Department of Health and Human Services

OFFICE OF 

INSPECTOR GENERAL 

 

 

RECOVERY AUDIT CONTRACTORS’ 

FRAUD REFERRALS 

 

Daniel R. Levinson 

Inspector General 

February 2010 

OEI-03-09-00130 
 

 EXECUTIVE SUMMARY 

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 

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EXECUTIVE SUMMARY 

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. 

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EXECUTIVE SUMMARY 

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. 
 TABLE OF CONTENTS 

EXECUTIVE SUMMARY ..................................i

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 

FINDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 

 

RECOMMENDATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 

 Agency Comments and Office of Inspector General Response . . . 12 

APPENDIX ................................................ 13 

 Agency Comments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 

ACKNOWLEDGMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
 

 INTRODUCTION 

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). 

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INTRODUCTION 

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 rates—California, Florida, 

and New York—were 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 CMS’s 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. 

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INTRODUCTION 

 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-Schultz’s 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. 

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INTRODUCTION 

 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 User’s Guide, version 3.0, p. 4. 

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INTRODUCTION 

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 million—or 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. 

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INTRODUCTION 

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. 

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INTRODUCTION 

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 CMS’s 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). 

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INTRODUCTION 

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 CMS’s 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.

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FINDINGS FINDINGS 

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Between 2005 and 2008, RACs referred two 

cases of potential fraud to CMS 

Two cases of potential fraud 

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 

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 

During the demonstration project, 

the RACs were routinely invited 

by CMS to participate in a 

number of conferences and 

meetings where fraud issues were 

discussed, but no formal training 

was provided to the RACs. In response to our information request 
 

FINDINGS 

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. 

10 

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. 

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A PPENDIX~A RECOMMENDATIONS 

 

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. 

 

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RECOMMENDATIONS 

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 CMS’s comments is provided in the Appendix. 

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A P PEN D x 

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 
 

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A PPENDIX 
 

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A PPENDIX 
 

 ACKNOWLEDGMENTS

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. 

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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 OIG’s 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.