Updated on: June 22, 2012

Error Rate of 3.9% Translates to $10.8 Billion Annually —CMS

Original story posted on: December 10, 2008




The Medicare program is a $276 billion operation.  Every minute 9,579 claims are processed.  The Centers for Medicare and Medicaid Services (CMS) are concerned about the accuracy of the payments made to providers.  CMS data analysis indicates an error rate of 3.9 percent.  While this does not sound like a huge rate, it translates to $10.8 billion annually.


CMS is entrusted with maintaining the Medicare Trust Fund so that it remains a viable source of support to Medicare beneficiaries.  There is much concern about the viability of the Medicare Trust Fund.  In 2011, baby boomers begin retiring. By 2019, Medicare is projected to be in the red.  By 2028, Medicare spending is projected to surpass spending on Social Security.


Congress mandated that CMS look at ways to reduce error and recoup any funds paid out in error.  One program piloted was called Recovery Audit Contractors (RACs).

Demonstration Project

Section 306 of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 directed the Department of Health and Human Services (HHS) to conduct demonstration projects to show the use of recovery audit contractors (entities who specialize in data mining to determine errors in payment) in identifying improper payment errors in the Medicare Program.


These contracts, awarded in March 2006, established Recovery Audit Contractors in three states: New York, California, and Florida.  These states were selected because together they represent 25 percent of Medicare payments.  In 2007, the pilot was briefly expanded to Massachusetts, South Carolina, and Arizona.  CMS signed three contracts with three organizations with expertise in data mining of invoice or transactional databases.  The organizations selected were PRG Shultz for California; Health Data, Incorporated to cover Florida; and Connolly Consulting to work in New York.


The RACs were provided access to CMS’ National Claims History file.  This database consisted of claims from October 1, 2001 through Sept 20, 2006 (representing $239.6 billion in Medicare payments).  RACs could look at claims up to four years old.  Claims from almost all providers were included with the exception of claims involving the following:

  • Physician evaluation and management (E/M) code levels
  • Hospice and home health services
  • Items previously reviewed by another Medicare contractor
  • Items involved in a potential fraud investigation
  • Services provided under a demonstration project
  • Managed care services
  • Items paid under the Medicare Drug Program (part D)
  • Cost report issues
  • Beneficiary payment responsibility


The RAC contractors used their data mining techniques to identify specific claims that contained payment errors or groups of claims that appeared to have a high risk for payment error.

Initially, the RACs received a contingency fee based on the amount of overpayments identified.  However, after actions taken by hospital associations in the initial three demonstration states,  CMS agreed to change the formula for reimbursing the RACs to include fees for identifying underpayments (effective March 1, 2006).

RACs Become Permanent

There were over $1billion in erroneous payments identified by all three RAC organizations.  Of this total, $992.7 million represented overpayments (96%) and $37.8M represented underpayments (4%).  To date, $46million of the overpayments recouped have been returned to the providers as a result of appeals that overturned the RAC initial decision.  The demonstration project cost $215.3million.  The net return on investment was $693.6 million.


Because of the more than satisfactory results of the RAC demonstration project, Congress established Recovery Audit Contractors as a permanent program.  The Tax Relief and HealthCare Act of 2006, signed into law by President Bush in December of 2006, required CMS to implement the RAC program nationally by January 1, 2010.


There are four different RAC contractors —one for each jurisdiction.  Contracts were awarded to the following:


  • Diversified Collection Services, Inc. of Livermore, California, in Region A, initially working in Maine, New Hampshire, Vermont, Massachusetts, Rhode Island and New York.

  • CGI Technologies and Solutions, Inc. of Fairfax, Virginia, in Region B, initially working in Michigan, Indiana and Minnesota.

  • Connolly Consulting Associates, Inc. of Wilton, Connecticut, in Region C, initially working in South Carolina, Florida, Colorado and New Mexico.

  • HealthDataInsights, Inc. of Las Vegas, Nevada, in Region D, initially working in Montana, Wyoming, North Dakota, South Dakota, Utah and Arizona.


RAC Roll-out Schedule

The rollout schedule is posted on the CMS RAC Website (http://www.cms.hhs.gov/RAC/10_ExpansionStrategy.asp). The implementation, however, will be delayed due to the fact that two of the unsuccessful bidders for the RAC contract have requested a hearing as to the reasons they were not selected.  This hearing is expected to occur in February 2009.  There is still a requirement from the legislation that the RAC program be implemented in all 50 states by January 1, 2010.


The RAC rollout schedule will be coordinated with that of the Medicare Administrative Contractors (MACs).  MACs will be replacing both the fiscal intermediaries that process Part A claims and the carriers that process Part B claims.  According to CMS, a RAC must suspend processing for three months before and three months after a MAC implementation in a MAC region.


The next article will summarize the RAC review process and compare the process defined for the permanent RAC program with the demonstration RAC process.


By Cheryl E. Servais, MPH, RHIA
Ms. Servais, MPH, RHIA, is Vice President, Compliance and Privacy Officer for Precyse Solutions
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Cheryl E. Servais, MPH, RHIA

Cheryl Servais has more than 25 years of experience in Health Information Management. In her position at Precyse Solutions, Ms. Servais' responsibilities include planning, designing, implementing and maintaining corporate-wide compliance programs, policies and procedures, and updating them to accommodate changes in federal and other regulations. In addition, she oversees training and development programs related to ethics, compliance and patient privacy; develops and chairs compliance and privacy advisory committees at the Executive and Board levels; and takes an active role in professional organizations.

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