Recovery Audit Contractors (RACs) are the bane of healthcare providers across the nation, but while they are not quite a necessary evil, they are here to stay, at least for now. While reform of the RAC system is necessary, as a Senate panel found this past summer, large scale changing of the system is unlikely.

Here are three reforms that would fix what many providers consider a broken process, and why they will never happen. The core reason is, of course, money.

Reform #1: Get rid of the contingency fee system.

The nation has four RAC regions and each has its own primary recovery audit contractor that is compensated based on the errors they find. The RACs receive between 9 percent and 12.5 percent of whatever they find.

In the spirit of fair play, the RACs receive the contingency fee for overpayments and underpayments. Just like the “Bank Error in Your Favor” card in the game of Monopoly, the RACs are also looking for errors in the healthcare provider’s favor, and if they find one receive their full contingency fee.

Senator Orrin Hatch at last summer’s hearing on RACs before the Senate Finance Committee (“Program Integrity: Oversight of Recovery Audit Contractors”) called the contingency system “perverse,” but you can’t argue with the results, at least in the eyes of the federal government. The RACs returned more than $2 billion in 2012, which is akin to almost a half-percentage cut in the Medicare budget of $550 million.

If there are billions of dollars in Medicare claim errors found each year, why not eschew the contingency fee and instead have the government create an agency to mine and audit claims? “If you only fund fifty auditors, they are only going to do fifty auditors worth of work,” argued Robert Rolf of CGI Federal at that same hearing. Only a private company working on contingency can scale up their operation to meet the demand for work, he argued.

What Rolfe and other have not mentioned is that the reason the contingency-fee-driven RACs are finding hundreds of millions of dollars in overpayments is because the bureaucrats in charge of reviewing claims and approving them made mistakes in the first place. Which leads to the next and most obvious reform …

Reform #2: Get rid of the RACs and instead improve claims processing

There would be no need for RACs if the bureaucratic machinery processing Medicare claims was more efficient and effective. Yet the federal government estimates that 8.6 percent of all claims paid by Medicare are “improper,” which includes everything from errors to fraud. This percentage is nearly double the average of all federal programs.

Only the RACs are paid on a contingency basis and therefore incentivized to find errors. However, while their contract requires them to educate healthcare providers on the errors, there are no direct financial incentives for them to do so. At last summer’s hearing, the representatives of the two providers testified that they had good relationships with the other Medicare contractors but found the education efforts of their RAC contractor lacking.

Why not improve the process upstream? If claims were error-free from the beginning, RACs would be unnecessary. The reason, of course, is money. It would cost too much to improve the process upstream. The genius of the RAC system is that it improves accuracy without incurring an impact on the federal budget. And the true cost of the program is shifted onto healthcare providers.

Reform #3: Penalize the RACs for errors.

Currently if a healthcare provider wins an appeal, the RAC returns its contingency fee. But a percentage of all RAC findings of improper payments are inaccurate, according to CMS.

Every month the RACs are tested on their accuracy. Putting aside the fact that how that accuracy is measured is a state secret (CMS does not make public the audits of the RACs, which are conducted by an independent contractor), the agency reports an annual “cumulative accuracy percentage” of each recovery audit contractor. In the last report to Congress (2011), CMS’s independent recovery audit validation contractor found the following:

Recovery Auditor and Cumulative Accuracy Score
Region A: DCS — 97.2 percent
Region B: CGI Federal — 95.8 percent
Region C: Connolly — 97.4 percent
Region D: HDI — 90.7 percent

Although many healthcare providers believe the accuracy number is, at best, inflated, and at worst, fallacious, it accurately compares the RACs as they perform compared to each other. One provider I spoke with suggested that the accuracy score be used to penalize the RAC. If they are found to be accurate only 90 percent of the time (the contractual minimum), then CMS could require them to return 10 percent of their contingency in that given year.

Not only would penalizing the RACs require changing their contract, but it would also requiring changing the criteria accuracy is measured. While 91 percent to 97 percent are considered (at least by the RACs who promote the numbers) high marks, penalizing them based on that number would mean they would lose millions in contingencies. To recoup those funds, the RAC would increase its contingency percentage.

In the end, healthcare providers are victims of RACs’ success. The RAC system is not going away.

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