The winding road of RAC audits

Oct. 22, 2014
Tracey Tillman, Implementation and Support Project Manager,
The SSI Group

After enjoying a nice summer vacation from Recovery Audit Contractor (RAC) audits, hospitals will soon be feeling the pressure all over again. In late August, the Centers for Medicare and Medicaid Services (CMS) announced plans to reinstate the Recovery Audit program on a limited basis. Soon, RACs in all regions will resume automated reviews; these will be in addition to select complex reviews based on topics chosen by CMS.  

Start preparing for audits

The announcement of plans to proceed with reviews is a clear reminder that RACs are not going away. While the latest developments will likely affect a significant number of facilities, the restart has proceeded at a sluggish pace. The reinstatement of the program is limited to certain claims and does not include inpatient hospital patient status reviews during the commencement period. Currently, there is a statute prohibiting RACs from processing post-payment patient status reviews of inpatient hospital admissions through March 2015. After March 2015, RACs will be able to perform Patient Status Reviews; however, the volume of audits will remain low due to Medicare Audit Contractors’ (MAC) reviews.

Look for changes to occur

While organizations have experienced a lull in RAC audits, they need to stay on top of the changing audit landscape. One such change, announced by CMS in February 2014, relates to RACs’ responsibilities before the appeal process begins. Specifically, beginning in the new contract cycle:

  • Recovery Audit Contractors must wait 30 days to allow for a discussion before sending the claim to the MAC for adjustment. Providers will not have to choose between initiating a discussion or an appeal.
  • Recovery Audit Contractors must confirm receipt of a discussion request within three days.
  • Recovery Audit Contractors must wait until the second level of appeal is exhausted before they receive their contingency fee.
  • CMS is establishing revised Additional Development Request (ADR) limits that will be diversified across different claim types (e.g., inpatient, outpatient).
  • CMS will require Recovery Audit Contractors to adjust the ADR limits in accordance with a provider’s denial rate. Providers with low denial rates will have lower ADR limits, while providers with high denial rates will have higher limits.

Why the delay?

According to CMS, the delay in restarting the Recovery Audit program was to enable the various RAC regions to restructure and allow time for the appeals to catch up. In January, CMS announced a plan to select four Medicare Part A/B RACs, along with one national DMS and Home Health/Hospice RAC.  Additionally, CMS modified the jurisdiction that each Medicare Part A/B RAC would oversee.  

The appeal crisis

Hospitals are waiting longer than they have in the past for an administrative law judge (ALJ) to hear appeals of claims denied by Medicare RACs. The extreme backlog of appeals has resulted in the suspension of the assignment of appeals to an ALJ for at least two years. Although the original rule mandated that ALJ appeal decisions be issued within 90 days of receiving the request for the hearing, the system was not built to withstand the volume of cases waiting to be processed.   

CMS’ Office of Medicare Hearings and Appeals (OMHA) reports the ALJ backlog is estimated at over 350,000 appeals for fiscal year (FY) 2013. The backlog for FY 2014 through July 1, 2014, is estimated at over 500,000 appeals, bringing the total to over 800,000 appeals pending as of July 2014. The backlog can be attributed to CMS allowing the volume of audits to multiply over the past three years. Meanwhile, OMHA supported only 65 administrative law judges until recently, when it allowed funding for seven additional teams that began work in late August 2014.

According to AHA’s RACTrac Survey from Q4 2013, participating hospitals report appealing almost half of all RAC denials. While 72 percent of denials appealed to the ALJ have been overturned in favor of the hospital, more than two out of every three appealed claims are stalled in the appeals process.  

The American Hospital Association (AHA) has done a good job of identifying, reporting and providing insights regarding RACs and how they impact a hospital. If a RAC finds that the services on an inpatient claim should have been provided as outpatient services, Medicare is not allowing full outpatient payment. Most inpatient claims that get denied do not get a chance to be rebilled because of the date of service. CMS only allows hospitals to rebill for services from the previous year, but gives RACs the ability to audit claims for the prior three years. RACs deny services that are more than one year old, which leaves the hospital at risk and unable to collect full outpatient payment though the rebilling process. When this occurs, a hospital’s only option is to seek full payment for the denial through the appeal process. According to CMS, 75 percent of all RAC-denied claims fall outside the one-year filing window and thus cannot be rebilled.

Together, the aforementioned appeals issues have resulted in the appeals process becoming both lengthy and costly to a hospital’s bottom line. 

What’s at risk?

AHA’s RACTrac Survey of participating hospitals in Q1 2014 shows that the average value of a medical record requested is about $10,087 for a specific RAC region. With the limits increasing over the years, many hospitals receive as many as 500 RAC requests every 45 days, resulting in over $40 million a year at risk. With so much at stake, the value of disputed and denied claims can threaten a hospital’s revenue cycle. Careful monitoring is required in order to understand the volumes and values of RAC requests, respond to audits in a timely fashion and work to achieve a favorable result. 

Let’s make a deal

Among the massive backlog of hospital inpatient claim appeals at OMHA, CMS is giving providers the chance to settle up and get paid – at least somewhat.  

In September 2014, CMS announced, via its website, that any acute care or critical access hospital willing to withdraw its pending appeals would receive “timely partial payment” of 68 percent of the disputed claims’ net allowable amount. CMS is encouraging hospitals with inpatient status claims currently pending in the appeals process “to make use of this administrative agreement mechanism to alleviate the administrative burden of current appeals on both the hospital and the Medicare system.” 

CMS identifies claims eligible for partial payment as those that have a date of admission prior to October 1, 2013. Additionally, based on a patient status review from a Medicare contractor, the claim must have been denied because services may have been reasonable and necessary, but treatment based on an inpatient status was not necessary. Along with deciding to settle select claims, hospitals can still choose to appeal others, and will have until October 31, 2014, to submit settlement documents.

Settlements are not available for claim appeals by psychiatric hospitals, inpatient rehab facilities, long-term care hospitals, cancer hospitals or children’s hospitals.

CMS will review applications for agreements using a three-step process:  

  • Step 1 – Hospitals submit spreadsheets of claims and appeals to CMS for review with a signed Administrative Agreement.
  • Step 2 – Hospitals review discrepancies from step 1 and resubmit a revised spreadsheet and Administrative Agreement within two weeks.
  • Step 3 – Hospitals receive payment, and the appeals submitted for settlement are dismissed.

For hospitals with thousands, or sometimes even millions, of dollars sitting in appeals, the option of getting paid 68 percent of the allowed amount could be enticing, especially when considering the alternative: additional legal fees, lengthy waits for judgments and the potential of not receiving anything. 

As new rules and changes come into effect, now is the time to identify and understand the audit changes that will impact facilities’ processes. Regular monitoring of the RAC websites is vital, as it enables those affected to keep up with the changing landscape and track new activity. Additionally, it is never too early to implement documentation improvements and refine the overall audit process in preparation for the changes.


  1. Centers for Medicare & Medicaid Services Recovery Audit Program Recent Updates
  2. Centers for Medicare & Medicaid Services RAC Program Improvements
  3. Centers for Medicare & Medicaid Services Recovery Audit Program Future Changes
  4. U.S. House Committee on Oversight & Government Reform Subcommittee on Energy, Health Care & Entitlements Hearing on Office of Medicare Hearings and Appeals Workloads, July 10, 2014
  5. Exploring the Impact of the RAC Program on Hospitals Nationwide: Results of AHA RACTRAC Survey, 4th Quarter 2013
  6. American Hospital Association Facts about The Medicare Audit Improvement Act of 2013 (H.R. 1250/S. 1012)
  7. Exploring the Impact of the RAC Program on Hospitals Nationwide: Results of AHA RACTRAC Survey, 1st Quarter 2014
  8. Centers for Medicare & Medicaid Services Inpatient Hospital Reviews
  9. Department of Health and Human Services Memorandum to OMHA Medicare Appellants
  10. AHA RACTrac Initiative