The past year marked an eventful one for the Centers for Medicare & Medicaid Services (“CMS”) Recovery Audit program (the “RAC Program”).1 Calls for reform, a backlog of provider appeals and government contracting restructuring hit a crescendo as the original contracts with the Recovery Audit Contractors (“RACs”) had original expiration dates in February 2014.2 While CMS approached the reprocurement as an opportunity to reform certain aspects of the RAC program, recent events have left the outcome of reform efforts uncertain.

Calls to Reform the RAC Program

Congress and Medicare providers united this year in calling for reform of the RAC program. In a February 2014 letter (the “House Letter”), more than 100 members of the U.S. House of Representatives asked Kathleen Sebelius, then-Secretary of the U.S. Department of Health and Human Services (“DHHS”), to take “immediate action” to implement reforms to ensure that RACs are “identifying real claim coding and medical documentation errors.” These members of Congress also cited concerns about the impact on Medicare beneficiaries, explaining that RAC denials of inpatient stays, issued up to three years after services were rendered, were causing higher out-of-pocket expenses under Medicare Part B, and that beneficiaries were being held financially responsible for post-acute care services no longer covered as a result of the reclassification of the hospital care. 3

The American Hospital Association (the “AHA”) cited similar concerns with the RAC program. It has pointed to a 2012 report issued by the DHHS, Office of Inspector General (the “OIG”), which found that 72% of hospital-appealed RAC denials are overturned at the Administrative Law Judge (“ALJ”) hearing level, the third level of appeals.4 The AHA cited this rate as evidence that the RACs were inappropriately and inaccurately denying payment to hospitals, cutting in to hospital resources and redirecting hospital funds from patient care matters to the costs of the appeals process.5

Members of Congress and the AHA also criticized CMS’ payment structure for RACs as creating incentives for RACs to deny as many claims as possible. Under the 2008 RAC agreements, RACs received percentage-based compensation after the first level of appeal. If a provider successfully pursued further appeals, the RAC was not required to return its fee to CMS for any overturned denial, but would not be required to pay any additional amounts, such as interest.6 Authors of the House Letter proposed an alternative payment arrangement with RACs receiving a retainer fee in a manner similar to other government contractors.

The AHA’s proposals for reform are reflected in the draft Medicare Audit Improvement Act of 2013 (H.R. 1250) (the “Draft Act”). The Draft Act, which has not been passed by the House, includes proposals to (ii) establish a consolidated limitation for medical requests; (iii) improve auditor performance by implementing financial penalties, and by requiring medical necessity audits to focus on widespread payment errors; (iv) improve RAC auditor transparency; (v) restore due process rights under the A/B rebilling demonstration; (vi) require physician review for medical necessity denials; and (vii) allow denied inpatient claims to be billed as outpatient claims when appropriate.7

On December 3, 2014, the American Medical Association (the “AMA”) joined the call for reform by sending a letter to CMS Administrator Marilyn Tavenner.8 The AMA raised many similar concerns as the AHA and the authors of the House Letter stating that “RAC auditors are often wrong and their bounty hunter- like tactics have caused physician practices undue hardship and expense.” The AMA also calls for CMS to implement financial penalties for inaccurate audit findings and award physicians interest when physicians win on appeal; provide an optional appeals settlement to physicians similar to that provided to hospitals; retain the current medical record request limits and allow medical record reimbursement for physicians; and ensure that audits of physicians are performed by a physician of the same specialty that is licensed in the same jurisdiction.

CMS’ Restructuring of the RAC Program and RAC Bid Protests

Amid these calls for change, CMS began the procurement process for the new Medicare Fee for Service Recovery Audit Program contracts in 2013. At that time, CMS notified incumbent RACs of proposed changes to the RAC Program and to the RAC contract awards, which were included in CMS’ December 2013 Request for Quotations (“RFQs”) for new Recovery Auditor contracts. CMS later proposed creating an additional national RAC solely for home health and durable medical equipment matters and extending the timing of a RAC’s payment for services until after the second appeal level. This latter proposal received swift opposition from existing RACs, in particular CGI Federal Inc. (“CGI”), which submitted pre-award protests to the federal Government Accountability Office (the “GAO”). When the GAO denied its protests on April 23, 2014, CGI elevated its case to the United States Court of Federal Claims (“Federal Claims Court”) to request an injunction to stay CMS from awarding new RAC contracts, to order CMS to revise its proposed payments terms and to provide all bidders for the new RAC contracts an opportunity to submit bids under a revised RFQ.

In August 2014, the Federal Claims Court denied CGI’s request for an injunction.9 CGI appealed the decision to the Court of Appeals for the Federal Claims Court and requested a stay to prevent CMS from awarding new RAC contracts in Regions 1, 2 and 4 while appeals in the case are pending.10 In early September 2014, the Federal Claims Court granted CGI’s request for a stay of its August ruling pending CGI’s appeal.11

For a more detailed discussion of the CGI action and the Federal Claims Court rulings, please review our discussion available at this link.

Impact on Current RAC Program Pending Contract Awards

The battles over the awarding of RAC program contracts did provide a slight reprieve to providers receiving RAC requests. In February 2014, CMS announced that RACs would suspend the RAC program pending the implementation of new RAC contracts. The current RACs had until June 1, 2014 to send improper payment documentation to the appropriate Medicare Administrative Contractor for payment adjustments.

On August 4, 2014, CMS announced that it would allow the RAC program to resume a limited number of reviews. This limited resumption of activities resulting from the continued delay in awarding new RAC contracts will be limited primarily to automated reviews and will exclude inpatient hospital patient status reviews. CMS will allow a small number of complex reviews on specific topics selected by CMS.

Developments in Appeals of RAC and Other Claims Denials

In December 2013, the Office of Medicare Hearings and Appeals (the “OMHA”) announced that, due to a significant backlog of claim appeals, the OMHA had temporarily suspended the assignment of most new requests for an ALJ hearing as of July 15, 2013. OMHA reported that this suspension resulted from a backlog of 357,000 claims already assigned to its 65 Administrative Law Judges, which had grown to 800,000 appeals pending on July 1, 2014.12

During the summer of 2014, the United States House Committee on Oversight and Government Reform heard from the OMHA regarding the backlog of appeals. Nancy Griswold, Chief ALJ, reported that adjudication timeframes have increased to 387 days rather than the required 90 days.13

In an effort to address this significant backlog, on August 29, 2014, CMS announced an offer to acute care hospitals and critical access hospitals (“CAH”) to settle pending appeals of claim denials by RACs and Quality Improvement Organization (“QIO”) related to certain inpatient claims in order to more quickly reduce the volume of patient status claim denials.14 Under the proposed settlement offer, CMS offered an administrative agreement to any acute care hospital or CAH willing to waive its right to request an appeal in exchange for timely partial payment of the claims.15 Hospitals would receive a payment equal to 68% of the net payable amount of the claims in controversy.16

The form administrative agreement applies to all “eligible claims” from “eligible providers.”17 Eligible claims are those that: (i) are denied by Medicare contractors on the basis that services may have been reasonable and necessary but treatment should have been provided in an outpatient setting rather than an inpatient one; (ii) are either under appeal or within their administrative timeframe to request an appeal review; (iii) have dates of admissions prior to October 1, 2013; and (iv) do not relate to a patient who is a Medicare Part C enrollee. In order to receive the partial payment, a hospital may not choose to settle some claims and continue to appeal others. Certain hospitals may be excluded from this settlement opportunity based on pending False Claims Act litigation or investigations. CMS accepted Administrative Agreement Requests submitted by hospitals on or prior to October 31, 2014.

The form Administrative Agreement states that CMS must pay the settlement amount to a provider within 60 days of an Administrative Agreement being fully executed. However, CMS sets no timetable for its own process of reconciling a hospital’s list of eligible claims or for when it must countersign an Administrative Agreement after completing such reconciliation. Given that quick resolution of claims may be a primary factor in a hospital’s decision to settle, CMS’ flexibility in its own time to countersign the administrative agreement may make settlement less attractive. It is also unclear how the settlement payment will be treated for purposes of a hospital’s Provider Statistical and Reimbursement (“PS&R”) Report and what additional implications the settlement payment may have on other Medicare reimbursement determinations.

CMS Transmittal 543 (Eff. October 27, 2014)

CMS also recently implemented changes impacting the appeals process. Effective October 27, 2014, CMS implemented CMS Transmittal 543, which adds a new Section 3.9 to Chapter 3 of the Medicare Program Integrity Manual, , instructing the Medicare Administrative Contractors (“MACs”) to support their medical review decisions through the ALJ level of appeal.18 MACs are now expected to provide support for CMS’ defense of medical review decisions that have reached the ALJ level, whether those decisions were originally made by a MAC, a recovery auditor or other Medicare audit contractors. MACs will be expected to assign a physician to participate at ALJ hearings and to oversee the ALJ hearing support process.

The new manual provisions outline how a MAC should work with a Quality Independent Contractor (“QIC”), the adjudicator for the second level of appeal, during the ALJ hearing process. For example, a notice of an ALJ hearing will be sent to the appropriate QIC. A MAC is then expected to coordinate with the QIC to ensure notification of all ALJ hearings to ensure a timely determination of whether to participate in the ALJ appeal. As part of its coordination responsibilities, a MAC is expected to establish a single point of contact for ALJ offices and to copy all CMS entities and parties relevant to a particular hearing. In that role, the MAC is further required to coordinate the roles and responsibilities of CMS-entity participants. Finally, regardless of whether a MAC is a participant or party to an ALJ appeal, the MAC must be prepared to discuss details related to the facts of each claim under appeal, the relevant coverage policies and payment requirements, and, for extrapolation cases, the background on how the provider/supplier was selected for review, the case adjudications, and the extrapolation process itself.

Impact on Providers

Providers should closely monitor ongoing developments of the RAC program, which may include Congressional reform, to ensure that they are prepared for any changes in the RAC program. However, while the future of the RAC program is unclear, providers should not expect for CMS to cease its auditing activities. CMS will continue to use private contractors for claims auditing to identify overpayments. Therefore, providers should ensure that they remain prepared to respond to Medicare auditors, including RACs. Such preparations should include ensuring that claims are appropriately billed, that the providers has retained supporting documentation related to claims and that provider staff remain aware of any policies and procedures related to responding to Medicare’s auditors. If providers identify any overpayments through ongoing compliance efforts, providers should timely refund these overpayments to the appropriate government payors.

1 The RAC Program was created by The Medicare Modernization Act of 2003. After a 3-year demonstration program in five states, CMS completed nationwide implementation of the RAC program in 2009.
2 CMS has extended the existing 2008 contracts through December 31, 2015 to allow incumbent RACs to work on appeals of claims, but the scope of the extension may be expanded as may be necessary See
3  Letter to the Honorable Kathleen Sebelius (Feb. 10, 2014), available at
4 OIG, “Improvements are Needed at the Administrative Law Judge Level of Medicare Appeals,” OEI-02-10-00340, (November 2012)(available at, last accessed on October 23, 2014).
5 See (last accessed on October 23, 2014).
6 CMS, Recovery Audit Contractors (RACs) and Medicare: The Who, What, When, Where, How and Why? (last accessed October 26, 2014).
7 H.R. 1250, 113th Congress (2013).
8 American Medical Association Letter to Marilyn B. Tavenner, CMS Administrator (Dec. 4, 2014) available at (last accessed on December 4, 2014).
9 CGI Federal Inc. v. United States, 2014 U.S. Claims LEXIS 842 (August 22, 2014).
10 As of November 3, 2014, CMS has yet to award contracts for Regions 3 and 5.
11 CGI Federal Inc. v. United States, No. 14-355C (U.S. Claims September 2, 2014).
12 Statement of Nancy J. Griswold, Chief Administrative Law Judge, Office of Medicare Hearings and Appeals on ‘Office of Medicare Hearings and Appeals Workloads’ before the United States House Committee on Oversight & Government Reform, Subcommittee on Energy Policy, Health Care and Entitlements, July 10, 2014 (last accessed October 22, 2014.)
13 Id.; Medicare, Medicaid, and SCHIP Benefits and Improvement Act of 2000 (BIPA) (Pub. L. 106-554).
14 See (last accessed on October 22, 2014).
15 Id.
16 Id.
17 Id.
18 CMS Manual System, Pub 100-08 Medicare Program Integrity, Transmittal 543, Change Request 8501 (Issued Date: September 26, 2014) (available at: (last access on December 1, 2014)