MEDICARE

Claim Review 

Programs Could Be 

Improved with 

Additional 

Prepayment Reviews 

and Better Data

Report to the Chairman, Committee on 

Finance, U.S. Senate

April 2016

GAO-16-394

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-16-394, a report to the 

Chairman, Committee on Finance, U.S. 

Senate

April 2016

MEDICARE 

Claim Review Programs Could Be Improved with 

Additional Prepayment Reviews and Better Data

Why GAO Did This Study

CMS uses several types of claim 

review contractors to help reduce 

improper payments and protect the 

integrity of the Medicare program. 

CMS pays its contractors differently—

the agency is required by law to pay 

RAs contingency fees from recovered 

overpayments, while other contractors 

are paid based on cost. Questions 

have been raised about the focus of 

RA reviews because of the incentives 

associated with the contingency fees.

GAO was asked to examine the review 

activities of the different Medicare 

claim review contractors. This report 

examines (1) differences between 

prepayment and postpayment reviews

and the extent to which contractors use 

them; (2) the extent to which the claim 

review contractors focus their reviews 

on different types of claims; and (3) 

CMS’s cost per review and amount of 

improper payments identified by the 

claim review contractors per dollar paid 

by CMS. GAO reviewed CMS 

documents; analyzed CMS and 

contractor claim review and funding 

data for 2013 and 2014; interviewed 

CMS officials, claim review contractors, 

and health care provider organizations; 

and assessed CMS’s oversight against 

federal internal control standards.

What GAO Recommends

GAO recommends that CMS (1) 

request legislation to allow the RAs to 

conduct prepayment claim reviews,

and (2) provide written guidance on 

calculating savings from prepayment 

reviews. The Department of Health and 

Human Services disagreed with the

first recommendation, but concurred 

with the second. GAO continues to 

believe the first recommendation is 

valid as discussed in the report.

What GAO Found

The Centers for Medicare & Medicaid Services (CMS) uses different types of 

contractors to conduct prepayment and postpayment reviews of Medicare feefor-service claims at high risk for improper payments. Medicare Administrative 

Contractors (MAC) conduct prepayment and postpayment reviews; Recovery 

Auditors (RA) generally conduct postpayment reviews; and the Supplemental 

Medical Review Contractor (SMRC) conducts postpayment reviews as part of 

studies directed by CMS. CMS, its contractors, and provider organizations 

identified few significant differences between conducting and responding to 

prepayment and postpayment reviews. Using prepayment reviews to deny 

improper claims and prevent overpayments is consistent with CMS’s goal to pay 

claims correctly the first time and can better protect Medicare funds because not 

all overpayments can be collected. In 2013 and 2014, 98 percent of MAC claim 

reviews were prepayment, and 85 percent of RA claim reviews and 100 percent 

of SMRC reviews were postpayment. Because CMS is required by law to pay 

RAs contingency fees from recovered overpayments, the RAs can only conduct 

prepayment reviews under a demonstration. From 2012 through 2014, CMS 

conducted a demonstration in which the RAs conducted prepayment reviews and 

were paid contingency fees based on claim denial amounts. CMS officials 

considered the demonstration a success. However, CMS has not requested 

legislation that would allow for RA prepayment reviews by amending existing 

payment requirements and thus may be missing an opportunity to better protect 

Medicare funds.

The contractors focused their reviews on different types of claims. In 2013 and 

2014, the RAs focused their reviews on inpatient claims, which represented 

about 30 percent of Medicare improper payments. In 2013 and 2014, inpatient 

claim reviews accounted for 78 and 47 percent, respectively, of all RA claim 

reviews. Inpatient claims had high average identified improper payment amounts, 

reflecting the costs of the services. The RAs’ focus on inpatient claims was 

consistent with the financial incentives from their contingency fees, which are 

based on the amount of identified overpayments, but the focus was not 

consistent with CMS’s expectations that RAs review all claim types. CMS has

since taken steps to limit the RAs’ focus on inpatient claims and broaden the 

types of claims being reviewed. The MACs focused their reviews on physician 

and durable medical equipment claims, the latter of which had the highest rate of 

improper payments. The focus of the SMRC’s claim reviews varied. 

In 2013 and 2014, the RAs had an average cost per review to CMS of $158 and 

identified $14 in improper payments per dollar paid by CMS to the RAs. The 

SMRC had an average cost per review of $256 and identified $7 in improper 

payments per dollar paid by CMS. GAO was unable to determine the cost per 

review and amount of improper payments identified by the MACs per dollar paid 

by CMS because of unreliable data on costs and claim review savings. 

Inconsistent with federal internal control standards, CMS has not provided written 

guidance on how the MACs should calculate savings from prepayment reviews.

Without reliable savings data, CMS does not have the information it needs to 

evaluate the MACs’ performance and cost effectiveness in preventing improper 

payments, and CMS cannot compare performance across contractors.

View GAO-16-394. For more information, 

contact Kathleen M. King at (202) 512-7114 or 

kingk@gao.gov.
Page i GAO-16-394 Medicare Claim Review Contractors 

Letter 1

Background 7

Few Differences Exist between Prepayment and Postpayment 

Reviews and Use Varies by Contractor, but Prepayment 

Reviews Better Protect Medicare Funds 12

Contractors Focused on Different Types of Claims in 2013 and 

2014 17

Both RAs and the SMRC Generated Savings for CMS, but 

Unreliable Data Prevent Comparison to MACs 25

Conclusions 29

Recommendations for Executive Action 30

Agency Comments and Our Evaluation 30

Appendix I Comments from the Department of Health and Human Services 32

Appendix II GAO Contact and Staff Acknowledgments 35

Tables

Table 1: Centers for Medicare & Medicaid Services (CMS) 

Contractors That Conduct Medicare Fee-for-Service 

Claim Reviews 8

Table 2: Prepayment and Postpayment Claim Reviews by 

Medicare Contractors, 2013-2014 15

Table 3: Percentage of Recovery Auditor (RA) Claim Reviews by 

Claim Type, 2013 and 2014 18

Table 4: Recovery Auditor Average Identified Improper Payment 

Amount per Postpayment Claim Review by Claim Type, 

2013 and 2014 19

Table 5: Percentage of Medicare Administrative Contractor (MAC) 

Claim Reviews by Claim Type, 2013 and 2014 22

Table 6: Percentage of Supplemental Medical Review Contractor 

(SMRC) Claim Reviews by Claim Type, Fiscal Year (FY) 

2013 and 2014 24

Table 7: Recovery Auditor Funding and Identified Improper 

Payments, 2013-2014 25

Table 8: Supplemental Medical Review Contractor Funding and 

Identified Improper Payments, 2013-2014 26

Contents
Page ii GAO-16-394 Medicare Claim Review Contractors 

Abbreviations

CERT Comprehensive Error Rate Testing

CMS Centers for Medicare & Medicaid Services

DME durable medical equipment

FFS fee-for-service

HHS Department of Health and Human Services

HHS OIG Department of Health and Human Services Office of 

Inspector General

MAC Medicare Administrative Contractor

RA Recovery Auditor

SMRC Supplemental Medical Review Contractor

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Page 1 GAO-16-394 Medicare Claim Review Contractors 

441 G St. N.W.

Washington, DC 20548

April 13, 2016

The Honorable Orrin Hatch

Chairman

Committee on Finance

United States Senate

Dear Mr. Chairman:

In fiscal year 2014, Medicare fee-for-service (FFS) provided health 

insurance for approximately 38 million elderly and disabled beneficiaries 

at a cost of approximately $364 billion.1 Because of its size, complexity, 

and susceptibility to mismanagement and improper payments, we have 

designated Medicare a high-risk program.2 Improper Medicare payments 

include payments made for treatments or services that are not covered by 

program rules, not medically necessary, or not provided to beneficiaries in 

the way that they were billed to Medicare. In fiscal year 2014, the Centers 

for Medicare & Medicaid Services (CMS)—the agency within the 

Department of Health and Human Services (HHS) that administers the 

Medicare program—made payments for 1.2 billion FFS claims. CMS later 

estimated that improper payments totaled nearly $46 billion in the 

Medicare FFS program that year.

To reduce improper payments and ensure that payments to Medicare 

providers are made correctly, CMS conducts a number of program 

integrity activities.3 One such program integrity activity is the manual 

review of FFS claims and related medical records by trained clinicians 

and coders to ensure that the claims are consistent with Medicare 

 1

Medicare is the federally financed health insurance program for persons aged 65 and 

over, certain individuals with disabilities, and individuals with end-stage renal disease. 

Medicare Part A covers inpatient hospital services, skilled nursing facility services, some 

home health services, and hospice services. Medicare Part B covers physician and 

hospital outpatient services, and durable medical equipment, prosthetics, orthotics, and 

supplies, among other things. Together, Parts A and B are known as traditional Medicare 

or Medicare FFS. 

2

See GAO, High-Risk Series: An Update, GAO-15-290 (Washington, D.C.: Feb. 2015).

3

In this report, the term provider includes entities such as hospitals and physicians, 

entities that provide laboratory, ambulance, home health, hospice, therapy, and skilled 

nursing services, as well as entities that supply Medicare beneficiaries with durable 

medical equipment.

Letter
Page 2 GAO-16-394 Medicare Claim Review Contractors 

coverage, payment, and coding policies. Many improper claims can be 

identified only by manually reviewing associated medical records and a 

beneficiary’s claim history, and exercising clinical judgment to determine 

whether a service is reasonable and necessary. Less than one percent of 

claims undergo manual reviews.4

Claim reviews can occur either before or after payments are made—

known as prepayment and postpayment claim reviews, respectively—and 

CMS uses both to identify improper payments. When potential payment 

errors are identified during prepayment claim reviews, the claims are 

denied or partially denied and providers are not paid the denied 

amounts.5 With postpayment claim reviews, CMS attempts to identify and 

recover overpayments, or remediate underpayments, for claims that have 

already been paid. CMS has stated that one of its key strategies to 

reduce improper payments is to pay claims properly the first time to 

prevent the agency from having to recover overpayments. 

CMS uses several different types of contractors to review claims at high 

risk for improper payment and claims that pose the greatest financial risk 

to Medicare. Medicare Administrative Contractors (MAC) process and pay 

claims and conduct prepayment and postpayment reviews. Recovery 

Auditors (RA) generally conduct postpayment claim reviews, though CMS 

conducted a demonstration from 2012 through 2014 during which RAs 

conducted prepayment reviews for certain services. The Supplemental 

Medical Review Contractor (SMRC) conducts postpayment claim reviews 

as part of CMS-directed studies on specific high-risk claims.

Compared to the other claim review contractors, RAs are paid differently 

for their reviews. Specifically, CMS is required by law to use a 

contingency fee structure under which the RAs are paid from recovered 

overpayments. In contrast, CMS pays other claim review contractors 

 4

In this report we use the term “claim review” to refer to manual claim reviews. CMS and 

others sometimes refer to these claim reviews as “audits” or “medical reviews.” In addition 

to manual claim reviews, CMS also uses automated prepayment reviews—called 

prepayment “edits”— that use computer programming logic to ensure that payments are 

made correctly. Whereas manual claim reviews are conducted on very few claims, all 

claims are subject to automated edits. For additional information on prepayment edits, see 

GAO, Medicare Program Integrity: Greater Prepayment Control Efforts Could Increase 

Savings and Better Ensure Proper Payment, GAO-13-102 (Washington, D.C.: Nov. 2012).

5

Partially denied claims include claims in which certain billed services are denied, while 

other services are paid, and claims in which services are “downcoded” to services with 

lower reimbursement rates.
Page 3 GAO-16-394 Medicare Claim Review Contractors 

based on their costs to review claims. Some stakeholders have 

questioned whether the RAs focus their reviews on certain types of claims

because of the financial incentives associated with the contingency fees.

You asked us to examine the activities of the Medicare claim review 

contractors. This report examines:

1. the differences, if any, between prepayment and postpayment 

reviews, and the extent to which the contractors utilize these types of 

reviews; 

2. the extent to which the Medicare claim review contractors focus their 

reviews on different types of claims; and 

3. CMS’s cost per review and the amount of improper payments 

identified by the claim review contractors per dollar paid by CMS. 

To examine the differences, if any, between prepayment and 

postpayment reviews, and the extent to which the contractors utilize these 

types of reviews, we interviewed key stakeholders—CMS, RA, and MAC 

officials—regarding any significant differences in conducting these 

reviews. We also reviewed relevant agency documents, including CMS 

reports to Congress on the RA program and each MAC’s medical review 

strategy for 2013 and 2014.6 We reviewed the President’s budget 

proposals for fiscal years 2015 through 2017 to identify any budget or 

legislative proposals relevant to the RA program.7 We also interviewed 

officials from 10 organizations representing a variety of different types of 

Medicare health care providers who have experienced claim reviews, 

including providers that had claims reviewed as part of the RA 

prepayment review demonstration, to obtain their perspectives on any 

differences between responding to prepayment and postpayment 

 6

Each year the MACs submit medical review strategies to CMS that include a prioritized 

list of the specific improper payment vulnerabilities deemed most critical by each MAC to 

address and a description of plans to address them.

7

Each year, the President submits a fiscal year budget request to Congress. In addition to 

providing detailed estimates of the financial operations of federal agencies and programs, 

the President's budget request typically includes legislative proposals.
Page 4 GAO-16-394 Medicare Claim Review Contractors 

reviews.8 To examine CMS’s ability to collect overpayments, we reviewed 

Department of Health and Human Services Office of Inspector General 

(HHS OIG) reports on Medicare “currently not collectible” 

overpayments—overpayments for which a provider has not made a 

repayment for at least 6 months after the due date. We also obtained data 

from CMS on the number of prepayment and postpayment claim reviews 

conducted by the RAs. We obtained data from each of the 16 MACs on 

the number of prepayment and postpayment claim reviews they 

completed.9 We obtained study reports generated by the SMRC from 

CMS, which provided data on the number of claims reviewed by the 

contractor. We obtained data on the number of MAC and RA claim 

reviews conducted in calendar years 2013 and 2014, and SMRC claim 

reviews for completed studies initiated in fiscal years 2013 and 2014. At 

the time of our review, data for 2013 and 2014 were the most recent 

complete years of data available.

To examine the extent to which the Medicare claim review contractors 

focus their reviews on the different types of claims, we reviewed CMS 

documentation detailing RA, MAC, and SMRC claim review program 

requirements, including the Medicare Program Integrity Manual and 

contract statements of work.10 We obtained data from CMS on the 

number of claim reviews conducted by the RAs by the following types of 

Medicare claims: inpatient, outpatient, skilled nursing facility, hospice, 

home health, durable medical equipment (DME), and physician and other 

 8

We interviewed officials from the following provider organizations: American Ambulance 

Association; American Association for Homecare; American Hospital Association; 

American Medical Association; American Medical Rehabilitation Providers Association; 

American Physical Therapy Association; Council for Quality Respiratory Care; National 

Association for Homecare & Hospice; National Association for the Support of Long Term 

Care; and Orthotic & Prosthetic Alliance. 

9

During the period of our review, CMS executed three MAC contracts that incorporated 

work associated with different, outgoing MAC contractors. Our data from these three 

MACs do not include claim reviews conducted under the outgoing contracts and, 

accordingly, our MAC data do not include all MAC claim reviews conducted during this 

time period.

10Our analysis included CMS claim review contractors that are responsible for reviewing 

claims at high risk for improper payment. We excluded several other CMS contractors that 

may review claims that have different responsibilities, such as Zone Program Integrity 

Contractors and Quality Improvement Organizations. Zone Program Integrity Contractors, 

who investigate potential Medicare fraud, may review provider claims as part of their 

investigations. Quality Improvement Organizations, who conduct activities to improve the 

quality of care for Medicare beneficiaries, review claims to ensure that care meets quality 

standards.
Page 5 GAO-16-394 Medicare Claim Review Contractors 

carrier.11 We obtained data from each of the 16 MACs on the number of 

claim reviews that they completed by the same seven types of Medicare 

claims. We reviewed the study reports generated by the SMRC, and 

categorized the claim reviews conducted by the contractor according to 

the same seven types of Medicare claims. We examined the RA, MAC, 

and SMRC claim review data in light of published Medicare 

Comprehensive Error Rate Testing (CERT) data on the rates and 

amounts of improper payments by claim type for fiscal years 2012 and 

2013.12 Because claim review contractors use prior year CERT findings 

to focus their reviews on claims at high risk for improper payment, we 

compared the contractors’ claim review data in 2013 and 2014 to fiscal 

year 2012 and 2013 CERT data. Additionally, we obtained data on CMS 

approvals of RA “audit issues”—the types of claims the RAs intend to 

review—from the inception of the program to May 2015.13

To examine the CMS cost per review and the amount of improper 

payments identified by the claim review contractors per dollar paid by 

CMS, we obtained data from CMS on agency funding of claim reviews for 

the MACs for calendar years 2013 and 2014. We also obtained CMS data 

on contingency fees paid to the RAs for reviews conducted in 2013 and 

2014 as of July 2015.14 For SMRC studies, we obtained data on agency 

funding for studies initiated in fiscal years 2013 and 2014. We also 

obtained data on the amount of improper payments identified by each of 

 11Inpatient and outpatient claims include claims for both hospitals and other institutional 

providers, such as inpatient and outpatient rehabilitation facilities. Physician and other 

carrier claims include claims for non-institutional providers, such as physicians, 

ambulances, and free-standing facilities, such as clinical laboratories. For the purposes of 

this report, we refer to this type of claim as “physician claims.” 

12The CERT rates and amounts we report may differ slightly from those in published 

CERT reports. We analyzed reported CERT data to generate improper payment rates and 

amounts for the seven types of Medicare claims, which did not necessarily align with the 

categories in the CERT reports. For example, the CERT reported the improper payment 

rate for inpatient hospital services, while we are reporting on the improper payment rates 

for inpatient claims broadly, which include inpatient rehabilitation services. 

13We reviewed CMS’s approval of RA audit issues for manual claim reviews. The RAs 

may also conduct automated postpayment reviews, and we did not review CMS approval 

of audit issues for those reviews. 

14The amount RAs are paid for specific claim reviews can vary over time based on 

additional collections and claim review appeals. Medicare has a process that allows for 

the appeal of claim denials, and the RAs have to return contingency fees for claim denials 

that are overturned on appeal.
Page 6 GAO-16-394 Medicare Claim Review Contractors 

the contractors based on reviews conducted in the same time periods.15

For the amount of improper payments identified by the MACs, we 

obtained data from each of the 16 MACs. We obtained data on improper 

payments identified by the RAs from CMS. For the amount of improper 

payments identified by the SMRC, we obtained data from the contractor’s 

study reports. We used the CMS cost per review and identified improper 

payment data to calculate the amount of improper payments identified by 

the claim review contractors per dollar paid by CMS, which allowed us to 

examine the value provided by each contractor.

For each of the three different types of contractors, we assessed the 

reliability of claim review data—including data on the number of 

prepayment and postpayment reviews, the number of reviews by claim 

type, and the amount of identified improper payments—and agency

funding data. We also assessed the reliability of the RA audit issues data. 

We assessed these data by reviewing related documentation; comparing 

the data to published data; interviewing CMS, RA, and MAC officials; and 

testing the data for missing data, outliers, or obvious errors. Based on our 

assessment, we found the following: 

• RA claim review, funding, and approved audit issues data were 

reliable for the purposes of our report. 

• SMRC claim review and funding data were reliable for the purposes of 

our report. 

• MAC data on the number of prepayment and postpayment reviews 

and the number of reviews by claim type were reliable for the 

purposes of our report. However, MAC data on the amount of 

identified improper payments and agency funding data for certain 

MACs were not reliable for the purposes of our report. As a result, we 

 15We obtained data on the amount of improper payments identified by each of the 

contractors, which may differ from the amount that is ultimately collected by CMS. Our 

data may differ from those published in CMS’s reports to Congress on the RA program. 

The reports to Congress present data on the amount of overpayments collected each 

fiscal year, which may include collections from overpayments identified in reviews 

conducted in prior years.
Page 7 GAO-16-394 Medicare Claim Review Contractors 

reviewed CMS’s oversight practices for these data and compared 

them against federal internal controls standards.16

We conducted this performance audit from June 2015 to February 2016 

in accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives.

Contractors have a long-standing and essential role in administering the 

Medicare program, including conducting program integrity activities, such 

as claims reviews, which are integral to preventing improper payments.17

The contractors use the same general process for conducting claims 

reviews: they select claims for review; request medical documentation 

from providers to support Medicare coverage of those claims; apply 

Medicare coverage, payment, and coding requirements to determine if 

claims were paid properly; and communicate the results of their reviews 

to the providers.18 The three types of contractors we examined—the 

MACs, RAs, and the SMRC—are all responsible, to some extent, for 

reviewing claims at high risk for improper payment and claims that pose 

 16See GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-

21.3.1 (Washington, D.C.: November 1999). Internal control is a process effected by an 

entity’s oversight body, management, and other personnel that provides reasonable 

assurance that the objectives of an entity will be achieved.

17An improper payment is any payment that should not have been made or that was made 

in an incorrect amount (including overpayments and underpayments) under statutory, 

contractual, administrative, or other legally applicable requirements. This definition 

includes any payment to an ineligible recipient, any payment for an ineligible good or 

service, any duplicate payment, any payment for a good or service not received (except 

where authorized by law), and any payment that does not account for credit for applicable 

discounts. Improper Payments Elimination and Recovery Act of 2010, Pub. L. No. 111-

204, § 2(e), 124 Stat. 2224, 2227 (2010) (codified at 31 U.S.C. § 3321 note). Office of 

Management and Budget guidance also instructs agencies to report as improper 

payments any payments for which insufficient or no documentation was found.

18We have previously reported on claim review contractor requirements and CMS’s 

contract oversight. See GAO, Medicare Program Integrity: Increased Oversight and 

Guidance Could Improve Effectiveness and Efficiency of Postpayment Claims Reviews, 

GAO-14-474 (Washington, D.C.: July 2014) and GAO, Medicare Program Integrity: 

Increasing Consistency of Contractor Requirements May Improve Administrative 

Efficiency, GAO-13-522 (Washington, D.C.: July 2013).

Background
Page 8 GAO-16-394 Medicare Claim Review Contractors 

the greatest financial risk to Medicare (see Table 1). However, the 

contractors have varying roles and levels of CMS direction and oversight 

in identifying claims for review.

Table 1: Centers for Medicare & Medicaid Services (CMS) Contractors That Conduct Medicare Fee-for-Service Claim Reviews

Medicare Administrative 

Contractors

Recovery Auditors Supplemental Medical Review 

Contractor

Number of 

contractors

16a 4 1

Primary purpose 

of contractor 

claims reviews

To better ensure payment accuracy 

in their geographic regions and 

ensure provider compliance with 

Medicare requirements

To identify improper payments 

through postpayment claim reviews

To conduct nationwide postpayment 

claim reviews as part of CMSdirected studies

Type of claim 

reviews 

conducted

Prepayment and postpayment Postpaymentb Postpayment

Identification of

claims for review

Contractors develop a claim review 

strategy for targeting high-risk claims

Contractors identify claims for review 

among CMS-approved audit issues

CMS directs studies on claims at 

high risk for improper payments 

Source: GAO analysis of CMS information. | GAO-16-394

Notes: Our report examines CMS claim review contractors that are responsible for reviewing claims 

at high risk for improper payment. We excluded several other CMS contractors that may review 

claims that have different responsibilities, such as Zone Program Integrity Contractors and Quality 

Improvement Organizations.

a

There are 12 Part A/B Medicare Administrative Contractors and 4 Durable Medical Equipment 

Medicare Administrative Contractors. Four of the 12 A/B Medicare Administrative Contractors process 

all home health and hospice claims. b

From 2012 through 2014, CMS conducted a demonstration in which the Recovery Auditors 

conducted prepayment claim reviews for certain types of claims.

MACs process and pay claims and conduct prepayment and postpayment

reviews for their established geographic regions. As of January, 2016, 12 

MACs—referred to as A/B MACs—processed and reviewed Medicare 

Part A and Part B claims, and 4 MACs—referred to as DME MACs—

processed and reviewed DME claims.19 MACs are responsible for 

identifying both high-risk providers and services for claim reviews, and 

CMS has generally given the MACs broad discretion to identify claims for 

 19Four of the 12 A/B MACs process all home health and hospice claims. 

MACs
Page 9 GAO-16-394 Medicare Claim Review Contractors 

review. Each individual MAC is responsible for developing a claim review 

strategy to target high-risk claims.

20

In their role of processing and paying claims, the MACs also take action 

based on claim review findings. The MACs deny payment on claims when 

they or other contractors identify payment errors during prepayment claim 

reviews. When MACs or other claim review contractors identify 

overpayments using postpayment reviews, the MACs seek to recover the 

overpayment by sending providers what is referred to as a demand letter. 

In the event of underpayments, the MACs return the balance to the 

provider in a future reimbursement.

The RA program has four regional RAs that generally conduct 

postpayment claim reviews based on CMS-approved audit issues. For 

each audit issue, the RAs submit to CMS for review and approval a 

description of the types of claims that they propose to review and the 

basis for assessing whether the claims and related payments are proper. 

For example, one RA received approval in 2013 to review DME supplier 

claims for knee braces to ensure that beneficiaries met Medicare 

coverage requirements for the equipment. Each RA is responsible for 

developing their own audit issues, and CMS generally gives the RAs 

discretion to identify claims for review among the approved issues. 

According to the RAs’ statement of work, CMS expects them to review all 

types of claims and to select those claims that are at high risk of improper 

payments for review. In limited circumstances, CMS has directed the RAs 

to review specific claims. For example, beginning in April 2013, CMS 

directed the RAs to review claims for therapy services that exceeded an 

annual per beneficiary limit.21

 20For additional information on the MAC roles and responsibilities, see GAO, Medicare 

Administrative Contractors: CMS Should Consider Whether Alternative Approaches Could 

Enhance Contractor Performance, GAO-15-372 (Washington, D.C.: Apr. 2015).

21Congress established per beneficiary Medicare limits for therapy services, which took 

effect in 1999. However, Congress imposed temporary moratoria on the limits several 

times until 2006, when it required CMS to implement an exceptions process in which 

exceptions to the limits are allowed for reasonable and necessary therapy services. 

Starting in 2012, the exceptions process has applied a claim review requirement on claims 

after a beneficiary’s annual incurred expenses reach certain thresholds. For additional 

information on the therapy service limits, see GAO, Medicare Outpatient Therapy: 

Implementation of the 2012 Manual Medical Review Process, GAO-13-613 (Washington, 

D.C.: July, 2013).

RAs
Page 10 GAO-16-394 Medicare Claim Review Contractors 

As required by law, the RAs are paid on a contingent basis from 

recovered overpayments.22 The contingency fees generally range from 

9.0 percent to 17.5 percent, and vary by RA region, the type of service 

reviewed, and the way in which the provider remits the overpayment. 

Because the RAs are paid from recovered funds rather than appropriated 

funds, the use of RAs expands CMS’s capacity for claim reviews without 

placing additional demands on the agency’s budget. The RAs are allowed 

to target high-dollar claims that they believe have a high risk of improper 

payments, though they are not allowed to identify claims for review solely 

because they are high-dollar claims. The RAs are also subject to limits 

that only allow them to review a certain percentage or number of a given 

provider’s claims.

The RAs initially identified high rates of error for short inpatient hospital 

stays and targeted those claims for review. Certain hospital services, 

particularly services that require short hospital stays, can be provided in 

both an inpatient and outpatient setting, though inpatient services 

generally have higher Medicare reimbursement amounts. The RAs found 

that many inpatient services should have been provided on an outpatient 

basis and denied many claims for having been rendered in a medically 

unnecessary setting.23 Medicare has a process that allows for the appeal 

of claim denials, and hospitals appealed many of the short inpatient stay 

claims denied by RAs. Hospital appeals of RA claim denials helped 

contribute to a significant backlog in the Medicare appeals system.24

The requirement that RAs be paid on a contingent basis from recovered 

overpayments generally precludes them from conducting prepayment 

reviews. However, according to CMS officials, the Secretary waived this 

requirement under HHS’s demonstration authority for the purpose of 

 2242 U.S.C. § 1395ddd(h)(1). 

23For additional information on Medicare coverage of short hospital stays, see Medicare 

Payment Advisory Commission, June 2015 Report to the Congress: Medicare and the 

Health Care Delivery System (Washington, D.C.: June 2015). 

http://www.medpac.gov/documents/reports/june-2015-report-to-the-congress-me

dicare-and-the-health-care-delivery-system.pdf

24The number of appeals for Part A claims increased substantially in recent years in part 

because of appeals of RA denials of inpatient hospital claims. To reduce the number of 

short inpatient hospital stay claims in the appeals process, from August through October 

2014, CMS offered an administrative agreement to any hospital willing to withdraw their 

pending appeals of short inpatient hospital stay claims in exchange for partial payment of 

68 percent of the claim amount.
Page 11 GAO-16-394 Medicare Claim Review Contractors 

determining whether RA prepayment reviews could prevent fraud and the 

resulting improper payments and, in turn, lower the FFS improper 

payment rate. From 2012 through 2014, operating under this waiver 

authority, CMS conducted the RA Prepayment Review Demonstration in 

11 states. In these states, CMS directed the RAs to conduct prepayment 

claim reviews for specific inpatient hospital services. Additionally, the RAs 

conducted prepayment reviews of therapy claims that exceeded the 

annual per beneficiary limit in the 11 demonstration states. Under the 

demonstration, instead of being paid a contingency fee based on 

recovered overpayments, the RAs were paid contingency fees based on 

claim denial amounts.

In anticipation of awarding new RA contracts, CMS began limiting the 

number of RA claim reviews and discontinued the RA Prepayment 

Review Demonstration in 2014. CMS required the RAs to stop sending 

requests for medical documentation to providers in February 2014, so 

that the RAs could complete all outstanding claim reviews by the end of 

their contracts. However, in June 2015, CMS cancelled the procurement 

for the next round of RA contracts, which had been delayed because of 

bid protests. Instead, CMS modified the existing RA contracts to allow the 

RAs to continue claim review activities through July 31, 2016. In 

November 2015, CMS issued new requests for proposals for the next 

round of RA contracts and, according to CMS officials, plans to award 

them in 2016. 

The SMRC conducts nationwide postpayment claim reviews as part of 

CMS-directed studies aimed at lowering improper payment rates. The 

SMRC studies often focus on issues related to specific services at high 

risk for improper payments, and provide CMS with information on the 

prevalence of the issues and recommendations on how to address them. 

Although CMS directs the types of services and improper payment issues 

that the SMRC examines, the SMRC identifies the specific claims that are 

reviewed as part of the studies.

CMS’s CERT program annually estimates the amount and rate of 

improper payments in the Medicare FFS program, and CMS uses the 

CERT results, in part, to direct and oversee the work of claim review 

contractors, including the MACs, RAs, and SMRC. CMS’s CERT program 

develops its estimates by using a contractor to conduct postpayment 

claim reviews on a statistically valid random sample of claims. The CERT 

program develops the estimates as part of CMS’s efforts to comply with 

the Improper Payments Information Act, which requires agencies to 

SMRC

Medicare CERT Program
Page 12 GAO-16-394 Medicare Claim Review Contractors 

annually identify programs susceptible to significant improper payments, 

estimate amounts improperly paid, and report these estimates and 

actions taken to reduce them.25 In addition, the CERT program estimates 

improper payment rates specific to Medicare service and provider types 

and identifies services that may be particularly at risk for improper 

payments. 

Prepayment reviews, which occur before payments are made, can better 

protect Medicare funds compared to postpayment reviews. One of CMS’s 

key strategies to reduce improper payments is to pay claims properly the 

first time, and prepayment reviews prevent CMS from having to recover 

overpayments—often referred to as the “pay and chase” process—

identified through postpayment reviews.26 Prepayment reviews can better 

protect agency funds because

 25See Improper Payments Information Act of 2002 (IPIA), Pub. L. No. 107-300, 116 Stat. 

2350 (2002) (codified, as amended, at 31 U.S.C. § 3321 note). The IPIA was 

subsequently amended by the Improper Payments Elimination and Recovery Act of 2010, 

Pub. L. No. 111-204, 124 Stat. 2224 (2010), and the Improper Payments Elimination and 

Recovery Improvement Act of 2012, Pub. L. No. 112-248, 126 Stat. 2390 (2013).

26We have also reported that prepayment controls are generally more cost-effective than 

postpayment controls and help avoid costs associated with the “pay and chase” process. 

See GAO, A Framework for Managing Fraud Risks in Federal Programs, GAO-15-593SP

(Washington, D.C.: July 28, 2015).

Few Differences Exist 

between Prepayment 

and Postpayment 

Reviews and Use 

Varies by Contractor, 

but Prepayment 

Reviews Better 

Protect Medicare 

Funds 

Prepayment Reviews 

Better Protect Medicare 

Funds, and Stakeholders 

Report Few Differences 

between Prepayment and 

Postpayment Reviews 
Page 13 GAO-16-394 Medicare Claim Review Contractors 

• CMS is not always able to collect overpayments identified through 

postpayment reviews. A 2013 HHS OIG study found that each year 

over the period from fiscal year 2007 to fiscal year 2010, 

approximately 6 to 9 percent of all overpayments identified by claim 

review contractors were deemed not collectible.27

• Postpayment reviews require more administrative resources 

compared to prepayment reviews. Once overpayments are identified 

on a postpayment basis, CMS requires contractors to take timely 

efforts to collect the overpayments. HHS OIG reported that the 

process for recovering overpayments can involve creating and 

managing accounts receivables for the overpayments, tracking 

provider invoices and payments, and managing extended repayment 

plans for certain providers.28 In contrast, contractors do not need to 

take these steps, and expend the associated resources, for 

prepayment reviews, which deny claims before overpayments are 

made.

Key stakeholders we interviewed identified few significant differences in 

conducting and responding to prepayment and postpayment reviews. 

Specifically, CMS, MAC, and RA officials stated that prepayment and 

postpayment review activities are generally conducted by claim review 

contractors in similar ways. Officials we interviewed from health care 

provider organizations told us that providers generally respond to 

prepayment and postpayment reviews similarly, as both types of review 

occur after a service has been rendered, and involve similar medical 

documentation requirements and appeal rights.

Though provider organizations generally reported responding to 

prepayment and postpayment reviews similarly, they did identify two 

issues specific to prepayment reviews. First, providers have the option to 

 27These statistics are based on CMS summary financial data, and the currently not 

collectable classification for overpayments can vary based on when overpayments are 

identified and demanded, and if overpayments are under appeal. See Department of 

Health and Human Services, Office of Inspector General, Medicare’s Currently Not 

Collectible Overpayments, OEI-03-11-00670 (Washington, D.C.: June 2013).

28HHS OIG, OEI-03-11-00670.
Page 14 GAO-16-394 Medicare Claim Review Contractors 

hold discussions with the RAs for postpayment review findings, and CMS 

recently implemented the option for SMRC findings as well. The 

discussions offer providers the opportunity to give additional information 

before payment determinations are made and before providers potentially 

enter the Medicare claims appeals process. Several of the provider 

organizations we interviewed found the RA discussions helpful, stating 

that some providers have been able to get RA overpayment 

determinations reversed. Such discussions are not available for RA 

prepayment claim reviews or for MAC reviews. CMS officials stated that 

the discussions are not feasible for prepayment claim reviews due to 

timing difficulties, as the MACs and RAs are required to make payment 

determinations within 30 days after receiving providers’ medical records. 

Second, providers stated that they may face certain cash flow burdens 

with prepayment claim reviews that they do not face with postpayment 

reviews due to how the claims are treated in the Medicare appeals 

process.29 When appealing postpayment review overpayment 

determinations, providers keep their Medicare payment through the first 

two levels of appeal before CMS recovers the identified overpayment. If 

the overpayment determinations are overturned at a higher appeal level, 

CMS must pay back the recovered amount with interest accrued for the 

period in which the amount was recouped. In contrast, providers do not 

receive payment for claims denied on a prepayment basis and, if 

prepayment denials are overturned on appeal, providers do not receive 

interest on the payments for the duration the payments were held by 

CMS.

The MACs, SMRC, and RAs varied in the extent to which they conducted 

prepayment and postpayment reviews from 2013 through 2014. Nearly all 

of the MAC claim reviews were conducted on a prepayment basis. From 

2013 through 2014, the MACs conducted approximately 3 million 

prepayment reviews, which accounted for 98 percent of their total claim 

reviews (see Table 2). The MACs generally use prepayment reviews to 

focus on high-risk services, including billing issues identified by CMS’s 

CERT program, CMS, or the HHS OIG and issues identified through the 

MACs’ own analyses. Each year the MACs are required to submit 

medical review strategies to CMS that include a prioritized list of high-risk 

 29The Medicare FFS appeals process consists of five levels of review that include CMS 

contractors, staff divisions within HHS, and ultimately, the federal judicial system, allowing 

appellants who are dissatisfied with the decision at one level to appeal to the next level. 

MACs Generally Use 

Prepayment Reviews, 

while RAs and the SMRC 

Use Postpayment 

Reviews
Page 15 GAO-16-394 Medicare Claim Review Contractors 

claims deemed most critical by each MAC to address and a description of 

plans to address them.

Table 2: Prepayment and Postpayment Claim Reviews by Medicare Contractors, 2013-2014

Medicare Administrative 

Contractors (MAC)

Supplemental Medical Review 

Contractor

Recovery Auditors

Number of 

reviewsa Percentage of total reviews 

(%)

Number of reviews Percentage of 

total reviews 

(%)

Number of reviews Percentage of 

total reviews 

(%)

Prepayment 

claim reviews

2,978,945 98 0 0 303,090b 15b

Postpayment 

claim reviews

75,916 2 178,167 100 1,677,023 85

Total claim 

reviews

3,054,861 100 178,167 100 1,980,113 100

Source: GAO analysis of the Centers for Medicare & Medicaid Studies (CMS) and MAC data. | GAO-16-394 

a

During 2013 and 2014, CMS executed three MAC contracts, which incorporated work associated 

with different outgoing MAC contractors. Our data from these three MACs do not include claim 

reviews conducted under the outgoing contracts and, accordingly, our MAC data do not include all 

MAC claim reviews conducted during this time period.

b

Recovery Auditors generally conduct postpayment claim reviews. However, from 2012 through 2014, 

CMS conducted a demonstration in which the Recovery Auditors conducted prepayment claim

reviews for certain types of claims.

During the same time period, the MACs conducted approximately 76,000 

postpayment claim reviews, though some MACs did not conduct any 

postpayment claims reviews. Prior to the establishment of the national RA 

program, the MACs conducted a greater proportion of postpayment 

reviews. However, the MACs have shifted nearly all of their focus to 

conducting prepayment reviews, as responsibility for conducting 

postpayment reviews has generally shifted to the RAs. According to CMS 

officials, the MACs currently use postpayment reviews to analyze billing 

patterns to inform other review activities, including future prepayment 

reviews, and to help determine where to conduct educational outreach for 

specific providers. CMS has also encouraged the MACs to use 

postpayment reviews to perform extrapolation, a process in which the 

MACs estimate an overpayment amount for a large number of claims 

based on a sample of claim reviews. According to CMS officials, 

extrapolation is not used often but is an effective strategy for providers 

that submit large volumes of low-dollar claims with high improper 

payment rates.

The SMRC is focused on examining Medicare billing and payment issues 

at the direction of CMS, and all of its approximately 178,000 reviews in 

2013 and 2014 were postpayment reviews. The SMRC uses postpayment 
Page 16 GAO-16-394 Medicare Claim Review Contractors 

reviews because its studies involve developing sampling methodologies 

to examine issues with specific services or specific providers. For 

example, in 2013, CMS directed the SMRC to complete a national review 

of home health agencies, which involved reviewing five claims from every 

home health agency in the country. CMS had the SMRC conduct this 

study to examine issues arising from a new coverage requirement that 

raised the improper payment rate for home health services.30 Additionally, 

a number of SMRC studies used postpayment sampling to perform 

extrapolation to determine overpayment amounts for certain providers.

The RAs generally conducted postpayment reviews, though they 

conducted prepayment reviews under the Prepayment Review 

Demonstration. The RAs conducted approximately 85 percent of their 

claim reviews on a postpayment basis in 2013 and 2014—accounting for 

approximately 1.7 million postpayment claim reviews—with the other 15 

percent being prepayment reviews conducted under the demonstration. 

CMS is no longer using the RAs to conduct prepayment reviews because

the demonstration ended. Outside of a demonstration, CMS must pay the 

RAs from recovered overpayments, which effectively limits the RAs to

postpayment reviews. CMS and RA officials who we interviewed 

generally considered the demonstration a success, and CMS officials told 

us that they included prepayment reviews as a potential work activity in 

the requests for proposals for the next round of RA contracts, in the event 

that the agency is given the authority to pay RAs on a different basis. 

However, the President’s fiscal year budget proposals for 2015 through 

2017 did not contain any legislative proposals that CMS be provided such 

authority. Obtaining the authority to allow the RAs to conduct prepayment 

reviews would align with CMS’s strategy to pay claims properly the first 

time. In not seeking the authority, CMS may be missing an opportunity to 

reduce the amount of uncollectable overpayments from RA reviews and 

save administrative resources associated with recovering overpayments. 

 30The rate of improper payments for home health services rose from 6.1 percent in fiscal 

year 2012 to 17.3 percent in fiscal year 2013and to 51.4 percent in fiscal year 2014. 

According to CMS, the increase in improper payments occurred primarily because of 

CMS’s implementation of a requirement that home health agencies have documentation 

showing that referring providers conducted a face-to-face examination of beneficiaries 

before certifying them as eligible for home health services.
Page 17 GAO-16-394 Medicare Claim Review Contractors 

Our analysis of RA claim review data shows that the RAs focused on 

reviewing inpatient claims in 2013 and 2014, though this focus was not 

consistent with the degree to which inpatient services constituted 

improper payments, or with CMS’s expectation that the RAs review all 

claim types. In 2013, a significant majority—78 percent—of all RA claim 

reviews were for inpatient claims, and in 2014, nearly half—47 percent—

of all RA claim reviews were for inpatient claims (see Table 3). For RA 

postpayment reviews specifically, which excludes reviews conducted as 

part of the RA Prepayment Review Demonstration, 87 percent of RA 

reviews were for inpatient claims in 2013, and 64 percent were for 

inpatient claims in 2014.31 Inpatient services had high amounts of 

improper payments relative to other types of services—with over $8 billion 

in improper payments in fiscal year 2012 and over $10 billion in fiscal 

year 2013—which reflect the costs of providing these services. However, 

inpatient services did not have a high improper payment rate relative to 

other services and constituted about 30 percent of overall Medicare FFS 

improper payments in both years.32

 31All of the prepayment reviews conducted by the RAs were CMS-directed reviews, either 

for specific inpatient hospital services or therapy services. With the exception of CMSdirected reviews for therapy services in the states outside of the Prepayment Review 

Demonstration, claims for postpayment review are generally selected by the RAs, based 

on audit issues approved by CMS.

32CMS officials noted that RA reviews of inpatient claims focused on claims for short 

inpatient hospital stays, which had high improper payment rates. For example, in fiscal 

year 2012, short inpatient hospital stays of one day or less had an improper payment rate 

of 36 percent. For our analysis, we obtained data by claim type, and we were unable to 

analyze the specific type of inpatient claims reviewed by the RAs. 

Contractors Focused 

on Different Types of 

Claims in 2013 and 

2014

RAs Focused on Inpatient 

Claim Reviews, Though 

CMS Has Taken Steps to 

Ensure RAs Review All 

Claim Types 
Page 18 GAO-16-394 Medicare Claim Review Contractors 

Table 3: Percentage of Recovery Auditor (RA) Claim Reviews by Claim Type, 2013 and 2014

Claim type 2013 Total RA reviews

(%)a

2013 RA postpayment 

reviews

(%)

FY 2012 improper payment 

rate (%)b FY 2012 percentage of estimated improper 

payments (%)b

Inpatient 78 87 7 28

Outpatient 8 4 5 10

Skilled nursing 

facility 

2 1 5 6

Hospice 0 0 2 1

Home health 

agency

2 2 6 4

Durable 

medical 

equipment

3 3 66 22

Physician 8 2 10 30

Number of RA 

reviews

1,463,978 1,300,379 — — 

Claim type 2014 Total RA reviews

(%)a

2014 RA postpayment 

reviews

(%)

FY 2013 improper payment 

rate (%)b FY 2013 percentage of estimated improper 

payments (%)b

Inpatient 47 64 8 29

Outpatient 22 14 6 11

Skilled nursing 

facility 

7 5 7 7

Hospice 0 0 8 3

Home health 

agency

4 5 17 9

Durable 

medical 

equipment

3 4 58 16

Physician 18 9 11 26

Number of RA 

reviews

516,135 376,644 — — 

Source: GAO analysis of the Centers for Medicare & Medicaid Services (CMS) data. | GAO-16-394

Note: Percentages may not add to 100 percent due to rounding.

a

Total RA reviews in 2013 and 2014 include postpayment reviews as well as prepayment reviews for 

certain types of claims conducted as part of the RA Prepayment Review Demonstration. 

b

The improper payment rate represents the percentage of Medicare fee-for-service payments that 

CMS’s Comprehensive Error Rate Testing (CERT) program estimates to be improper in a given fiscal 

year. The CERT program estimated that the total amount of improper payments in fiscal year 2012 

was $29.6 billion, and $36.0 billion in fiscal year 2013.Since the claim review contractors often base 

their reviews on prior year CERT findings on claims at high risk for improper payment, we compared 

2013 and 2014 RA claim review data to fiscal year 2012 and 2013 CERT data. 
Page 19 GAO-16-394 Medicare Claim Review Contractors 

As will be discussed, the proportion of inpatient reviews in 2014 would 

likely have been higher if CMS—first under its own authority and then as 

required by law—had not prohibited the RAs from conducting reviews of 

claims for short inpatient hospital stays at the beginning of fiscal year 

2014. The RAs conducted about 1 million fewer claim reviews in 2014 

compared to 2013, and nearly all of the decrease can be attributed to 

fewer reviews of inpatient claims. 

In general, the RAs have discretion to select the claims they review, and 

their focus on reviewing inpatient claims is consistent with the financial 

incentives associated with the contingency fees they receive, as inpatient 

claims generally have higher payment amounts compared to other claim 

types. By law, RAs receive a portion of the recovered overpayments they 

identify, and RA officials told us that they generally focus their claim 

reviews on audit issues that have the greatest potential returns. Our 

analysis found that RA claim reviews for inpatient services had higher 

average identified improper payment amounts per postpayment claim 

review relative to other claim types in 2013 and 2014 (see Table 4). For 

example, in 2013, the RAs identified about 10 times the amount per 

postpayment claim review for inpatient claims compared to claim reviews 

for physicians.

Table 4: Recovery Auditor Average Identified Improper Payment Amount per Postpayment Claim Review by Claim Type, 2013 

and 2014

Claim type Recovery Auditor 2013 reviews Recovery Auditor 2014 reviews

Inpatient $3,085 $2,431

Outpatient $1,116 $1,103

Skilled nursing facility $2,303 $2,731

Hospice — — 

Home health agency $775 $1,380

Durable medical equipment $826 $458

Physician $308 $304

Source: GAO analysis of the Centers for Medicare & Medicaid Services data. | GAO-16-394

Although CMS expects the RAs to review all claim types, CMS’s oversight 

of the RAs did not ensure that the RAs distributed their reviews across 

claim types in 2013 and 2014. According to CMS officials, the agency’s 

approval of RA audit issues is the primary way in which CMS controls the 

type of claims that the RAs review. However, the officials said they 

generally focus on the appropriateness of the review methodology when 

determining whether to approve the audit issues, instead of on whether 
Page 20 GAO-16-394 Medicare Claim Review Contractors 

the RA’s claim review strategy encompasses all claim types. The RAs 

generally determine the types of audit issues that they present to CMS for 

approval, and based on our analysis of RA audit issues data, we found 

that from the inception of the RA program to May 2015, 80 percent of the 

audit issues approved by CMS were for inpatient claims. Additionally, 

CMS generally gives RAs discretion regarding the claims that they select 

for review among approved audit issues.

However, CMS has taken steps to limit the RAs’ focus on inpatient claims 

through changes to the RA program, and the agency has included 

additional oversight mechanisms in the statements of work for the next 

round of RA contracts. As a result of CMS implementing new coverage 

policies for inpatient admissions, the RAs were prohibited from 

conducting reviews related to the appropriateness of inpatient admissions 

for claims with dates of admission between October 1, 2013 and 

December 31, 2015.33 The RAs are currently only allowed to review the 

appropriateness of inpatient admissions for claims with dates of 

admission on or after January 1, 2016, for providers identified as high-risk 

for noncompliance with Medicare coverage policies.

34 Further, starting 

January 1, 2016, CMS implemented claim type-specific RA review limits 

for institutional providers, rather than a single limit for all of the provider’s 

claims. For example, a hospital that bills for inpatient and outpatient 

services will have separate inpatient and outpatient RA review limits that 

reflect the proportion of claims paid to the hospital in the previous year. 

Additionally, in the statements of work for the next round of RA contracts, 

 33Effective October 1, 2013, CMS changed the coverage requirements for short inpatient 

hospital stays. As a result, CMS prohibited RA claim reviews related to the 

appropriateness of inpatient admissions for claims with dates of admission between 

October 1, 2013 and September 30, 2014. In April 2014 and April 2015, Congress 

enacted legislation directing CMS to continue the prohibition of RA claim reviews related 

to the appropriateness of inpatient admissions for claims with dates of admission through 

September 30, 2015, unless there was evidence of fraud and abuse. Protecting Access to 

Medicare Act of 2014, Pub. L. No. 113-93, § 111, 128 Stat.1040, 1044 (2014); Medicare 

Access and CHIP Reauthorization Act of 2015, Pub. L. No. 114-10, § 521, 129 Stat. 87, 

176 (2015). In July 2015, CMS announced that it would not allow such RA claim reviews 

for claims with dates of admission of October 1, 2015 through December 31, 2015. The 

RAs were allowed to continue reviews of short stay inpatient claims for reasons other than 

reviewing inpatient status, such as reviews related to coding requirements.

34Beginning on October 1, 2015, Quality Improvement Organizations assumed 

responsibility for conducting initial claim reviews related to the appropriateness of inpatient 

hospital admissions. Starting January 1, 2016, the Quality Improvement Organizations will 

refer providers exhibiting persistent noncompliance with Medicare policies to the RAs for 

potential further review.
Page 21 GAO-16-394 Medicare Claim Review Contractors 

CMS stated that it will monitor the extent to which the RAs are reviewing 

all claim types, may impose a minimum percentage of reviews by claim 

type, and may take corrective action against RAs that do not review all 

claim types.

CMS has also taken steps to provide incentives for the RAs to review 

other types of claims. To encourage the RAs to review DME claims—

which had the highest rates of improper payments in fiscal years 2012 

and 2013—CMS officials stated that they increased the contingency fee 

percentage paid to the RAs for DME claims.35 Further, in the requests for 

proposals for the next round of RA contracts, CMS included a request for 

a national RA that will specifically review DME, home health agency, and 

hospice claims. CMS officials told us that they are procuring this new RA 

because the existing four regional RAs reviewed a relatively small 

number of these types of claims. Although DME, home health agency, 

and hospice claims combined represented more than 25 percent of 

improper payments in both 2013 and 2014, they constituted 5 percent of 

RA reviews in 2013 and 6 percent of reviews in 2014.

In 2013 and 2014, the MACs focused their claim reviews on physician 

and DME claims. Physician claims accounted for 49 percent of MAC 

claim reviews in 2013 and 55 percent of reviews in 2014, while 

representing 30 percent of improper payments in fiscal year 2012 and 26 

percent in fiscal year 2013 (see Table 5). DME claims accounted for 29 

percent of their reviews in 2013 and 26 percent in 2014, while 

representing 22 percent of total improper payments in fiscal year 2013 

and 16 percent of improper payments in fiscal year 2014. DME claims 

also had the highest rates of improper payments in both years. 

 35DME claims have the highest contingency fee percentages relative to other claim types 

in each RA region, with the fees generally ranging from 14.0 percent to 17.5 percent.

MAC Claim Reviews 

Focused on Physician and 

DME Claims 
Page 22 GAO-16-394 Medicare Claim Review Contractors 

Table 5: Percentage of Medicare Administrative Contractor (MAC) Claim Reviews by Claim Type, 2013 and 2014

Claim type 2013 MAC reviews

(%)a

FY 2012 improper payment rate 

(%)b FY 2012 percentage of estimated improper payments (%)b

Inpatient 7 7 28

Outpatient 8 5 10

Skilled nursing facility 2 5 6

Hospice 1 2 1

Home health agency 3 6 4

Durable medical equipment 29 66 22

Physician 49 10 30

Number of MAC reviews 1,439,954 — — 

Claim type 2014 MAC reviews

(%)a

FY 2013 improper payment rate 

(%)b FY 2013 percentage of estimated improper payments (%)b

Inpatient 4 8 29

Outpatient 9 6 11

Skilled nursing facility 1 7 7

Hospice 1 8 3

Home health agency 4 17 9

Durable medical equipment 26 58 16

Physician 55 11 26

Number of MAC reviews 1,614,907 — — 

Source: GAO analysis of MAC and the Centers for Medicare & Medicaid Services (CMS) data. | GAO-16-394

Note: Percentages may not add to 100 percent due to rounding.

a

During 2013 and 2014, CMS executed three MAC contracts which incorporated work associated with 

different, outgoing MAC contractors. Our data from these three MACs do not include claim reviews 

conducted under the outgoing contracts and, accordingly, our MAC data do not include all MAC claim 

reviews conducted during this time period.

b

The improper payment rate represents the percentage of Medicare fee-for-service payments that 

CMS’s Comprehensive Error Rate Testing (CERT) program estimates to be improper in a given fiscal 

year. The CERT program estimated that the total amount of improper payments in fiscal year 2012 

was $29.6 billion, and $36.0 billion in fiscal year 2013.Since the claim review contractors often base 

their reviews on prior year CERT findings on claims at high risk for improper payment, we compared 

2013 and 2014 MAC claim review data to fiscal year 2012 and 2013 CERT data. 

According to CMS officials, the MACs focused their claim reviews on 

physician claims—a category which encompasses a large variety of 

provider types, including labs, ambulances, and individual physician 
Page 23 GAO-16-394 Medicare Claim Review Contractors 

offices—because they constitute a significant majority of all Medicare 

claims.36 CMS officials also told us that they direct MAC claim review 

resources to DME claims in particular because of their high improper 

payment rate. Further CMS officials told us that the MACs’ focus on 

reviewing physician and DME claims was in part due to how CMS 

structures the MAC claim review workload. CMS official noted that each 

A/B MAC is responsible for addressing improper payments for both 

Medicare Part A and Part B, and MAC Part B claim reviews largely focus 

on physician claims. Additionally, 4 of the 16 MACs are DME MACs that 

focus their reviews solely on DME claims. CMS officials also noted that 

MAC reviews of inpatient claims were likely lowered during this period 

because of CMS’s implementation of new coverage policies for inpatient 

admissions. Similar to the RAs, the MACs were limited in conducting 

reviews for short inpatient hospital stays after October 1, 2013.37

The focus of the SMRC’s claim reviews depended on the studies that 

CMS directed the contractor to conduct in 2013 and 2014. In 2013, the 

SMRC focused its claim reviews on outpatient and physician claims, with 

physician claims accounting for half of all SMRC reviews (see Table 6). 

Physician claims accounted for 30 percent—the largest percentage—of 

the total amount of estimated improper payments in fiscal year 2012. In 

2014, the SMRC focused 46 percent of its reviews on home health 

agency claims and 44 percent of its claim reviews on DME claims, which 

had the two highest improper payment rates in fiscal year 2013.

 36Physician claims constituted more than 75 percent of all Medicare claims in 2013.

37In changing coverage requirements for short inpatient hospital stays, CMS directed the 

MACs to conduct “probe and educate” reviews on a set number of claims for most 

hospitals to assess their understanding and compliance with the new requirements and to 

conduct individualized educational efforts.

The Focus of SMRC Claim 

Reviews Varied between 

2013 and 2014 Based on 

CMS’s Direction
Page 24 GAO-16-394 Medicare Claim Review Contractors 

Table 6: Percentage of Supplemental Medical Review Contractor (SMRC) Claim Reviews by Claim Type, Fiscal Year (FY) 2013 

and 2014

Claim type

FY 2013 SRMC reviews (%) FY 2012 improper payment 

rate (%)a FY 2012 percentage of estimated improper payments (%)a

Inpatient 8 7 28

Outpatient 36 5 10

Skilled nursing facility 0 5 6

Hospice 0 2 1

Home health agency 0 6 4

Durable medical equipment 7 66 22

Physician 50 10 30

Number of SMRC reviews 67,697 — — 

Claim type FY 2014 SRMC reviews (%) FY 2013 improper payment 

rate (%)a FY 2013 percentage of estimated improper payments (%)a

Inpatient 0 8 29

Outpatient 5 6 11

Skilled nursing facility 1 7 7

Hospice 0 8 3

Home health agency 46 17 9

Durable medical equipment 44 58 16

Physician 4 11 26

Number of SMRC reviews 110,470 — — 

Source: GAO analysis of the Centers for Medicare & Medicaid Services (CMS) data. | GAO-16-394

Note: Percentages may not add to 100 percent due to rounding.

a

The improper payment rate represents the percentage of Medicare fee-for-service payments that 

CMS’s Comprehensive Error Rate Testing (CERT) program estimates to be improper in a given fiscal 

year. The CERT program estimated that the total amount of improper payments in fiscal year 2012 

was $29.6 billion, and $36.0 billion in fiscal year 2013.Since the claim review contractors often base 

their reviews on prior year CERT findings on claims at high risk for improper payment, we compared 

2013 and 2014 SMRC claim review data to fiscal year 2012 and 2013 CERT data. 

CMS generally directs the SMRC to conduct studies examining specific 

services, and the number of claims reviewed by claim type is highly 

dependent on the methodologies of the studies. For example, one SMRC 

study involved reviewing nearly 50,000 DME claims for suppliers deemed 

high risk for having improperly billed for diabetic test strips. In 2014, the 

claim reviews for this study accounted for all of the SMRC’s DME claim 

reviews and nearly half of all the SMRC claim reviews. Additionally, in 

2014, the SMRC reviewed more than 50,000 claims as part of its study 

that examined five claims from every home health agency. The study 

followed a significant increase in the improper payment rate for home 

health agencies from 2012 to 2013, from 6 percent to 17 percent. In some 
Page 25 GAO-16-394 Medicare Claim Review Contractors 

cases, SMRC studies focused on specific providers. For example, a 2013 

SMRC study reviewed claims for a single hospital to follow up on billing 

issues previously identified by the HHS OIG.

The RAs were paid an average of $158 per claim review conducted in 

2013 and 2014 and identified $14 in improper payments, on average, per 

dollar paid by CMS in contingency fees (see Table 7). The cost to CMS in 

RA contingency fees per review decreased from $178 in 2013 to $101 in 

2014 because the average identified improper payment amount per 

review decreased from $2,549 to $1,509. The decrease in the average 

identified improper payment amount per review likely resulted from the 

RAs conducting proportionately fewer reviews of inpatient claims in 2014 

compared to 2013. 

Table 7: Recovery Auditor Funding and Identified Improper Payments, 2013-2014

2013 2014 2013 and 2014 

combined

Number of claim reviews 1,463,978 516,135 1,980,113

Payments in contingency feesa $260,270,105 $51,888,213 $312,158,318

Average cost to CMS per review $178 $101 $158

Identified improper payments $3,731,142,616 $778,942,350 $4,510,084,966

Average identified improper payments per review $2,549 $1,509 $2,278

Identified improper payments per dollar paid by the Centers for Medicare & 

Medicaid Services (CMS)

$14 $15 $14

Source: GAO analysis of CMS data. | GAO-16-394

Note: aContingency fee data for RA claim reviews in 2013 and 2014 represent costs as of July 2015. 

The amount RAs are paid for specific claim reviews can vary over time based on additional 

collections and claim reviews that are overturned on appeal. 

Both RAs and the 

SMRC Generated 

Savings for CMS, but 

Unreliable Data 

Prevent Comparison 

to MACs 

CMS Paid the RAs an 

Average of $158 per 

Review, and the RAs 

Averaged $14 in Identified 

Improper Payments per 

Dollar Paid by CMS in 

2013 and 2014 
Page 26 GAO-16-394 Medicare Claim Review Contractors 

The SMRC was paid an average of $256 per claim review conducted in 

studies initiated in fiscal years 2013 and 2014, though the amount paid 

per claim review varied by study and varied between years (see Table 8). 

In particular, the amount paid to the SMRC is significantly higher for 

studies that involve extrapolation for providers who had their claims 

reviewed as part of the studies and were found to have a high error rate. 

Based on our analysis, the higher average amount paid per review in 

2014—$346 compared to $110 in 2013—can in part be attributed to the 

SMRC conducting proportionally more studies involving extrapolation in 

2014. As well as increasing study costs, the use of extrapolation can 

significantly increase the associated amounts of identified improper 

payments per study. For example, the SMRC study on diabetic test strips 

involved extrapolation and included reviews of nearly 50,000 claims from 

500 providers. It cost CMS more than $23 million to complete, but the 

SMRC identified more than $63 million in extrapolated improper 

payments. According to CMS officials, the agency has the SMRC perform 

extrapolation as part of its studies when it is cost effective—that is, when 

anticipated extrapolated overpayment amounts are greater than the costs 

associated with having the SMRC conduct the extrapolations. 

Table 8: Supplemental Medical Review Contractor Funding and Identified Improper Payments, 2013-2014

2013 2014 2013 and 2014 

combined

Number of claim reviews 67,697 110,470 178,167

CMS funding $7,462,133 $38,193,029 $45,655,162

Average cost to CMS per review $110 $346 $256

Identified improper payments $183,499,208 $145,224,361 $328,723,569

Average identified improper payments per review $2,711 $1,315 $1,845

Identified improper payments per dollar paid by the Centers for Medicare & 

Medicaid Services (CMS)

$25 $4 $7

Source: GAO analysis of CMS data. | GAO-16-394

The amount the SMRC was paid per review also varied based on the type 

of service being reviewed and the number of reviews conducted. CMS 

pays the SMRC more for claim reviews for Part A services, such as 

inpatient and home health claims, than for claim reviews for Part B 

services, such as physician and DME claims, because CMS officials said 

that claim reviews of Part A services are generally more resourceintensive. Additionally, CMS gets a volume discount on SMRC claim 

reviews, with the cost per review decreasing once the SMRC reaches 

certain thresholds for the number of claim reviews in a given year.

CMS Paid the SMRC an 

Average of $256 per 

Review, and the SMRC 

Averaged $7 in Identified 

Improper Payments per 

Dollar Paid in 2013 and 

2014 
Page 27 GAO-16-394 Medicare Claim Review Contractors 

The SMRC identified $7 in improper payments per dollar paid by the 

agency, on average, in 2013 and 2014, though the average amount 

varied considerably by study and varied for 2013 and 2014. In 2013, the 

SMRC averaged $25 in improper payments per dollar paid, while in 2014, 

it averaged $4. The larger figure for 2013 is primarily attributed to two 

SMRC studies that involved claim reviews of inpatient claims that 

identified more than $160 million in improper payments but cost CMS less 

than $1 million in total to conduct. 

We were unable to determine the cost per review and the amount of 

improper payments identified by the MACs per dollar paid by CMS 

because the agency does not have reliable data on funding of MAC claim 

reviews for 2013 and 2014, and the agency collects inconsistent data on 

the savings from prepayment claim denials. For an agency to achieve its 

objectives, federal internal control standards provide that an agency must 

obtain relevant data to evaluate performance towards achieving agency 

goals.38 By not collecting reliable data on claim review funding and by not 

having consistent data on identified improper payments, CMS does not 

have the information it needs to evaluate MAC cost effectiveness and 

performance in protecting Medicare funds.

We found that CMS’s data on MAC funding for claim reviews were not 

reliable because in 2013 and 2014 not all MACs reported funding data 

specific to prepayment and postpayment reviews. We previously reported 

in 2011 that CMS did not have reliable information to determine the 

amount of funds spent by each MAC on individual program integrity 

activities, and we recommended that CMS complete planned data system 

changes to accurately capture such funding data.39 Despite CMS having 

made the needed data system changes, we found that in 2013 and 2014 

at least three MACs were still not reporting data that provided information 

on the specific funds spent to conduct prepayment and postpayment 

claim reviews. Instead, the MACs were reporting their costs in terms of 

 38GAO/AIMD-00-21.3.1. 

39MACs are involved with multiple aspects of Medicare operations, and therefore, they 

receive funds to conduct several different types of program integrity activities. Our 2011 

report found that the lack of reliable data on funds spent by each MAC limited CMS’s 

ability to assess the cost effectiveness of its program integrity activities. For more 

information, see GAO, Medicare Integrity Program: CMS Used Increased Funding for New 

Activities but Could Improve Measurement of Program Effectiveness, GAO-11-592

(Washington, D.C.: July, 2011).

CMS’s Lack of Reliable 

MAC Cost and Savings 

Data Precludes Analysis of 

the Cost per Review and 

the Amount of Improper 

Payments Identified per 

Dollar Paid by CMS
Page 28 GAO-16-394 Medicare Claim Review Contractors 

higher-level, broader contractual work activities. CMS officials told us that 

they have not required the MACs to report data on specific funds spent to 

conduct prepayment and postpayment claim reviews. However, as of 

February 2016, CMS officials told us that all MACs are either currently 

reporting specific data on prepayment and postpayment claim review 

costs or planning to do so soon. 

We also found that data on savings from MAC prepayment reviews were 

not consistent across the MACs. In particular, the MACs use different 

methods to calculate and report savings associated with prepayment 

claim denials, which represented about 98 percent of MAC claim review 

activity in 2013 and 2014. According to CMS and MAC officials, claims 

that are denied on a prepayment basis are never fully processed, and the 

Medicare payment amounts associated with the claims are never 

calculated. In the absence of processed payment amounts, the MACs use 

different methods for calculating prepayment savings. According to the 

MACs: 

• Two MACs use the amount that providers bill to Medicare to calculate 

savings from prepayment claim denials. However, the amount that 

providers bill to Medicare is often significantly higher than and not 

necessarily related to how much Medicare pays for particular 

services. One MAC estimated that billed amounts can be, on average, 

three to four times higher than allowable amounts. Accordingly, 

calculated savings based on provider billed amounts can greatly 

inflate the estimated amount that Medicare saves from claim denials. 

Nine MACs calculate prepayment savings by using the Medicare 

“allowed amount.” The allowed amount is the total amount that 

providers are paid for claims for particular services, though it is 

generally marginally higher than the amount that Medicare pays, as it 

includes the amount Medicare pays, cost sharing that beneficiaries 

are responsible for paying, and amounts that third parties are 

responsible for paying.40 Additionally, the allowed amounts may not 

account for Medicare payment policies that may reduce provider 

payments, such as bundled payments.41

 40Many Medicare FFS beneficiaries have some form of additional health care coverage 

provided by third parties that helps cover the beneficiaries’ Medicare cost sharing. 

41Medicare may reimburse providers a single “bundled” payment for multiple services 

provided as part of a single episode of care. 
Page 29 GAO-16-394 Medicare Claim Review Contractors 

• Five MACs compare denied claims with similar claims that were paid 

to estimate what Medicare would have paid.42

CMS has not provided the MACs with documented guidance or other 

instructions for how to calculate savings from prepayment reviews. 

Federal internal controls standards provide that an agency must 

document guidance that has a significant impact on the agency’s ability to 

achieve its goals.43 In reviewing MAC claim review program 

documentation, including the Medicare Program Integrity Manual and 

MAC contract statements of work, we were unable to identify any 

instructions on how the MACs should calculate savings from prepayment 

claim denials. Further, several MACs we interviewed indicated that they 

have not been provided guidance for calculating savings from 

prepayment denials. CMS officials told us that they were under the 

impression that all of the MACs were reporting prepayment savings data 

based on the amount that providers bill to Medicare, which can 

significantly overestimate the amount that Medicare saves from 

prepayment claim denials. Because CMS has not provided documented 

guidance on how to calculate savings from prepayment claim review, the 

agency lacks consistent and reliable information on the performance of 

MAC claim reviews. In particular, CMS does not have reliable information 

on the extent to which MAC claim reviews protect Medicare funds or on 

how the MACs’ performance compares to other contractors conducting 

similar activities.44

CMS contracts with claim review contractors that use varying degrees of 

prepayment and postpayment reviews to identify improper payments and 

protect the integrity of the Medicare program. Though we found few 

differences in how contractors conduct and how providers respond to the 

two review types, prepayment reviews are generally more cost-effective 

 42Two of the MACs that compare denied claims to similar paid claims to calculate 

prepayment savings use this method only for Part A claims, and for Part B claims they use 

allowed amounts. Additionally, according to CMS officials, the RAs also compared denied 

claims to similar paid claims to calculate the savings associated with their reviews for the 

Prepayment Review Demonstration. 

43GAO/AIMD-00-21.3.1.

44In addition, CMS has reported data on MAC claim review savings to Congress. For 

example, see HHS, Fiscal Year 2016 Centers for Medicare & Medicaid Services 

Justification of Estimates for Appropriations Committees.

Conclusions
Page 30 GAO-16-394 Medicare Claim Review Contractors 

because they prevent improper payments and limit the need to recover 

overpayments through the “pay and chase” process, which requires 

administrative resources and is not always successful. Although CMS 

considered the Prepayment Review Demonstration a success, and 

having the RAs conduct prepayment reviews would align with CMS’s 

strategy to pay claims properly the first time, the agency has not 

requested legislative authority to allow the RAs to do so. Accordingly, 

CMS may be missing an opportunity to better protect Medicare funds and 

agency resources. 

Inconsistent with federal internal control standards, CMS has not provided 

the MACs with documented guidance or other instructions for how to 

calculate savings from prepayment reviews. As a result, CMS does not 

have reliable data on the amount of improper payments identified by the 

MACs, which limits CMS’s ability to evaluate MAC performance in 

preventing improper payments. CMS uses claim review contractors that 

have different roles and take different approaches to preventing improper 

payments. However, the essential task of reviewing claims is similar 

across the different contractors and, without better data, CMS is not in a 

position to evaluate the performance and cost effectiveness of these 

different approaches.

We recommend that the Secretary of HHS direct the Acting Administrator 

of CMS to take the following two actions:

• In order to better ensure proper Medicare payments and protect 

Medicare funds, CMS should seek legislative authority to allow the 

RAs to conduct prepayment claim reviews.

• In order to ensure that CMS has the information it needs to evaluate 

MAC effectiveness in preventing improper payments and to evaluate 

and compare contractor performance across its Medicare claim 

review program, CMS should provide the MACs with written guidance 

on how to accurately calculate and report savings from prepayment 

claim reviews. 

We provided a copy of a draft of this report to HHS for review and 

comment. HHS provided written comments, which are reprinted in 

appendix I. In its comments, HHS disagreed with our first 

recommendation, but it concurred with our second recommendation. HHS 

also provided us with technical comments, which we incorporated in the 

report as appropriate.

Recommendations for 

Executive Action

Agency Comments 

and Our Evaluation
Page 31 GAO-16-394 Medicare Claim Review Contractors 

HHS disagreed with our first recommendation that CMS seek legislative 

authority to allow the RAs to conduct prepayment claim reviews. HHS 

noted that other claim review contractors conduct prepayment reviews 

and CMS has implemented other programs as part of its strategy to move 

away from the “pay and chase” process of recovering overpayments, 

such as prior authorization initiatives and enhanced provider enrollment 

screening. However, we found that prepayment reviews better protect 

agency funds compared with postpayment reviews, and believe that 

seeking the authority to allow the RAs to conduct prepayment reviews is 

consistent with CMS’s strategy.

HHS concurred with our second recommendation that CMS provide the 

MACs with written guidance on how to accurately calculate and report 

savings from prepayment claim reviews. HHS stated that it will develop a 

uniform method to calculate savings from prepayment claim reviews and 

issue guidance to the MACs.

As agreed with your office, unless you publicly announce the contents of 

this report earlier, we plan no further distribution until 30 days from the 

report date. At that time, we will send copies to the Secretary of Health 

and Human Services, the Acting Administrator of CMS, appropriate 

congressional requesters, and other interested parties. In addition, the 

report will be available at no charge on the GAO website at 

http://www.gao.gov.

If you or your staff members have any questions about this report, please 

contact me at (202) 512-7114 or at kingk@gao.gov. Contact points for our 

Offices of Congressional Relations and Public Affairs may be found on 

the last page of this report. GAO staff that made key contributions to this 

report are listed in appendix II.

Sincerely,

Kathleen M. King

Director, Health Care
Appendix I: Comments from the Department of 

Health and Human Services

Page 32 GAO-16-394 Medicare Claim Review Contractors 

Appendix I: Comments from the Department 

of Health and Human Services
Appendix I: Comments from the Department of 

Health and Human Services

Page 33 GAO-16-394 Medicare Claim Review Contractors 
Appendix I: Comments from the Department of 

Health and Human Services

Page 34 GAO-16-394 Medicare Claim Review Contractors 
Appendix II: GAO Contact and Staff 

Acknowledgments

Page 35 GAO-16-394 Medicare Claim Review Contractors 

Kathleen M. King, (202) 512-7114, kingk@gao.gov. 

In addition to the contact named above, Lori Achman, Assistant Director; 

Michael Erhardt; Krister Friday; Richard Lipinski; Kate Tussey; and 

Jennifer Whitworth made key contributions to this report. 

Appendix II: GAO Contact and Staff 

Acknowledgments

GAO Contact

Staff 

Acknowledgments

(291270)
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