DEPARTMENT OF HEALTH AND HUMAN SERVICES 
Centers for Medicare & Medicaid Services 
7500 Security Boulevard 
Baltimore, Maryland   21244-1850 
 
  
 
SMDL# 10-021 
ACA# 10 
 
October 1, 2010 
 
Re: Recovery Audit Contractors (RACs) for Medicaid 
 
Dear State Medicaid Director: 
 
This letter is part of a series of letters intended to provide preliminary guidance on the 
implementation of the Affordable Care Act (P. L. 111-148).  Specifically, this letter provides 
initial guidance on section 6411 of the Affordable Care Act, Expansion of the Recovery Audit 
Contractor (RAC) Program, which amends section 1902(a)(42) of the Social Security Act (the 
Act) requiring States to establish programs to contract with RACs to audit payments to Medicaid 
providers by December 31, 2010.  The Centers for Medicare & Medicaid Services (CMS) 
expects States to fully implement their RAC programs by April 1, 2011.  As required by statute, 
CMS will be issuing regulations in this area shortly, providing additional guidance. 
 
State Medicaid RACs  
 
Under Section 1902(a)(42)(B)(i) of the Act, States and Territories are required to establish 
programs to contract with one or more Medicaid RACs for the purpose of identifying 
underpayments and overpayments and recouping overpayments under the State plan and under 
any waiver of the State plan with respect to all services for which payment is made to any entity 
under such plan or waiver.  States must establish these programs in a manner consistent with 
State law, and generally in the same manner as the Secretary contracts with contingency fee 
contractors for the Medicare RAC program.   
 
States and Territories will need to submit to CMS a State plan amendment (SPA) through which 
the State will either attest that it will establish a Medicaid RAC program by December 31, 2010, 
or indicate that it is seeking an exemption from this provision.  State programs to contract with 
Medicaid RACs are not required to be fully operational by December 31, 2010.  States should 
submit Medicaid RAC SPAs to their respective CMS Regional Offices. 
 
Many States already have experience utilizing contingency-fee-based Third Party Liability 
recovery contractors.  CMS will allow States to maintain flexibility in the design of Medicaid 
RAC program requirements and the number of entities with which the States elect to contract 
within the parameters of the statutory requirements.  There are a number of operational and 
policy considerations in State Medicaid RAC program design (some of which will be discussed 
in greater depth in future rulemaking) such as: 
 
  Page 2  State Medicaid Director  
 
a.  Qualifications of Medicaid RACs; 
b.  Required personnel - for example physicians and certified coders;  
c.  Contract duration; 
d.  RAC responsibilities; 
e.  Timeframes for completion of audits/recoveries; 
f.  Audit look-back periods; 
g.  Coordination with other contractors and law enforcement; 
h.  Appeals; and 
i.  Contingency fee considerations. 
 
Finally, we note that States may not supplant existing State program integrity or audit initiatives 
or programs with Medicaid RACs.  States must maintain those efforts uninterrupted with respect 
to funding and activity. 
 
Exceptions 
 
Section 1902(a)(42)(B)(i) of the Act specifies that States shall establish programs under which 
they contract with Medicaid RACs subject to such exceptions or requirements as the Secretary 
may require for purposes of a particular State.  This provision enables CMS to vary the Medicaid 
RAC program requirements.  For example, CMS may exempt a State from the requirement to 
pay Medicaid RACs on a contingent basis for collecting overpayments when State law expressly 
prohibits contingency fee contracting.  However, some other fee structure could be required 
under any such exception (e.g., a flat fee arrangement). 
 
States that otherwise wish to request variances with respect to, or an exception from, Medicaid 
RAC program requirements will need to submit to CMS requests in writing from the States 
Medicaid Director to the CMS/ Medicaid Integrity Group. We will evaluate requests from States 
in a timely manner.  CMS anticipates granting complete Medicaid RAC program exceptions 
rarely and only under the most compelling of circumstances.  
 
As noted above, all States will need to submit SPAs which either attest that they will establish 
compliant Medicaid RAC programs, or indicate the reason for not doing so.  For States that 
require a State legislative change granting authority to establish a Medicaid RAC program, the 
SPA can be submitted indicating that the Medicaid RAC program cannot be established until 
legislative authority is granted.   
 
Contingency Fees and Other Payment Matters 
 
Sections 1902(a)(42)(B)(ii)(I) and (II) of the Act provide that payments to Medicaid RACs are to 
be made only from amounts recovered on a contingent basis for collecting overpayments and 
in amounts specified by the State for identifying underpayments.  CMS will not dictate 
contingency fee rates, but will establish a maximum contingency rate for which Federal 
Financial participation (FFP) will be available. This rate will be the highest contingency fee rate 
that is paid by CMS under the Medicare RAC program.  Page 3  State Medicaid Director  
 
Currently, the four Medicare RAC contracts have an established period of performance of up to 
five years, beginning in 2009. The highest contingency fee rate is 12.5 percent. To make States 
aware of future Medicaid RAC contingency fee cap amounts, we expect to publish in a Federal 
Register notice, no later than December 31, 2013, the highest Medicare RAC contingency fee 
rate.  This rate will apply to FFP availability for any Medicaid RAC contracts with a period of 
performance beginning on or after July 1, 2014. The established cap would be in place based on 
the period of performance of the Medicare RAC contracts. A State that determines that it must 
pay a contingency rate above CMS ceiling rate (for example, in order to attract any qualified 
Medicaid RAC applicants) may request a waiver from CMS, or may elect to pay the differential 
amount between the ceiling and amount paid solely from State funds. 
 
Contingency fee rates for identifying and collecting overpayments should be reasonable and 
determined by each State, taking into account factors including, but not limited to, the level of 
effort to be performed by the RAC, the size of the States Medicaid population, the nature of the 
States Medicaid health care delivery system, and the number of Medicaid RACs engaged.  A 
State may pay Medicaid RACs on a contingency fee or flat fee basis for identifying 
underpayments and the percentage or amount may vary based on factors such as the amount of 
the identified underpayment.  Whichever methodology a State employs, it should be 
appropriately structured to incentivize the Medicaid RAC to identify underpayments.  
 
A State must refund the Federal Medical Assistance Percentage (FMAP) share of the net amount 
of overpayment recoveries after deducting the fees paid to Medicaid RACs.  In other words, a 
State must take a Medicaid RACs fee payments off the top before calculating the FMAP share 
of the overpayment recovery owed CMS.  Overpayments are to be reported on the amount 
remaining after the fees are paid to the Medicaid RAC.  This treatment of the fees and 
expenditures is linked directly to the specific statutory language implementing the Medicaid 
RAC requirements.  It does not apply to any other provisions of Medicaid overpayment 
recoveries. Section 1902(a)(42)(B)(ii)(IV)(aa) of the Act also provides that amounts spent by a 
State to carry out the administration of the program are to be reimbursed at the 50 percent 
administrative claiming rate.  CMS will share in States expenditures through both the 
contingency fee with respect to payments to the Medicaid RACs and the administrative match 
for qualified administrative costs associated with the States implementation and oversight of the 
Medicaid RAC program.  
 
The total fees paid to a Medicaid RAC include both the amounts associated with (1) identifying 
and recovering overpayments, and (2) identifying underpayments.  Due to the statutory 
limitations, total fees must not exceed the amounts of overpayments collected.  We do not 
anticipate this will be a problem for States.  Our experience with Medicare RAC contractors is 
that overpayment recoveries exceed underpayment identification by more than a 9:1 ratio.  
Therefore, a State will not need to maintain a reserve of recovered overpayments to fund RAC 
costs associated with identifying underpayments.  However, the State must maintain an 
accounting of amounts recovered and paid.  The State must also ensure that it does not pay in 
total Medicaid RAC fees more than the total amount of overpayments collected.   
  Page 4  State Medicaid Director  
 
Because of the limitations placed on FFP by Section 1108(g) of the Act, Territories must assess 
the feasibility of implementing and funding Medicaid RACs in their jurisdiction.  CMS will 
provide technical assistance to the Territories on how to implement the provisions in Sections 
1902(a)(42)(B)(ii)(I), (II), and (IV) of the Act in their locality.  CMS is encouraging the 
Territories to review the requirements of these provisions including regulations, when published, 
and contact the New York or San Francisco Regional Office to work on submitting a SPA or 
requesting an exception.     
 
Appeals  
 
Section 1902(a)(42)(B)(ii)(III) of the Act requires States to have an adequate process for entities 
to appeal any adverse decisions made by the Medicaid RACs.  Each State has existing 
administrative appeals processes with respect to audits of Medicaid providers.  So long as States 
are able to accommodate Medicaid RAC appeals within their existing Medicaid provider appeal 
structure, CMS is not requiring States to adopt a new administrative review infrastructure to 
conduct Medicaid RAC appeals.  
 
Reporting 
 
States will be required to report to CMS their contingency fee rates, along with other Medicaid 
RAC contract metrics such as the number of audits conducted, recovery amounts, number of 
cases referred for potential fraud, contract periods of performance, contractors names, and other 
factors such as whether a State has implemented provider or service-specific Medicaid RACs.  
States will report certain elements of this information via the quarterly Form CMS-64, and other 
information via separate data reporting forms CMS will require. 
 
Coordination 
 
Section 1902(a)(42)(B)(ii)(IV)(cc) of the Act requires that CMS ensure that States and their 
Medicaid RACs coordinate their recovery audit efforts with other entities.  These entities include 
contractors or entities performing audits of entities receiving Medicaid payments, as well as with 
Federal and State law enforcement entities including the U.S. Department of Justice, (including, 
without limitation, the Federal Bureau of Investigation), the Department of Health and Human 
Services Office of Inspector General, State Medicaid Fraud Control Units (MFCUs), and State 
Surveillance and Utilization Review Units.  We will work systematically, both internally and 
with States, to minimize the likelihood of overlapping audits. 
 
States should ensure that contracts with Medicaid RACs provide that any indication of Medicaid 
(or other health care) fraud or abuse discerned by the Medicaid RACs will be referred timely 
either to the State MFCU or directly to an appropriate law enforcement organization.  Likewise, 
States must take affirmative steps to ensure that Medicaid RACs do not duplicate or compromise 
the efforts of other contractors, entities or agencies that may be undertaking a fraud and abuse 
investigation.  Such coordination should be undertaken in advance of any audit by a Medicaid 
RAC, and may be accomplished by negotiating a memorandum of understanding or reaching  Page 5  State Medicaid Director  
 
another agreement between the Medicaid RAC and other Federal and State contractors or entities 
performing Medicaid audits, as well as the aforementioned law enforcement agencies.  CMS 
expects that States will also provide ongoing information on the nature and direction of their 
respective Medicaid RAC activities.  Moreover, CMS will issue supplemental guidance 
regarding the interface between Medicaid RACs and CMS Medicaid Integrity Contractors at a 
later date.  
 
Section 6411(a)(2)(A) of the Affordable Care Act requires CMS to coordinate the expansion of 
the  RAC program to Medicaid with the States, particularly with respect to States that enter into 
contracts with Medicaid RACs prior to December 31, 2010.  CMS will provide technical 
assistance and support to States to ensure these programs are compliant with Medicaid RAC 
program requirements, and will provide continuing guidance through the CMS Medicaid 
Program Integrity Technical Advisory Group.  
 
Enclosed with this letter is a draft SPA preprint form in which States may attest to the 
implementation of the Medicaid RAC program, or indicate that the State does not intend to 
operate a program in accordance with the statutory requirements of Section 6411 of the 
Affordable Care Act, along with its reason(s) for not doing so.  Additionally, the draft preprint 
requires States to attest that they are in compliance with the provisions of the Medicaid RAC 
program and, where appropriate, provide additional program details.  Currently, CMS is seeking 
Office of Management and Budget approval to utilize the preprint.  Accordingly, this form is 
recommended for use by States, but not required, until the Paperwork Reduction Act process is 
completed.  
 
We look forward to our continuing work together as we implement this important legislation.  If 
you have questions regarding the information presented in this letter, please contact Ms. Angela 
Brice-Smith, Director of the Medicaid Integrity Group, Center for Program Integrity, at 
Angela.Brice-Smith@cms.hhs.gov or 410-786-4340. 
 
Sincerely, 
 
/s/ 
 
Peter Budetti, M.D., J.D. 
Deputy Administrator & Director 
Center for Program Integrity 
 
/s/ 
 
Cindy Mann 
Deputy Administrator & Director 
Center for Medicaid, CHIP and Survey & 
Certification 
  Page 6  State Medicaid Director  
 
Enclosure 
cc:  
 
CMS Regional Administrators 
 
CMS Associate Regional Administrators 
Division of Medicaid and Childrens Health 
 
State Program Integrity Directors 
 
Richard Fenton 
Acting Director 
Health Services Division 
American Public Human Services Association 
 
Joy Wilson 
Director, Health Committee 
National Conference of State Legislatures 
 
Matt Salo 
Director of Health Legislation 
National Governors Association 
 
Carol Steckel 
President 
National Association of Medicaid Directors 
 
Debra Miller 
Director of Health Policy 
Council of State Governments 
 
Christine Evans, M.P.H. 
Director, Government Relations 
Association of State and Territorial Health Officials/ 
 
Alan Weil, J.D., M.P.P. 
Executive Director 
National Academy for State Health Policy 
    Page 7  State Medicaid Director  
 
DRAFT  Medicaid State Plan Preprint Page -- DRAFT 
Revision:              State ____________________ 
 
PROPOSED SECTION 4 - GENERAL PROGRAM ADMINISTRATION 
4.5    Medicaid Recovery Audit Contractor Program 
 
   
Citation  _____The  State  has  established  a  program  under  which  it  will 
  contract with one or more recovery audit contractors (RACs) 
Section 1902(a)(42)(B)(i)     for  the  purpose  of  identifying  underpayments  and 
of the Social Security Act    overpayments of Medicaid claims under the State plan and 
  under any waiver of the State plan.  
    ____The  State  is  seeking  an  exception  to  establishing  such 
  program for the following reasons: 
   
   
Section 1902(a)(42)(B)(ii)(I)       _____The State/Medicaid agency has contracts of the type(s) listed 
of the Act  in   section 1902(a)(42)(B)(ii)(I) of the Act. All contracts 
  meet the requirements of the statute.  RACs are consistent 
  with the statute. 
   
  Place a check mark to provide assurance of  the following: 
   
    _____The State will make payments to the RAC(s) only from 
  amounts recovered. 
   
       _____The State will make payments to the RAC(s) on a       
  contingent basis for collecting overpayments. 
   
Section 1902  The following payment methodology shall be used to determine State 
(a)(42)(B)(ii)(II)(aa) of the Act  payments to Medicaid RACs for identification and recovery of 
  overpayments (e.g., the percentage of the contingency fee): 
   
  _____   The State attests that the contingency fee rate paid to the 
  Medicaid RAC will not exceed the highest rate paid to 
  Medicare RACs, as published in the Federal Register. 
   
  _____   The State attests that the contingency fee rate paid to the 
  Medicaid RAC will exceed the highest rate paid to 
  Medicare RACs, as published in the Federal Register. The 
  State will only submit for FFP up to the amount 
  equivalent to that published rate. 
   
    Page 8  State Medicaid Director  
   
   
  _____The contingency fee rate paid to the Medicaid RAC that 
  will exceed the highest rate paid to Medicare RACs, as 
  published in the Federal Register.  The State will submit a 
  justification for that rate and will submit for FFP for the 
  full amount of the contingency fee. 
   
Section 1902  _____The following payment methodology shall be used to 
(a)(42)(B)(ii)(II)(bb)   determine State payments to Medicaid RACs for the 
of the Act  identification of underpayments (e.g., amount of flat fee, 
  the percentage of the contingency fee): 
   
   
Section 1902 (a)(42)(B)(ii)(III)   _____   The State has an adequate appeal process in place for 
of the Act  entities to appeal any adverse determination made by the 
  Medicaid RAC(s). 
   
Section 1902  _____   The State assures that the amounts expended by the State 
(a)(42)(B)(ii)(IV)(aa)  to carry out the program will be amounts expended as 
of the Act  necessary for the proper and efficient administration of the 
  State plan or a waiver of the plan. 
   
   
Section  ______ The State assures that the recovered amounts will be  
1902(a)(42)(B)(ii)(IV(bb) of               subject to a States quarterly expenditure estimates and 
the Act  funding of the States share. 
   
   
Section 1902  _____ Efforts of the Medicaid RAC(s) will be coordinated with 
(a)(42)(B)(ii)(IV)(cc) Of the  other contractors or entities performing audits of entities 
Act  receiving payments under the State plan or waiver in the 
  State, and/or State and Federal law enforcement entities 
  and the CMS Medicaid Integrity Program.