than it pays other administrative contractors. Historically, Medicare's administrative contractors have been paid a fixed annual budget for a defined scope of work. In contrast, Congress mandated that CMS pay RACs using contingency fees. A contingency fee is a negotiated payment, typically a percentage, for every overpayment recovered. Under a contingency fee payment system, contractors receive no additional administrative funding. This type of compensation has been criticized for incentivizing RACs to aggressively audit and deny provider claims.
This report provides an overview of the RAC program along with a brief history of improper payments in Medicare. A description of the medical review processes used by RACs and how it compares with other Medicare administrative contractors is also presented. The report concludes with a discussion of current issues. This report will be updated as needed.