CMS' Annual RAC Update at Odds with Reality for O&P Community

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By Peter W. Thomas, JD, and Sarah Imhoff, JD

The Centers for Medicare & Medicaid Services (CMS) recently released its fiscal year (FY) 2013 Medicare fee-for-service (FFS) Recovery Audit Contractor (RAC) program report to Congress, as required by federal law. The RAC program was implemented nationwide in 2009 to identify, correct, and prevent improper Medicare and Medicaid payments through review of beneficiary claims data. Once again, the data reported by CMS stands in stark contrast to the experience of O&P practitioners on the front lines of providing healthcare to Medicare beneficiaries.

According to the report, the Medicare FFS RACs corrected $3.75 billion in improper Medicare FFS payments, including $3.65 billion in overpayments and $102.4 million in underpayments. This represents a significant increase from the FY 2012 report, which stated that $2.4 billion of improper payments were corrected. Overall, the program returned $3.03 billion to the Medicare trust fund after accounting for Recovery Auditor (RA) contingency fees of $301.7 million, CMS administrative costs of $152.4 million, and first level appeals of $57.6 million. (Authors' note: Program costs and administrative expenses incurred at the third and fourth levels of appeal (Office of Medicare Hearings and Appeals (OMHA) and the Medicare Appeals Council within the Departmental Appeals Board (DAB)) were not included in calculating the savings because RA program funding is not allocated to those levels of appeal.) According to the report, this accounts for a 92 percent rate of correct RAC claim overpayment determinations. The magnitude of these recoveries to the Medicare trust fund is the single most effective argument made by proponents of the RAC program against significant changes to it to level the playing field for all Medicare providers.

Improper Payment Statistics

Mark Twain popularized the saying, "There are three kinds of lies: lies, damned lies, and statistics." This CMS report brings this famous quote to mind. The CMS data reflected in this and previous RAC program reports appear to be at odds with the real-life experiences of practitioners undergoing extensive audits related to claims for O&P services provided to Medicare beneficiaries. The fact is that the way CMS categorizes and reports on audit and appeals data distorts the true experience of rank-and-file O&P practitioners.

According to the CMS report, of the overpayment corrections, 96 percent were from Medicare Part A claims, with 2 percent from Medicare Part B, and 2 percent from durable medical equipment, prosthetics, orthotics, and supplies (DMEPOS). The majority of Medicare Part A claims were inpatient hospital claims, representing $3.5 billion of the $3.75 billion in overpayments, or 94 percent of the total overpayment corrections. Most of the claims were due to short-stay inpatient hospital admissions where the documentation failed to demonstrate medical necessity for an inpatient stay over an outpatient stay. The second largest overpayment correction was durable medical equipment (DME), with $74 million in overpayments corrected. (It is not clear from the report what percentage of this figure involved O&P claims for payment.) Of the underpayment corrections, Medicare Part A represented 98 percent of all corrections, with $100 million restored to providers. Specifically, 84 percent of all underpayments were related to the inpatient setting.

The vast majority of improper payments collected came from complex reviews, totaling $3.53 billion, where supporting medical records are required to determine if there is an improper payment. Automated reviews consisted of 56.8 percent of the number of claims collected, but the claims requiring complex reviews involved much higher amounts corrected. On average across the RAs, 39.4 percent of claims that underwent a complex review were determined to be improper payments. These statistics are affected by the outpatient therapy caps, which place a $3,700 cap per beneficiary for occupational therapy services or combined physical therapy and speech language pathology services furnished in an outpatient hospital. As all claims for therapy services that exceed the cap trigger complex medical review, this may have led to higher amounts collected.

Appeal Statistics

As most O&P providers know by now, there are four levels in the administrative appeals process: redetermination by Medicare Administrative Contractors (MACs); reconsideration by Qualified Independent Contractors (QICs); Administrative Law Judge (ALJ) review; and the Medicare Appeals Council within the U.S. Department of Health & Human Services (HHS) DAB. Disputed claims can also proceed to federal district court after a DAB decision, but federal district court appeals are rare and not included in the CMS report.

CMS reports that in FY 2013, providers initially appealed 500,629 claims at the redetermination stage, or 30.7 percent of all overpayment determinations. Of these, 77.6 percent were Medicare Part A claims and 22.4 percent were Medicare Part B and DMEPOS claims. Only 7.6 percent of the Medicare Part A claims were overturned on appeal, but 61.8 percent of Medicare Part B and DMEPOS claims were overturned.

Overall, at the first stage of appeal, 19.7 percent of all appealed claims were overturned. Medicare Part A continued to represent the majority of claims at the other stages of appeal, representing over 98 percent of all appealed claims in stages two through four. In the reconsideration stage, 14.6 percent of all decided claims were overturned. At the ALJ stage, 24.5 percent of all decided claims were overturned, and 5.5 percent of all decided claims were overturned at the DAB stage.

Across all four stages of appeal, CMS reports that in FY 2013, 9.3 percent of all claims with initial overpayment determinations were overturned on appeal. Breaking down the numbers, 10 percent of all Medicare Part A overpayment determinations were overturned on appeal, and 8.5 percent of all Medicare Part B and DMEPOS claims were overturned. Of the total 836,849 claims appealed, about 18.1 percent, or 151,645 claims, were overturned in the provider's favor.

However, CMS notes that appealed claims may be counted multiple times if the claim had multiple appeal decisions rendered in FY 2013. For example, if a claim was initially reviewed at the redetermination stage at the beginning of the year and denied and then it was heard at the reconsideration stage at the end of the year and upheld, it would be counted twice, once as being denied and once as being overturned. Thus, these statistics are misleading and do not provide accurate information about the overall success rate of appeals compared to initial overpayment determinations.

CMS states that appeals are overturned for a variety of reasons, such as discrepancies between ALJ decisions and RA decisions, the ability of providers to correct and resubmit Medicare Part B claims after overpayment determinations that make claims payable, and the submission of additional documentation during the filing of appeals that can change the improper payment determination and allow claims to be payable. CMS notes that when the provider corrects the claim during the appeals process and thereafter the appeal is overturned, the RA was correct in its determination. Therefore, in the future, CMS states in the report that it would like to report these provider corrections as a separate category in the appeals statistics to try to account for the corrections.

Of course, the CMS RAC program report does not address the extensive backlog that RAC audits have created in the ALJ appeals process. This backlog has significantly delayed the amount of time it takes for all Medicare appeals to be decided, including O&P claims. Although the Medicare statute requires ALJs to decide any case appealed to OMHA within 90 days, this statutory deadline is routinely violated by HHS. (Incidentally, this ALJ hearing delay is the subject of a federal lawsuit challenging CMS' noncompliance with this statutory deadline.) Recently, the chief ALJ who oversees OMHA, Nancy Griswold, stated in public testimony that the backlog of Medicare appeals would exceed one million cases by the end of 2014, and resolution of the case backlog could take as long as ten years.

This is disastrous for Medicare providers who are caught up in the Medicare appeals process. The extensive recoupments taking place throughout the country are having a profound effect on the ability of providers to maintain their operations, expand their capacity and range of services, and continue to serve patients with the highest quality of care. Strains on cash flow and heightened resources devoted to administrative positions inevitably drain the focus from patient care, especially for small businesses like independent O&P practices.

Short-Stay Inpatient Hospital Admission Claims

O&P is a relatively small profession, and the RAC statistics underscore this point. As the statistics show, the majority of FY 2013 appeals at the ALJ level consisted of short-stay inpatient hospital claims that had overpayment determinations due to the conclusion that the inpatient stays were not medically necessary. If the RA determined that the patient could have been treated as an outpatient instead, Medicare policy prior to March 13, 2013, only allowed providers to rebill for a limited number of Medicare Part B services.

However, during FY 2012, CMS issued Interim Rule 1455-R in an effort to reduce the number of short-term inpatient admission appeals. The ruling allows a hospital with a denied short-stay inpatient hospital claim to submit a Medicare Part B inpatient claim for payment for hospital services that would have been provided if the beneficiary only received outpatient services. The interim rule was finalized as part of the FY 2014 Hospital Inpatient Prospective Payment System final rule as of October 1, 2013, with a one-year timely filing restriction. As this new policy was implemented in 2013, the full effects of the rule will not be known until FY 2014 results are examined. But at the very least, it is expected to limit the number of short-stay appeals glutting the ALJ system.

RA Accuracy Rates

In order to measure accuracy, CMS uses an independent contractor, called a Recovery Audit Validation Contractor, to review a monthly sample of RA-reviewed claims data with improper payment determinations. This contractor grants an annual accuracy score for each RA, which CMS states represents how often the RAs were accurately determining overpayments or underpayments.

Among the four RAs, CMS reports that the lowest accuracy score in FY 2013 was 92.8 percent and the highest was 99.1 percent. These figures are at odds with the experience of many provider sectors that routinely have their appeals overturned once a neutral decision maker (i.e., an ALJ) hears these cases. However, according to the CMS report, the sample size was only between 799 and 1,020 claims for each auditor. Considering that there were 1,532,249 claims corrected in FY 2013, an overall sample of about 3,600 claims among the four RAs represents only 0.2 percent of all claims determined to be improper. Based on the experience of the O&P profession alone, there clearly needs to be a larger sample size in order to generate more realistic accuracy scores, especially when compared to the percent of overturned appeals in FY 2013.

CMS Corrective Actions and Improvement Efforts

CMS also highlights in its report the corrective actions, continuous improvement initiatives, and program development efforts taken during FY 2013. CMS uses the results of audits performed by the RAs to develop corrective actions to prevent improper payments. Specifically, CMS analyzes all claims with more than $500,000 in RA corrections and groups them into vulnerability categories, or claim types that pose a financial risk to the Medicare FFS program due to their high amount of improper payments. CMS identified 25 vulnerabilities in FY 2013 and will develop edits over the next year in order to lessen the rate of improper payments.

In terms of corrective actions by its contractors, CMS has spent considerable time improving the audit process for short-stay Part A hospital claims. In addition, CMS has issued guidance on a number of topics over the year. The Comprehensive Error Rate Testing (CERT) program completed nine special studies to provide information to providers on areas that are at risk for improper payments, consist of new benefits, or have recently had policy changes. CMS also states that it released 17 Medicare Learning Network articles; four quarterly provider compliance newsletters; 11 reports on FFS facility billing practices; and 36,000 reports on billing practices for eight facility types through the Comparative Billing Reports system to help educate providers on what constitutes improper billing.

CMS also states its commitment to alleviate provider burden, ensure the accuracy of RA determinations, and promote transparency. However, all of the steps CMS has taken to implement this goal are largely behind the scenes and not transparent to the public. For instance, to promote continuous improvement in FY 2013, CMS focused on increased communication between stakeholders. The main initiatives were to hold regularly scheduled conference calls between RA, MAC, and CMS staff to discuss program issues and identify improvements, improve the Recovery Audit Data Warehouse to track more audit information, and reduce the occurrence of multiple contractors reviewing the same claims.

In addition, CMS has worked to improve the ability of providers to submit electronic medical records to expedite the audit and appeals process. The Electronic Submission of Medical Documentation (esMD) program is key to CMS' goals of increasing effectiveness and efficiency, as it would help eliminate the time-consuming need for providers to mail their paper records to contractors for review. In FY 2013, all four RAs increased their use of the esMD program, with an average participation increase of 10 percent. Apparently, one RA reported that 20 percent of its providers submitted their additional documentation through the esMD program.

Finally, CMS states in its report that it has invested in improvements to the RAC program based on reports issued by the HHS Office of the Inspector General (OIG) and the U.S. Government Accountability Office (GAO) that indicated areas for improvement. In September 2013, OIG released a report that focused on the corrective actions CMS took to address payment vulnerabilities and the actions it took on fraud. On July 23, 2013, GAO issued a report that scrutinized the consistency of contractor determinations between RAs, MACs, Zone Program Integrity Contractors (ZPICs), and CERT contractors.

In addition, CMS plans to contract with one nationwide RA to review all DMEPOS and home health and hospice (HH/H) claims, and four Part A and B RAs to review all other Medicare FFS claims. The report states that this will ensure greater review of DMEPOS and HH/H claims, and the geographic division of the four RAs will be changed to be more equitable and better align with MAC jurisdictions.


Ultimately, this congressionally mandated report continues to show the government's tolerance for audit activities that attract substantial monetary recoveries from providers, but fails to significantly address the substantive, equitable concerns with the Medicare audit and appeals process raised by numerous provider sectors over the past several years, including the O&P profession. Legitimate healthcare providers who serve Medicare patients continue to make the case for audit and appeals reform and some in Congress are listening. Recent introduction of legislation by U.S. Representative Renee Ellmers (R-NC), House Resolution (H.R.) 5083, titled the Medicare DMEPOS Audit Improvement and Reform Act (AIR) of 2014, is an example of congressional efforts to level the playing field for legitimate providers.

The strong headwind of billions of dollars in Medicare recoveries makes enactment of legislation to reform the Medicare audit and appeals process challenging. It would be unfortunate if patient harm would have to be demonstrated before Congress chooses to act.

Peter W. Thomas, JD, serves as general counsel for the National Association for the Advancement of Orthotics and Prosthetics (NAAOP). Sarah Imhoff, JD, is with Powers Pyles Sutter & Verville, Washington DC. She is awaiting notification of passage of the Bar Exam.