Department of Health and Human Services
OFFICE OF 
 
 
INSPECTOR GENERAL 
 
 
 
 
 
 
 
 
RECOVE  RY AUDIT CONTRACTORS 
 
F R  
RAUD  EFERRALS
 
 
 
 
 
 
 
 
Daniel R. Levinson  
Inspector General 
 
February 2010 
OEI-03-09-00130   
   
 E X E C U T I V E   S U M M A R Y  
OBJECTIVES
 
To determine the extent to which: 
1.   recovery audit contractors (RAC) referred cases of potential fraud to 
the Centers for Medicare & Medicaid Services (CMS) during the 
demonstration project, and   
2.   CMS provided training to RACs regarding fraud identification and 
referral during the demonstration project and in the permanent 
program. 
BACKGROUND 
CMS contracts with RACs to identify improper payments of Medicare 
Part A and Part B claims.  RACs conduct postpayment reviews to 
identify overpayments and underpayments and recoup any 
overpayments they identify.  RACs receive payment based on the 
amount of improper payments identified.   
CMS conducted a 3-year RAC demonstration project from               
March 2005 through March 2008 that was designed to (1) detect and 
correct past improper payments in the Medicare fee-for-service program 
and (2) provide information to CMS and to the Medicare claims 
processing contractors that could help protect the Medicare trust funds 
by preventing future improper payments.  The demonstration covered 
California, Arizona, Florida, South Carolina, New York, and 
Massachusetts.  Three RACs participated in the demonstration project 
and identified more than $1.03 billion in Medicare improper payments.  
After the demonstration period, CMS awarded contracts to four 
companies that will serve as RACs in the permanent program. 
RACs are not responsible for reviewing claims for fraudulent activity; 
however, they are responsible for referring to CMS any instances of 
potential fraud that are identified during their reviews.  This is the first 
indepth study of the RACs role in referring cases of potential fraud. 
FINDINGS 
Between 2005 and 2008, RACs referred two cases of potential fraud 
to CMS.  Only one RAC reported referring two cases of potential fraud 
involving specific providers to CMS during the 3-year demonstration 
project.  However, CMS reported that it received no specific provider 
referrals from RACs during the demonstration project.  While it did not 
  OEI-03-09-00130  RECOVERY AUDIT CONTRACTORS FRAUD REFERRALS  i   
   
E X E C U T I V E   S U M M A R Y  
make formal referrals to CMS, another RAC notified CMS of numerous 
claims it identified involving improper payments.  The third RAC did 
not refer any cases of potential fraud to CMS during the demonstration 
project.   
During the demonstration project, CMS did not provide any formal 
training to RACs regarding the identification and referral of potential 
fraud; however, CMS did provide the permanent RACs with a 
presentation about fraud.  CMS did not provide RACs in the 
demonstration with formal training regarding the identification and 
referral of potential fraud.  CMS did provide the permanent RACs with 
a presentation about fraud, which discussed the need for the RACs to be 
knowledgeable about fraud in Medicare, the definition of fraud, and 
examples of potential Medicare fraud.  CMS is planning to provide the 
permanent RACs with further education and training on the 
identification of potential fraud.  In addition, two of the three RACs 
reported providing informal training to their staff regarding the 
identification and referral of potential fraud.  
RECOMMENDATIONS 
During the 3-year demonstration project, RACs identified over $1 billion 
in improper payments, yet referred only two cases of potential fraud to 
CMS.  Because RACs do not receive their contingency fees for cases they 
refer that are determined to be fraud, there may be a disincentive for 
RACs to refer cases of potential fraud. 
RACs are required to refer any cases of potential fraud that they 
identify; however, they must be able to identify fraud to refer it.  Having 
a RAC staff that is knowledgeable about fraud and trained to identify 
fraud will increase awareness and detection of potential fraud during 
the claims review process.  CMS did not provide RACs in the 
demonstration project with formal training on how to identify fraud.  
However, CMS did provide the permanent RACs with a presentation 
about fraud.   
Therefore, we recommend that CMS: 
Conduct followup to determine the outcomes of the two referrals 
made during the demonstration project.   
Implement a database system to track fraud referrals.   
Require RACs to receive mandatory training on the identification 
and referral of fraud.  
  OEI-03-09-00130  RECOVERY AUDIT CONTRACTORS FRAUD REFERRALS  ii   
   
E X E C U T I V E   S U M M A R Y  
AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL 
RESPONSE 
CMS concurred with all three of our recommendations.  In regard to our 
first recommendation, CMS stated that it researched the two cases 
identified by the RAC for potential referral and determined they should 
be referred to the Office of Inspector General (OIG) for further 
development.  CMS is in the process of forwarding the two cases to OIG.  
OIG will review these cases and determine what actions need to be 
taken. 
CMS concurred with our second recommendation and stated that it is in 
the process of developing a system to track the RAC claims review 
process.   
Finally, in response to our third recommendation, CMS stated that it 
has already provided two training sessions to the RACs and is in 
discussion with OIG and the Department of Justice on additional 
training.  The OIG training session was scheduled for January 2010. 
  OEI-03-09-00130  RECOVERY AUDIT CONTRACTORS FRAUD REFERRALS  iii   
 T A B L E   O F   C O N T E N T S  
EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
 
 
I N T RO DU C T IO N . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 
 
 
F I N D ING S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 
  Between 2005 and 2008, RACs referred two cases of                               
  potential fraud to CMS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 
  During the demonstration project, CMS did not provide any formal      
  training to RACs regarding the identification and referral of     
  potential fraud; however, CMS did provide the permanent RACs          
  with a presentation about fraud. . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 
   
R E C OMME N DA TIO N S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 
  Agency Comments and Office of Inspector General Response . . . 12 
 
APPENDIX ................................................ 13 
  Agency Comments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 
 
A CKN OW LEDGMEN TS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16   
   
 I N T R O D U C T I O N  
OBJECTIVES 
To determine the extent to which: 
1.   recovery audit contractors (RAC) referred cases of potential fraud to 
the Centers for Medicare & Medicaid Services (CMS) during the 
demonstration project, and  
2.   CMS provided training to RACs regarding fraud identification and 
referral during the demonstration project and in the permanent 
program. 
BACKGROUND 
The Medicare Prescription Drug, Improvement, and Modernization Act 
of 2003 directed the Secretary of the U.S. Department of Health and 
Human Services (the Secretary) to undertake a demonstration project to 
assess the use of RACs under the Medicare Integrity Program in         
(1) identifying underpayments and overpayments, and (2) recouping 
overpayments (for services for which payment was made under Part A 
or Part B of Title XVIII of the Social Security Act).1  The demonstration 
project lasted 3 years (March 2005 through March 2008) and provided 
CMS with information about the feasibility and merits of applying 
recovery audit principles and methods to the Medicare program. 
The Tax Relief and Health Care Act of 2006 directed the Secretary to 
expand the RAC program nationally by January 2010.2  In October 
2008, CMS awarded contracts to four companies that serve as the RACs 
for the permanent program.  At the time of data collection for this 
report, the permanent RACs were conducting provider outreach and 
beginning to phase in their review of providers but were not fully 
operational.   
RACs are not responsible for reviewing claims for fraudulent activity.  
CMS contracts with program safeguard contractors (PSC) and Zone 
Program Integrity Contractors (ZPIC) to perform benefit integrity 
 
1 The Medicare Prescription Drug, Improvement, and Modernization Act of 2003,         
P.L. 108-173, Title III  306. 
2 The Tax Relief and Health Care Act of 2006, P.L. 109-432  302(a), Social Security Act  
 1893(h), 42 U.S.C.  1395ddd(h). 
  OEI-03-09-00130  RECOVERY AUDIT CONTRACTORS FRAUD REFERRALS  1   
   
I N T R O D U C T I O N  
functions including fraud detection.3  However, in the course of 
reviewing claims for improper payments, RACs may come across 
instances where the overpayment appears to involve fraudulent activity.  
RACs are responsible for referring these instances of potential fraud to 
CMS.4   
The RAC program is unique because RACs operate on a contingency fee 
basis, unlike any other Medicare contractor.  While RACs are not 
responsible for identifying fraud, they are responsible for referring any 
cases of potential fraud to CMS.  RACs do not receive contingency fees 
for these cases when they are determined to be fraud.  Thus, there may 
be a disincentive for RACs to refer cases of potential fraud.   
This is the first indepth study of the RACs role in referring cases of 
potential fraud.  Specifically, this study examined the role of the 
demonstration RACs in referring cases of potential fraud.  It also 
focused on training that the demonstration RACs and the permanent 
RACs received from CMS regarding the identification and referral of 
potential fraud.   
Recovery Audit Contractor Demonstration Project   
The 3-year RAC demonstration project was conducted from March 2005 
through March 2008 and was designed to (1) detect and correct past 
improper payments in the Medicare fee-for-service program, and         
(2) provide information to CMS and to the Medicare claims processing 
contractors that could help protect the Medicare trust funds by 
preventing future improper payments.5   
CMS awarded the first RAC contracts in March 2005.  Initially, the 
States with the highest Medicare utilization ratesCalifornia, Florida, 
and New Yorkwere selected for the demonstration.  In the summer of 
2007, CMS expanded the demonstration to Massachusetts, South 
Carolina, and Arizona.  The companies selected for the demonstration 
were:  
 
3 PSCs and ZPICs are CMSs fraud, waste, and abuse detection contractors.  CMS is in 
the process of transferring PSC functions to the ZPICs and expects all ZPICs to be 
operational in 2010.  
4 CMS, Statement of Work for the Recovery Audit Contractor Program, November 7, 
2007, p. 24. 
5 CMS, The Medicare Recovery Audit Contractor (RAC) Program:  An Evaluation of the 
3-Year Demonstration, June 2008, p. 11.  Available online at 
http://www.cms.hhs.gov/RAC/Downloads/RAC%20Evaluation%20Report.pdf.  Accessed  on 
February 2, 2009.  
  OEI-03-09-00130  RECOVERY AUDIT CONTRACTORS FRAUD REFERRALS  2   
   
I N T R O D U C T I O N  
  PRG-Schultz (California, Arizona6),   
  HealthDataInsights (Florida, South Carolina), and 
  Connolly Consulting (New York, Massachusetts).   
CMS compensated RACs through contingency fees, which were a 
percentage of the amount of improper payments RACs corrected.  
Contingency fees included fees paid to RACs for detecting and collecting 
overpayments plus the fees paid for detecting and refunding 
underpayments.  CMS and RACs negotiated these contingency fees, 
which ranged from 18 to 38 percent during the demonstration.   
RAC responsibilities.  CMS tasked RACs with identifying, through 
postpayment review, Medicare Part A or Part B claims with 
underpayments or overpayments.7  Improper payments could include 
noncovered services, incorrectly coded services, duplicate services, and 
incorrect payment amounts.  For each overpayment identified, RACs were 
to attempt recoupment.   
Claims review process.  Using claims data from 2001 through 2007, RACs 
were responsible for identifying claims containing improper payments.  
RACs used their own proprietary software to perform automated reviews 
to identify claims that contained improper payments.  RACs also 
conducted more complex medical reviews on claims.  In conducting claim 
reviews, RACs had to comply with Medicare policies, regulations, national 
coverage determinations, local coverage determinations, and manual 
instructions.   
CMS excluded a number of claim types from review by the RACs.  These 
exclusions included: 
  claims for hospice and home health services,  
  payments made to providers under a CMS-conducted 
demonstration, 
  claims previously reviewed by another Medicare contractor,  
  claims involved in a potential fraud investigation, and 
 
6 While contractually Arizona was added to PRG-Schultzs jurisdiction in July 2007, no 
Arizona claims were reviewed before the end of the RAC demonstration.  
7 CMS, Statement of Work for the Recovery Audit Contractors Participating in the 
Demonstration (Non-Medicare Secondary Payer), No. 40700NMSPB, p. 1. 
  OEI-03-09-00130  RECOVERY AUDIT CONTRACTORS FRAUD REFERRALS  3   
   
I N T R O D U C T I O N  
  potentially miscoded physician evaluation and management 
claims.8 
Appeals.  Providers were able to appeal RAC overpayment 
determinations.  There are five levels in the Medicare Part A and Part B 
appeals process:  (1) redetermination by a carrier, Fiscal Intermediary 
(FI), or Medicare Administrative Contractor; (2) reconsideration by a 
Qualified Independent Contractor; (3) hearing by an Administrative 
Law Judge; (4) review by the Medicare Appeals Council; and (5) judicial 
review in the U.S. District Court.9   
Appeals affected RACs ability to retain contingency fees.  Once RACs 
were notified by CMS of an appeal request, they were required to cease 
all recovery attempts.  CMS required RACs to pay back the contingency 
fee if the appeal was favorable to the provider at the redetermination 
level.  Subsequent appeals after the redetermination level did not affect 
the RACs ability to retain the contingency fee.   
RAC Data Warehouse.  CMS gave RACs access to the RAC Data 
Warehouse to facilitate the activities of the RACs, CMS, FIs, carriers, 
Durable Medical Equipment Regional Carriers (DMERC), Quality 
Improvement Organizations (QIO), PSCs, and law enforcement 
agencies.10  The RAC Data Warehouse was designed for numerous 
coordinating, tracking, and reporting functions.   
RACs were prohibited from reviewing claims that had been flagged by 
other Medicare contractors and law enforcement agencies in the RAC 
Data Warehouse.  Therefore, before beginning any claim reviews, RACs 
were required to compare their list of claims to be reviewed against the 
flagged claims in the RAC Data Warehouse.  Flagged claims are those 
that have been previously medically reviewed, settled, or are currently 
under investigation.  Claims can be flagged by CMS, FIs, carriers, 
DMERCs, QIOs, PSCs, and law enforcement agencies.   
Potential fraud referrals.  Fraud detection was not part of the scope of work 
for demonstration RACs.  However, RACs were responsible for referring 
claims they determined to be potentially fraudulent to the CMS Project 
 
8 CMS, The Medicare Recovery Audit Contractor (RAC) Program:  An Evaluation of the 
3-Year Demonstration, p. 13. 
9 CMS, Original Medicare (Fee-for-Service) Appeals:  Overview.  Available online at 
http://www.cms.hhs.gov/OrgMedFFSAppeals/.  Accessed on March 11, 2009. 
10 CMS, RAC Data Warehouse Users Guide, version 3.0, p. 4. 
  OEI-03-09-00130  RECOVERY AUDIT CONTRACTORS FRAUD REFERRALS  4   
   
I N T R O D U C T I O N  
Officer.11  The CMS Project Officer would then forward the referrals to the 
Program Integrity Group at CMS for further review and determination to 
refer to the PSC and/or law enforcement.  CMS prohibited RACs from 
reviewing or taking further action on these claims.  Further, RACs could 
not collect their contingency fee for claims they referred and that CMS 
determined to be fraud.  However, if CMS determined that a referral did 
not involve potential fraud, the RAC was allowed to proceed with 
reviewing the claim.   
Outcome of the demonstration project.  During the 3-year demonstration 
project, RACs identified more than $1.03 billion in Medicare improper 
payments, 96 percent ($980 million) of which were overpayments collected 
from providers.  The remaining 4 percent ($37.8 million) were 
underpayments that were repaid to providers.12  Of the overpayments,      
85 percent ($828.3 million) were collected from inpatient hospital 
facilities.13 
During the demonstration project, providers appealed 22.5 percent of the 
RAC overpayment determinations.  Overall, 7.6 percent of all overpayment 
determinations were overturned on appeal.14    
The total cost of the demonstration project was $201.3 millionor about 
20 cents for each dollar collected.15, 16  CMS paid RACs a total of         
$187.2 million in fees over the duration of the demonstration.  Medicare 
 
11 The demonstration project statement of work provides for referrals to be made to 
PSCs; however, CMS directed demonstration RACs to make fraud referrals to the CMS 
Project Officer instead.  Further, RACs were not given a specific format or method by which 
to make the referrals to CMS.  CMS, Statement of Work for the Recovery Audit Contractors 
Participating in the Demonstration (Non-Medicare Secondary Payer), p. 14.   
12 CMS, The Medicare Recovery Audit Contractor (RAC) Program:  An Evaluation of the 
3-Year Demonstration, p. 15.  
13 Ibid., p. 19. 
14 CMS, The Medicare Recovery Audit Contractor (RAC) Program:  Update to the 
Evaluation of the 3-Year Demonstration, January 2009, p. 4.  Available online at 
http://www.cms.hhs.gov/RAC/Downloads/AppealUpdatethrough83108ofRACEvalReport.pdf.  
Accessed on February 2, 2009. 
15 CMS, The Medicare Recovery Audit Contractor (RAC) Program:  An Evaluation of the 
3-Year Demonstration, p. 14. 
16 The demonstration project also included Medicare Secondary Payer (MSP) RACs.  
These RACs were responsible for identifying and recovering MSP nonbeneficiary Group 
Health Plan-based overpayments.  The total costs provided in this paragraph include MSP 
RACs.  We did not include MSP RACs in our review.   
  OEI-03-09-00130  RECOVERY AUDIT CONTRACTORS FRAUD REFERRALS  5   
   
I N T R O D U C T I O N  
claims processing contractors costs were an additional $8.7 million, and 
other expenses were $5.4 million.17    
Recovery Audit Contractor Permanent Program 
Section 302 of the Tax Relief and Health Care Act of 2006 requires that 
the RAC program be implemented nationally by 2010.  In March 2007, 
CMS began conducting a full and open competition to award four 
permanent RAC contracts.18  Each RAC is responsible for identifying 
overpayments and underpayments in one of four regional jurisdictions.                       
In October 2008, CMS announced its selection of the following 
companies as RACs: 
  Region A (Maine, New Hampshire, Vermont, Massachusetts, 
Rhode Island, New York):  Diversified Collection Services (DCS), 
Inc., of Livermore, California;  
  Region B (Michigan, Indiana, Minnesota):  CGI Technologies and 
Solutions (CGI), Inc., of Fairfax, Virginia;  
  Region C (South Carolina, Florida, Colorado, New Mexico):  
Connolly Consulting Associates, Inc., of Wilton, Connecticut; and 
  Region D (Montana, Wyoming, North Dakota, South Dakota, 
Utah, Arizona):  HealthDataInsights (HDI), Inc., of Las Vegas, 
Nevada. 
Shortly after the RAC selections were announced, two unsuccessful 
bidders filed protests with the Government Accountability Office (GAO).  
As a result, CMS was required to impose an automatic stay in the 
contract work of the four RACs.  As required under provisions of the 
Competition and Contracting Act of 1984, GAO had 100 days to issue its 
decision in the matter.  On February 4, 2009, settlement was reached 
and the imposed stay was lifted.  As a result, PRG-Schultz, Inc., will 
serve as a subcontractor to DCS, CGI, and HDI in Regions A, B, and D; 
and Viant Payment Systems, Inc., will serve as a subcontractor to 
Connolly Consulting in Region C.   
By the end of 2009, CMS had fully implemented the RAC program and 
expanded it to all States.   
 
17 CMS, The Medicare Recovery Audit Contractor (RAC) Program:  An Evaluation of the 
3-Year Demonstration, p. 3.  
18 CMS, Recovery Audit Contractors:  Overview.  Available online at 
http://www.cms.hhs.gov/RAC/01_Overview.asp#TopOfPage.  Accessed on February 9, 2009. 
  OEI-03-09-00130  RECOVERY AUDIT CONTRACTORS FRAUD REFERRALS  6   
   
I N T R O D U C T I O N  
Changes to the RAC program.  Based on lessons learned during the 
demonstration project, several changes were made to improve the RAC 
program.19  Changes included the following:  
  RACs must pay back the contingency fee if the claim is overturned 
at any level of appeal, not just the redetermination level.  
  The look-back period for reviewing claims was reduced from          
4 years to 3 years, and RACs cannot review any claims prior to 
October 1, 2007. 20 
  RACs must report identified vulnerabilities monthly to CMS. 
Potential fraud referrals.  CMS made no changes to the fraud referral 
process for the permanent RACs.  RACs must continue to report claims 
that they determine to be potentially fraudulent to the CMS Project 
Officer and do not receive their contingency fee for referrals determined to 
be fraud.  As in the demonstration, RACs are allowed to continue 
reviewing these claims if CMS determines that the claims do not involve 
potential fraud.     
Oversight of Recovery Audit Contractors 
RACs are overseen by CMSs Division of Recovery Audit Operations, 
part of the Provider Compliance Group within the Office of Financial 
Management.  Each RAC has a CMS lead Project Officer and one or two 
co-Project Officers that are assigned to the task order.   
METHODOLOGY 
Scope  
We focused our data collection on the three RACs that participated in 
the 3-year demonstration project (March 2005 through March 2008).  
We also collected information from CMS regarding its oversight of the 
RACs during the demonstration project and permanent program.             
We did not collect information from the four permanent RACs because 
they had not begun reviewing claims at the time of this study.    
 
 
19 CMS, The Medicare Recovery Audit Contractor (RAC) Program:  An Evaluation of the 
3-Year Demonstration, p. 25.  
20 The look-back period is the amount of time between the medical record request date 
and the claim payment date (i.e., RACs cannot ask for medical records more than 3 years 
after a claim was paid).  
  OEI-03-09-00130  RECOVERY AUDIT CONTRACTORS FRAUD REFERRALS  7   
   
I N T R O D U C T I O N  
Data Collection and Analysis 
From each of the three demonstration RACs, we requested information 
regarding each case of potential fraud that was referred to CMS during 
the demonstration project.  The type of information we requested 
included:  provider name, provider identification number, date of 
referral, to whom the referral was sent, whether acknowledgment of the 
referral was received, method of sending the referral, type of potential 
fraud identified, type of claim, and provider type.  We also requested all 
documentation pertaining to each referral.  From this information, we 
determined the number and type of referrals that each RAC made to 
CMS during the demonstration project. 
Additionally, we asked RACs to provide us with information about 
policies and procedures regarding the referral of potential fraud that 
they had in place during the demonstration.  We also asked about 
training that they received from CMS regarding the identification and 
referral of cases of potential fraud.  We reviewed and summarized RAC 
responses to each of these questions to determine the extent to which 
RACs received training from CMS regarding fraud identification and 
referral during the demonstration project.   
From CMS, we requested information about the referrals of potential 
fraud that it received from the RACs during the demonstration project.  
Specifically, we asked CMS to provide us with the following information 
for each referral received:  provider name, provider identification 
number, date of referral, name of RAC that sent the referral, whether 
CMS sent the RAC a confirmation of receipt for the referral, type of 
claim, whether the referral was forwarded for further review or 
investigation, and the outcome of the referral.  We also requested all 
documentation pertaining to each referral.  We compared this 
information to the information we received from the RACs.      
We also asked CMS to provide us with information on its policies and 
procedures for addressing referrals of potential fraud as well as training 
that it provided to RACs in identifying and referring cases of potential 
fraud.  We reviewed CMSs responses to determine the extent to which 
it provided RACs with training on fraud identification and referral.     
Standards 
This study was conducted in accordance with the Quality Standards for 
Inspections approved by the Council of the Inspectors General on 
Integrity and Efficiency.
  OEI-03-09-00130  RECOVERY AUDIT CONTRACTORS FRAUD REFERRALS  8   
   
F I NF DI INN DG IS N  G S  
 
Between 2005 and 2008, RACs referred two  Two cases of potential fraud 
cases of potential fraud to CMS  involving specific providers were 
referred by RACs to CMS during 
the 3-year demonstration project.  The two cases were referred by one 
RAC and were sent by letter directly to the CMS Project Officer.  
However, in response to our information request, CMS reported that it 
received no specific provider referrals from RACs during the 
demonstration project.  CMS also reported that it did not track the 
outcomes of referrals it received from RACs.   
The two referrals involved rehabilitation service providers and both 
involved suspected alterations of medical records after the services were 
rendered.  According to the RAC referral letters sent to CMS, the RAC 
had no contact with the providers in reference to the allegations and 
continued to complete its complex and/or automated, postpayment 
review of the providers.  If CMS had determined that the referrals were 
potentially fraudulent, the RAC should have ceased its review of these 
claims.   
While another RAC did not make any formal fraud referrals to CMS, it 
indicated that it notified CMS of multiple claims involving millions of 
dollars in improper payments to physician practices for Intravenous 
Immune Globulin (IVIG) treatments in Florida.  CMS directed the RAC 
to close down its review of these claims.  The RAC reported that CMS 
then referred these IVIG claims to the PSC and/or law enforcement to 
develop cases against numerous providers throughout Florida.  During 
this time, CMS decided to exclude claims from physician practices as 
well as claims from durable medical equipment suppliers in three 
southern counties of Florida from further RAC review. 
The third RAC had no potential fraud referrals during the 
demonstration project. 
 
During the demonstration project, CMS did not  During the demonstration project, 
provide any formal training to RACs regarding  the RACs were routinely invited 
by CMS to participate in a 
the identification and referral of potential fraud; 
number of conferences and 
however, CMS did provide the permanent RACs 
meetings where fraud issues were 
with a presentation about fraud   
discussed, but no formal training 
was provided to the RACs.  In response to our information request 
  OEI-03-09-00130  RECOVERY AUDIT CONTRACTORS FRAUD REFERRALS  9   
   
F I N D I N G S  
regarding RAC training, CMS stated, In order to determine if recovery 
auditors could work in Medicare, CMS purposely did not provide formal 
training to the RACs.  The RACs needed to prove to Medicare and the 
provider community that they could work in the Medicare environment.  
Significant CMS intervention would have clouded the result.21  
However, in October 2008, CMS gave a presentation regarding 
Medicare fraud to the permanent RACs participating in the permanent 
program.  The presentation discussed the definition of fraud, examples 
of potential Medicare fraud, and the need for the RACs to be 
knowledgeable about fraud in Medicare. 
CMS told us it is planning to provide RACs in the permanent program 
with further education and training on the identification and referral of 
potential fraud.  
Although CMS did not provide formal training to the RACs during the 
demonstration project, two RACs reported providing informal training to 
their own staff regarding the identification and referral of potential fraud 
One RAC noted that its Executive Vice President has experience in 
Medicare fraud as a result of previously working for CMS, where he was 
responsible for benefit integrity functions.  The identification of 
potential fraud was regularly discussed at staff meetings, improper 
payment query meetings, and other meetings where the Executive Vice 
President participated and provided advice and counsel to staff.  In 
addition, this RAC held monthly conference calls with its Project Officer 
to discuss operational issues, including potential fraud issues.  
Another RAC reported that auditors were advised to refer cases to 
upper management when concerns were prompted by questionable 
billing patterns or the nature of the medical documentation.  These 
concerns resulted in further examination of the claims data, additional 
medical review, and referrals to CMS.   
The other RAC did not provide its staff with training regarding the 
identification or referral of potential fraud. 
 
21 Response received on June 22, 2009, from CMS Director for the Division of Recovery 
Audit Operations and CMS Director for the Division of Benefit Integrity Management 
Operations in CMS.     
  OEI-03-09-00130  RECOVERY AUDIT CONTRACTORS FRAUD REFERRALS  10   
   
 R E C O M M E N D A T I O N S  
A P P E N D I X ~ A  
 
During the 3-year demonstration project, RACs identified over $1 billion 
in improper payments.  Yet, RACs referred only two cases of potential 
fraud to CMS during this time.  Because RACs do not receive their 
contingency fees for cases they refer that are determined to be fraud, 
there may be a disincentive for RACs to refer cases of potential fraud.      
RACs are required to refer any cases of potential fraud that they 
identify; however, they must be able to identify fraud to refer it.  Having 
a RAC staff that is knowledgeable about fraud and trained to identify it 
will increase awareness and detection of potential fraud during the 
claims review process.  However, CMS did not provide RACs in the 
demonstration project with formal training on how to identify and refer 
fraud, although CMS did provide the permanent RACs with a 
presentation about fraud.   
Therefore, we recommend that CMS: 
Conduct followup to determine the outcomes of the two referrals made 
during the demonstration project 
CMS indicated that it received no provider-specific referrals from the 
RACs during the demonstration project.  However, one RAC submitted 
copies of two provider-specific referrals that were sent to the CMS 
Project Officer during the demonstration project.  CMS should 
determine the outcome of these referrals. 
Implement a database system to track fraud referrals  
We recommend that CMS develop a database system to track fraud 
referrals it receives from RACs.    
Require RACs to receive mandatory training on the identification and 
referral of fraud 
Although RACs are not responsible for identifying fraud, having more 
training in detecting fraudulent activity could assist RACs in 
identifying potential fraud that they might encounter during their 
reviews.  CMS should ensure that the permanent RACs receive training 
on how to identify cases of potential fraud.  Furthermore, CMS should 
develop guidelines to assist the RACs in determining when to refer 
cases of potential fraud for further investigation.  
 
 
  OEI-03-09-00130  RECOVERY AUDIT CONTRACTORS FRAUD REFERRALS  11   
   
R E C O M M E N D A T I O N S  
AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL 
RESPONSE 
CMS concurred with all of our recommendations.  In addition, CMS 
stated that the RACs primary focus is the identification and correction 
of improper payments, not identification of potential fraud.  However, 
since fraudulent payments could potentially be identified in the RACs 
improper payment reviews, their reviews also serve to identify instances 
of potential fraud.  CMS also stated that if RACs identified potential 
fraud during the demonstration, their statement of work required them 
to forward these cases to CMS and CMS would determine if further 
referral to the program safeguard contractors or other law enforcement 
was warranted.  We recognize that RACs are not responsible for 
identifying potential fraud; however, we believe that there may be a 
disincentive for RACs to refer cases of potential fraud because they do 
not receive their contigency fees for cases determined to be fraud.   
CMS concurred with our first recommendation and stated that it had 
researched the two cases identified by the RAC for potential referral 
and determined they should be referred to the Office of Inspector 
General (OIG) for further development.  CMS is in the process of 
forwarding the two cases to OIG.  OIG will review these cases and 
determine what actions need to be taken. 
CMS concurred with our second recommendation and stated that it is in 
the process of developing a system to track the RAC claims review 
process.  This will include new issues approved for review, as well as 
corrective actions taken and referrals to and from a RAC.  The referrals 
will include potential fraud referrals and will require closure so that 
feedback can be given when necessary. 
CMS also concurred with our third recommendation and stated that it 
has already provided two training sessions to the RACs and is in 
discussion with OIG and the Department of Justice on additional 
training.  The OIG training session was scheduled for January 2010. 
The full text of CMSs comments is provided in the Appendix. 
  OEI-03-09-00130  RECOVERY AUDIT CONTRACTORS FRAUD REFERRALS  12  x 
A  P  PEN  D 
Agency Comments 
/'''''''''''''
~
(  DEPARTMENT OF HEALTH & HUMAN SERVICES  Centers for Medicare & Medicaid Services 
,S~ 
Administrator 
Washington, DC 20201 
JAN 0 5 2010 
DATE: 
TO: 	 Daniel R, Levinson 
Inspector General 
FROM: 	 Charlene Frizzera 
Acting Administrator 
SUBJECT: 	 Office ofInspector General (OIG) Draft Report: "Recovery Audit Contractors' 
Fraud Referrals" (OEl-03-09-00130) 
Thank you for the opportunity to review and comment on the OIO's draft report, "Recovery 
Audit Contractors' Fraud Referrals," The Centers for Medicare & Medicaid Services (CMS) 
appreciates the time and resources the 0]0 has invested to review the Recovery Audit Contractor 
(RAC) fraud referrals during the RAC demonstration. 
Section 306 of the Medicare Modernization Act required CMS to establish the RAC 
demonstration.  Its purpose was to detennine if recovery auditors could identify improper 
payments paid by the Medicare fee-for-service program. CMS awarded three contracts in 2005 
to three unique contractors to identify claims-based Medicare fee-for-service improper payments, 
conducting the demonstration first in California, New York, Florida and then later in 
Massachusetts, South Carolina and Arizona, The RAC demonstration succeeded in correcting 
more than $1 billion in improper Medicare payments.  About 96 percent of these improper 
payments were overpayments, a fraction of which was used to pay for the program and the rest 
was returned to the Medicare Trust Fund. 
It is important to note that the RACs were not tasked with identifying potential fraud under the 
demonstration, nor is identifying fraud a key role as the program is launched nationally.  The 
RACs' primary focus is the identification and correction ofimproper payments. Since fraudulent 
payments could potentially be identified in the RAC's improper payment reviews, their reviews 
also serVe to identify instances of potential fraud.  However, if the RACs did identify potential 
fraud in the demonstration, their Statement of Work (SOW) required them to forward the case to 
CMS and then CMS would determine iffurther referral to the Program Safeguard Contractors 
(PSCs) or other law enforcement was warranted, Two potential referrals were received from the 
RACs and CMS determined that they warranted additional follow-up and will refer them to the 
010 for further development. Thus, as the RAC continues to perfoml the functions of its SOW, 
potential fraud may be uncovered and referral to the appropriate entity will take place, 
OEI-03-09-00130  RECOVERY AUDIT CONTRACTORS' FRAUD REFERRALS  13   
   
A P P E N D I X  
  OEI-03-09-00130  RECOVERY AUDIT CONTRACTORS FRAUD REFERRALS  14   
   
A P P E N D I X  
 
 
  OEI-03-09-00130  RECOVERY AUDIT CONTRACTORS FRAUD REFERRALS  15   
   
 A C K N O W L E D G M E N T S  
This report was prepared under the direction of Robert A. Vito, Regional 
Inspector General for Evaluation and Inspections in the Philadelphia 
regional office, and Linda M. Ragone, Deputy Regional Inspector 
General.   
Maria Schepise Johnson served as the project leader for this study.  
Central office staff who contributed include Scott Manley.  
 
  OEI-03-09-00130  RECOVERY AUDIT CONTRACTORS FRAUD REFERRALS  16   
Office of Inspector General 
http://oig.hhs.gov 
 
The mission of the Office of Inspector General (OIG), as mandated by Public Law 95-452, as 
amended, is to protect the integrity of the Department of Health and Human Services 
(HHS) programs, as well as the health and welfare of beneficiaries served by those 
programs.  This statutory mission is carried out through a nationwide network of audits, 
investigations, and inspections conducted by the following operating components: 
Office of Audit Services 
The Office of Audit Services (OAS) provides auditing services for HHS, either by conducting 
audits with its own audit resources or by overseeing audit work done by others.  Audits 
examine the performance of HHS programs and/or its grantees and contractors in carrying 
out their respective responsibilities and are intended to provide independent assessments of 
HHS programs and operations.  These assessments help reduce waste, abuse, and 
mismanagement and promote economy and efficiency throughout HHS. 
Office of Evaluation and Inspections 
The Office of Evaluation and Inspections (OEI) conducts national evaluations to provide 
HHS, Congress, and the public with timely, useful, and reliable information on significant 
issues.  These evaluations focus on preventing fraud, waste, or abuse and promoting 
economy, efficiency, and effectiveness of departmental programs.  To promote impact, OEI 
reports also present practical recommendations for improving program operations.  
Office of Investigations 
The Office of Investigations (OI) conducts criminal, civil, and administrative investigations 
of fraud and misconduct related to HHS programs, operations, and beneficiaries.  With 
investigators working in all 50 States and the District of Columbia, OI utilizes its resources 
by actively coordinating with the Department of Justice and other Federal, State, and local 
law enforcement authorities.  The investigative efforts of OI often lead to criminal 
convictions, administrative sanctions, and/or civil monetary penalties. 
Office of Counsel to the Inspector General 
The Office of Counsel to the Inspector General (OCIG) provides general legal services to 
OIG, rendering advice and opinions on HHS programs and operations and providing all 
legal support for OIGs internal operations.  OCIG represents OIG in all civil and 
administrative fraud and abuse cases involving HHS programs, including False Claims Act, 
program exclusion, and civil monetary penalty cases.  In connection with these cases, OCIG 
also negotiates and monitors corporate integrity agreements.  OCIG renders advisory 
opinions, issues compliance program guidance, publishes fraud alerts, and provides other 
guidance to the health care industry concerning the anti-kickback statute and other OIG 
enforcement authorities.