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[Federal Register Volume 76, Number 180 (Friday, September 16, 2011)]
[Rules and Regulations]
[Pages 57808-57844]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-23695]

[[Page 57807]]

Vol. 76

Friday,

No. 180

September 16, 2011

Part II

Department of Health and Human Services

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Centers for Medicare & Medicaid Services

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42 CFR Part 455

Medicaid Program; Recovery Audit Contractors; Final Rules

Federal Register / Vol. 76 , No. 180 / Friday, September 16, 2011 / 
Rules and Regulations

[[Page 57808]]

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 455

[CMS-6034-F]
RIN 0938-AQ19

Medicaid Program; Recovery Audit Contractors

AGENCY: Centers for Medicare & Medicaid Services (CMS), HHS.

ACTION: Final rule.

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SUMMARY: This final rule implements section 6411 of the Patient 
Protection and Affordable Care Act (the Affordable Care Act), and 
provides guidance to States related to Federal/State funding of State 
start-up, operation and maintenance costs of Medicaid Recovery Audit 
Contractors (Medicaid RACs) and the payment methodology for State 
payments to Medicaid RACs. This rule also directs States to assure that 
adequate appeal processes are in place for providers to dispute adverse 
determinations made by Medicaid RACs. Lastly, the rule directs States 
to coordinate with other contractors and entities auditing Medicaid 
providers and with State and Federal law enforcement agencies.

DATES: Effective Date: These regulations are effective on January 1, 
2012.

FOR FURTHER INFORMATION CONTACT: Joanne Davis, (410) 786-5127.

SUPPLEMENTARY INFORMATION:

I. Background

A. Current Law

    The Medicaid program is a cooperative Federal/State program 
designed to allow States to receive matching funds from the Federal 
Government to finance medical assistance to eligible low income 
beneficiaries. Medicaid was enacted in 1965 by the passage of the 
Social Security Act Amendments of 1965 creating title XIX of the Social 
Security Act (the Act).
    States may choose to participate in the Medicaid program by 
submitting a State Plan for medical assistance that is approved by the 
Secretary of the U.S. Department of Health and Human Services. While 
States are not required to participate in the Medicaid program, all 
States, the District of Columbia, and the territories do participate. 
Once a State elects to participate in the program, it is required to 
comply with its State Plan, as well as the requirements imposed by the 
Act and applicable Federal regulations.
    CMS is the primary Federal agency providing oversight of State 
Medicaid activities and facilitating program integrity efforts. Our 
administration of the Medicaid program requires that we expend billions 
of dollars in Federal matching payments to States for Medicaid 
expenditures. We also have an obligation to prevent, identify, and 
recover improper payments to individuals, contractors, and 
organizations.
    In November 2009, the President signed Executive Order (E.O.) 13520 
in an effort to reduce improper payments by increasing transparency in 
government and holding agencies accountable for reducing improper 
payments. On March 22, 2010, the Office of Management and Budget (OMB) 
issued guidance for agencies regarding the implementation of E.O. 13520 
entitled Part III to OMB Circular A-123, Appendix C (Appendix C). 
Appendix C outlines the responsibilities of agencies, determines the 
programs subject to E.O. 13520, defines supplemental measures and 
targets for high priority programs, and establishes reporting 
requirements under E.O. 13520 and procedures to identify entities with 
outstanding payments.
    Section 6411 of the Patient Protection and Affordable Care Act 
(Pub. L. 111-148, enacted on March 23, 2010) (the Affordable Care Act) 
directs States to establish programs by December 31, 2010 in which they 
will contract with 1 or more Recovery Audit Contractors (Medicaid 
RACs). The Medicaid RACs will review Medicaid claims submitted by 
providers of services for which payment may be made under the State 
Plan or a waiver of the State Plan to identify overpayments and 
underpayments.
    Section 6411(a)(1) of the Affordable Care Act amended section 
1902(a)(42) of the Act to provide that ``the State shall establish a 
program under which the State contracts (consistent with State law and 
in the same manner as the Secretary enters into contracts with recovery 
audit contractors under section 1893(h) * * *) with 1 or more recovery 
audit contractors for the purpose of identifying underpayments and 
overpayments and recouping overpayments * * *'' To offer context for 
our approach to the Medicaid RAC program, we provide background 
discussion on the Medicare RAC program under section 1893(h) of the 
Act.

B. Medicare RACs

    Medicare RACs are private entities with which CMS contracts to 
identify underpayments and overpayments as well as recoup overpayments, 
until recently, limited to Medicare's fee-for-service program. 
Initially authorized by the Congress as a 3-year demonstration program 
by the Medicare Prescription Drug, Improvement, and Modernization Act 
of 2003 (Pub. L. 108-173, enacted on December 8, 2003) (MMA), Medicare 
RACs were permanently authorized in the Tax Relief and Health Care Act 
of 2006 (Pub. L. 109-432, enacted on December 20, 2006)(TRHCA).
    During the Medicare RAC demonstration period, CMS contracted with 
RACs to review claims from Medicare participating providers and 
suppliers in New York, Florida, California, Arizona, Massachusetts, and 
South Carolina. From 2005 through 2008, the Medicare RACs identified 
and corrected over $1 billion in improper payments. The majority, or 96 
percent, of the improper payments were overpayments, while the 
remaining 4 percent were underpayments. As a result of the demonstrated 
cost effectiveness of the Medicare RACs, the TRHCA required CMS to 
implement a nationwide Medicare RAC program. The TRHCA directed CMS to 
expand the Medicare RAC program nationwide by January 1, 2010.
    In our evaluation of the Medicare RAC demonstration, providers were 
surveyed and they identified to CMS a number of concerns and processes 
that needed to be improved. For example, Medicare RACs were reportedly 
inconsistent in documenting their ``good cause'' for reviewing a claim. 
In addition, providers complained that a lack of physician presence on 
Medicare RAC staffs contributed to Medicare claims incorrectly being 
denied. As a result, we met with stakeholders, including the provider 
community, and made a number of changes to improve the Medicare RAC 
program. In the permanent Medicare RAC program, CMS directed Medicare 
RACs to consistently document their ``good cause'' for reviewing a 
claim. In addition, CMS now requires each Medicare RAC to hire a 
minimum of 1.0 Full Time Equivalent (FTE) physician Medical Director to 
oversee the medical record review process; assist nurses, therapists, 
and certified coders upon request; manage quality assurance procedures; 
and maintain relationships with provider associations.
    Both the MMA and the TRHCA required CMS to pay Medicare RACs on a 
contingency fee basis. Currently, CMS

[[Page 57809]]

pays Medicare RACs a contingency fee rate ranging between 9 and 12.50 
percent. These contingency fees were not fixed by CMS, but were 
established by the contractors through a bidding process with CMS. 
Providers may appeal Medicare RAC determinations through the 
established Medicare appeals process. During the demonstration period, 
Medicare RACs were required to return contingency fees if the claim 
determination was overturned on the first level appeal. However, 
Medicare RACs were entitled to retain contingency fees if the 
determination was overturned on subsequent levels of appeal. In the 
permanent Medicare RAC program, CMS requires Medicare RACs to return 
the contingency fee payment if the determination is overturned at any 
stage of the appeals process.

C. Existing State Contingency Fee Contracts

    There is precedent for State Medicaid contingency fee contracts for 
purposes of recovering Medicaid overpayments subject to third party 
liability (TPL) requirements. Section 1902(a)(25) of the Act requires 
States to take all reasonable measures to determine the legal liability 
of third parties to pay for medical assistance furnished to a Medicaid 
recipient under the State Plan. Several States have elected to do so 
through the use of contingency fee arrangements with TPL contractors. 
In addition, several States currently contract with contingency fee 
contractors to recover Medicaid overpayments unrelated to TPL. In a 
memorandum to CMS Regional Administrators dated November 7, 2002, we 
revised our policy prohibiting Federal financial participation (FFP) 
for States to pay costs to contingency fee contractors, unrelated to 
TPL. The revised policy allowed contingency fee payments if the 
following conditions were met: (1) The intent of the contingency fee 
contract must be to produce savings or recoveries in the Medicaid 
program and (2) the savings upon which the contingency fee payment is 
based must be adequately defined and the determination of fee payments 
documented to CMS's satisfaction.

II. Provisions of the Proposed Medicaid RAC Rule

    In the November 10, 2010 Federal Register (75 FR 69037), we 
published a proposed rule that set forth guidance to States related to 
Federal/State funding of Medicaid RACs and the payment methodology for 
State payments to Medicaid RACs in accordance with the Affordable Care 
Act. We proposed adding new regulatory provisions in 42 CFR part 455 
subpart F governing Program Integrity--Medicaid.
    Section 6411(a) of the Affordable Care Act amended and expanded 
section 1902(a)(42) of the Act to require States to establish Medicaid 
RAC programs by December 31, 2010, to contract with 1 or more 
contractors to audit Medicaid claims and to identify underpayments and 
overpayments and collect overpayments. While States were required to 
establish their Medicaid RAC programs by December 31, 2010, via the 
State Plan amendment (SPA) process, the Medicaid RAC programs were not 
required to be implemented by this date. In the November 10, 2010 
proposed rule, we stated that, absent an exception, States were 
required to fully implement their Medicaid RAC programs by April 1, 
2011.
    The difference between establishing and implementing Medicaid RAC 
programs was clarified for States prior to the publication of the 
proposed rule. On October 1, 2010, we issued a State Medicaid Director 
(SMD) letter providing preliminary guidance to States on the 
implementation of their RAC programs. In the SMD letter, States were 
advised that they should attest that they would establish a Medicaid 
RAC program by submitting a SPA to CMS no later than December 31, 2010, 
or indicate that they would be seeking to be excepted from one or more 
of the proposed provisions, or indicate that they would be seeking a 
complete exception from establishing a Medicaid RAC program. 
Subsequently, on February 1, 2011, we issued an Informational Bulletin 
stating that the proposed April 1, 2011 implementation date would be 
delayed, in part, to ensure that States would be able to comply with 
the provisions of the final rule.
    Section 1902(a)(42)(B) of the Act directs all States to establish 
Medicaid RAC programs, subject to the exceptions and requirements as 
the Secretary may require. This provision enables CMS to vary the 
Medicaid RAC program requirements, or except a State from establishing 
a Medicaid RAC program in certain circumstances, including where it 
would be inconsistent with State law. For example, the Secretary may 
exempt a State from the requirement to pay Medicaid RACs on a 
contingent basis for collecting overpayments when State law expressly 
prohibits contingency fee contracting. However, some other fee 
structure could be required under any exception.
    Similarly, during the Medicaid RAC SPA process, some States advised 
CMS that they were required to enact legislation before amending their 
State plans. Because the establishment of a Medicaid RAC program is 
accomplished by a SPA, some State legislatures did not have the 
opportunity to convene and enact the amendment to their State plans 
prior to December 31, 2010. In this case, those States submitted 
requests to delay establishing Medicaid RAC programs until after those 
State legislatures met. CMS granted these requests.
    Also, there were circumstances, unrelated to the examples above, 
where States sought exceptions from some or all of the requirements of 
the Medicaid RAC program. Accordingly, Sec.  455.516 proposed that 
States seeking exceptions from contracting with Medicaid RACs must 
submit a written justification for the request to CMS. We anticipate 
granting complete Medicaid RAC program exceptions rarely, and only 
under the most compelling of circumstances.
    Section 6411(a) of the Affordable Care Act amended section 
1902(a)(42) of the Act, regarding States Medicaid RAC programs:
     Under section 1902(a)(42)(B)(ii)(I) of the Act, payments 
must be made to a Medicaid RAC under contract with a State only from 
amounts recovered. As discussed in the proposed rule, we interpret this 
to mean that payments to Medicaid RACs may not exceed the total amounts 
recovered. For example, if a Medicaid RAC's efforts result in the 
recovery of a total of $1 million, the fees paid to the RAC for its 
work regarding both overpayments and underpayments must not exceed $1 
million. The intent of the statute is for States and the Federal 
government to reduce improper payments in the Medicaid program in order 
to realize savings. Additionally, we interpret this to mean that 
payments to contractors were not made based upon amounts merely 
identified but not recovered, or amounts that may initially be 
recovered but that subsequently must be repaid due to determinations 
made in appeals proceedings.
    In the proposed rule, we stated that the payment methodology 
determinations for States, as well as the timing of payments to 
Medicaid RACs for their work, were separate but closely related issues. 
We stated that the distinction between amounts recovered and amounts 
identified had implications for how States structured and administered 
payment agreements with Medicaid RACs, as well as the timing of 
Medicaid RACs' receipt of payments. We offered two options illustrating 
ways that States could structure payments.

[[Page 57810]]

    In option one, for example, State A paid RAC A its fee when RAC A 
identified and recovered an overpayment. If provider A appealed and 
prevailed at any stage, RAC A would be required to return any portion 
of the contingency fee that corresponded to the amount of an 
overpayment that was overturned at any level of appeal.
    In the second option, State B determined it would pay RAC B its 
contingency fee at the point at which the recovery amount is fully 
adjudicated; that is, at the conclusion of any and all appeals 
available to provider B. At that point, State B would pay RAC B a 
contingency fee based on the amount recovered.
     Under section 1902(a)(42)(B)(ii)(II)(aa) of the Act, 
payments to a Medicaid RAC contractor must be made on a contingent 
basis for collecting overpayments from the amounts recovered. In the 
proposed rule, we noted that we were aware that the Medicaid RAC 
program, by virtue of the differences between the Medicare and Medicaid 
programs, would not operate identically to the Medicare RAC program. We 
recognized that each State must tailor its Medicaid RAC activities to 
the uniqueness of its own State, and indicated that we would not 
prescribe a set contingency fee rate for States. Instead, we would 
implement certain guidelines based upon section 1902(a)(42)(B) of the 
Act and our experience with the Medicare RAC program, but allow States 
the discretion to set their fees within those guidelines.
    Medicaid RACs will contract with States and territories to identify 
and collect overpayments, and will be paid on a contingency fee basis 
by the States. In the Medicare RAC program, CMS contracts with Medicare 
RACs to identify and recover overpayments from Medicare providers, and 
are paid on a contingency fee basis by CMS. In the proposed rule, we 
recognized the differences among States and territories when 
coordinating the collection of overpayments with RACs. The statute 
requires Medicaid RACs to collect overpayments. However, some States 
may not be able to delegate the collection of overpayments to 
contractors, while other States may have other restrictions.
    Currently, there are 4 Medicare regional RACs operating. Those RACs 
are paid an average contingency fee rate of 10.86 percent by CMS, with 
the highest rate being 12.50 percent. We interpret the statutory 
language that States must establish a Medicaid RAC program ``in the 
same manner as the Secretary enters into contracts with'' Medicare RACs 
to mean that some of the provisions of the Medicare RAC program, 
generally, should serve as a model for the proposed Medicaid RAC 
program, not that Medicaid RACs should be structured identically to 
Medicare RACs. Accordingly, in Sec.  455.510(b)(3) and (b)(4), we 
stated that CMS would not provide FFP for any amount of a State's 
contingency fee in excess of the then highest Medicare RAC contingency 
fee rate unless a State requests an exception from CMS and provides an 
acceptable justification.
    We proposed that, in the absence of an approved exception, a State 
may only pay a RAC from the overpayments collected, and may only 
receive FFP on a contingency fee up to the highest Medicare RAC 
contingency rate. Any additional payment from the State to the RAC must 
be made using State-only funds. FFP is not available for administrative 
expenditure claims for the marginal difference between the highest 
Medicare fee and the State's contingency fee. For example, unless an 
exception applies, if the highest Medicare RAC contingency fee is 12.50 
percent and the State pays a Medicaid RAC 14 percent, we will not pay 
the Federal match on the 1.50 percent difference. In other words, the 
State must use State-only funds to make up the difference between the 
State's 14 percent contingency fee and the 12.50 percent contingency 
fee ceiling. Currently, the Medicare RAC contracts have an established 
period of performance of up to 5 years, beginning in calendar year 
2009. Initially, the maximum contingency fee rate for which FFP will be 
available for States to pay Medicaid RACs will be the highest Medicare 
RAC contingency fee, which is 12.50 percent. We anticipate that fee 
will be the maximum rate when States implement their RAC programs. 
Subsequently, we will make States aware of any modifications to the 
payment methodology for contingency fees and Medicaid RAC maximum 
contingency rates for which FFP will be available by publishing in a 
Federal Register notice, by December 31, 2013, the maximum Medicare 
contingency fee rate, which will apply to FFP availability for any 
Medicaid RAC contracts covering the period of performance beginning on 
July 1, 2014. The established rate will be in place for 5 years, or 
until we publish a new maximum rate in the Federal Register.
    The Medicare RAC program is still a relatively new program. In our 
early outreach campaign to provide technical support and assistance to 
States in the procurement of their RAC contracts, we studied many of 
the lessons learned from the Medicare RAC Demonstration, as well as the 
current provisions of the permanent Medicare RAC program and sought to 
incorporate many lessons learned in this final rule. For example, we 
proposed that States require their Medicaid RACs to employ trained 
medical professionals to review Medicaid claims, as we now require the 
Medicare RACs to do. We indicated that States should also be cognizant 
of potential organizational conflicts of interest and should take 
affirmative steps to identify and prevent any conflicts of interest.
    In the proposed rule, we reported that the Office of Inspector 
General of the U.S. Department of Health and Human Services (HHS-OIG) 
had found that the Medicare RACs identified over $1 billion in improper 
payments, but referred only two cases of potential fraud to CMS. HHS-
OIG opined that Medicare RACs had no incentive to make fraud referrals 
because the RACs did not receive contingency fees for those referrals. 
In the proposed rule, we cautioned States, in their design of Medicaid 
RAC programs, to ensure that the Medicaid RACs report instances of 
fraud and/or abuse in addition to the pursuit of overpayments. At Sec.  
455.508(b), we proposed that whenever RACs had reasonable grounds to 
believe that fraud and/or abuse had occurred, they must report it to 
the appropriate law enforcement officials. We solicited comments on 
these proposals, as well as other issues that States should consider in 
the design of their RAC programs. At Sec.  455.508(c), we proposed that 
Medicaid RACs must meet the additional requirements that States may 
establish.
     Under section 1902(a)(42)(B)(ii)(II)(bb) of the Act, 
payment to a Medicaid RAC for identifying underpayments may be made in 
any amount as the State may specify. Currently, Medicare RACs are paid 
a contingency fee to identify underpayments, similar to the way in 
which they are paid to identify and recover overpayments. In the 
proposed rule, we stated that a State may elect to use a similar 
approach, or elect to establish a set fee or some other fee structure 
for the identification of underpayments. Consistent with a State's 
obligation to ensure that it pays the correct amount to the right 
provider for the appropriate service at the right time for the right 
beneficiary, whatever methodology a State chooses must adequately 
incentivize the detection of underpayments. At Sec.  455.510(c), we 
proposed granting States the flexibility to specify the underpayment 
fee for Medicaid RACs. Additionally, we stated

[[Page 57811]]

that CMS would monitor the methodologies and amounts paid by States to 
Medicaid RACs to identify underpayments, and may consider future 
additional regulation depending on what data reveal over time.
    Section 1902(a)(42)(B)(ii)(I) of the Act requires that payments to 
a Medicaid RAC only come from amounts recovered. We proposed that 
Federal matching payments were not available for RAC contingency fees 
paid in excess of the overpayment amounts collected. The proposed rule 
stated that the total fees paid to a Medicaid RAC included both the 
amounts associated with: (1) Identifying and recovering overpayments; 
and (2) identifying underpayments. Due to the requirement in section 
1902(a)(42)(B)(ii)(I) of the Act that contingency fees only come from 
amounts recovered, total fees must not exceed the amount of 
overpayments collected.
    In the proposed rule, we cited data from the Medicare RAC 
Demonstration that overpayment recoveries by Medicare RACs exceeded 
underpayment identification by more than a 9:1 ratio. Therefore, we 
concluded that States would not need to maintain a reserve of recovered 
overpayments to fund Medicaid RAC costs associated with identifying 
underpayments. However, we proposed that States maintain an accounting 
of amounts recovered and paid.
    We also proposed that States report overpayments to CMS based on 
the net amount remaining after all fees are paid to the Medicaid RAC. 
In the proposed rule, we linked the treatment of the fees and 
expenditures to the specific statutory language implementing the 
Medicaid RAC requirements and did not extend it to Medicaid overpayment 
recoveries in other contexts.
    We stated, for example, RAC X's fee for overpayment identification 
is 10 percent of the recovery amount. The fee for identification of 
underpayments is 10 percent of the amount identified. If an overpayment 
recovery amount was $100, and the total amount of underpayment was $20, 
the total fees paid to the Medicaid RAC would be $12 ($10 for the 
identification and recovery of the overpayment and $2 for the 
identification of the underpayment). The State would report the 
recovery (collection) amount of $100 and the $10 RAC fee at the 
original match rate for the overpayment and the $2 RAC fee at the match 
rate for payment of the underpayment. If the State paid a provider 
based on the Medicaid RAC-identified underpayment, and that expenditure 
was claimed in accordance with timely filing requirements, we proposed, 
the $20 expenditure would be matched at the regular Federal Medical 
Assistance Percentage (FMAP), or the appropriate FFP rate.
    Currently, Sec.  433.312 directs States to refund the Federal share 
of overpayments, regardless of whether the State actually recovers the 
overpayments from the provider. In the proposed rule, we noted that 
this requirement, and all other requirements relating to overpayments, 
would apply to Medicaid RAC-identified overpayments. Therefore, if a 
Medicaid RAC identified an overpayment to a provider, the State would 
refund the Federal share of the overpayment amount to the Federal 
Government, regardless of whether the State collected the overpayment.
     Under section 1902(a)(42)(B)(ii)(III) of the Act, States 
must have an adequate appeals process for entities to challenge adverse 
Medicaid RAC determinations. We proposed at Sec.  455.512 that States 
must provide appeal rights available under State law or administrative 
procedures to Medicaid providers that seek review of an adverse 
Medicaid RAC determination. We proposed two alternatives the State 
could use to achieve this. In alternative one, a State may utilize an 
existing appeals infrastructure to adjudicate Medicaid RAC appeals. The 
State would submit to CMS a proposal describing the appeals process, 
which would need to be approved prior to implementing its RAC program.
    In alternative two, a State may elect to establish a separate 
appeals process for RAC determinations, which must also ensure 
providers adequate due process in pursuing an appeal. Accordingly, in 
Sec.  455.512 we proposed to give States the flexibility to determine 
the appeals process that will be available to providers seeking review 
of adverse RAC determinations. However, through the State Plan 
amendment (SPA) process, each State has indicated that it already has 
in place an administrative appeals infrastructure they will use for a 
provider to appeal an adverse Medicaid RAC determination.
    Finally, we also noted in the proposed rule that the potential 
length of a State's administrative appeals process may have an impact 
on the methodology or structure of the payment agreement between a 
State and a Medicaid RAC. For example, in a contract between State X 
and RAC X, where State X's administrative appeal process can extend for 
2 years, RAC X may not receive payment for an extended period of time. 
Accordingly, RAC X's contingency fee rate will most likely reflect 
operating, maintenance and legal costs over that period. Alternatively, 
in State Y, completion of the administrative appeals process takes 9 
months. A contract between State Y and RAC Y may reflect a different 
contingency fee rate.
     Under section 1902(a)(42)(B)(ii)(IV)(aa) of the Act, for 
purposes of section 1903(a)(7) of the Act, expenditures made by the 
State to carry out the Medicaid RAC program are necessary for the 
proper and efficient administration of the State Plan or waiver of the 
plan. We interpret this reference to section 1903(a)(7) of the Act to 
mean that amounts expended by a State to establish and operate the 
Medicaid RAC program (aside from fee payments, the treatment of which 
is discussed elsewhere in this preamble) are to be shared by the 
Federal Government at the 50 percent administrative rate. Therefore, we 
proposed at Sec.  455.514(b), that FFP is available to States for 
administrative costs subject to reporting requirements.
    We also proposed that States would report to CMS certain elements 
describing the effectiveness of their Medicaid RAC programs. These 
proposed elements included general program descriptors (for example, 
contract periods of performance, contractors' names) and program 
metrics (for example, number of audits conducted, recovery amounts, 
number of cases referred for potential fraud). These elements will be 
provided in sub-regulatory guidance specified by CMS.
     Sections 1902(a)(42)(B)(ii)(IV)(bb) and 1903(d) of the Act 
apply to amounts recovered (not merely identified) under the Medicaid 
RAC program. In the proposed rule, we indicated that a State would be 
required to refund the Federal share of the net amount of overpayment 
recoveries after deducting the contingency fees paid to a RAC (in 
conformance with the restrictions discussed above, including the 
maximum allowed RAC contingency fee and the exception process). In 
other words, a State would be required to take a RAC's contingency fee 
``off the top'' before calculating the Federal share of the overpayment 
recovery to be returned to CMS. The amounts recovered would be subject 
to a State's quarterly expenditure estimates and the funding of the 
State's share.
    Additionally, we noted in the proposed rule that the U.S. 
territories operate under a separate funding authority that is 
statutorily-capped. As a result of the limitations placed on FFP by 
section 1108(g) of the Act, territories would need to assess the 
feasibility of implementing and funding Medicaid RAC contractors in 
their jurisdictions.

[[Page 57812]]

As of the date of this final rule, all of the territories requested and 
were granted exceptions from establishing RAC programs. These 
exceptions will not be reassessed. Should RAC programs become feasible 
due to a change in circumstances, the territories can amend their State 
Plans to establish RAC programs.
     Under section 1902(a)(42)(B)(ii)(IV)(cc) of the Act, 
States and their Medicaid RACs must coordinate their efforts with other 
contractors or entities performing audits of entities receiving 
payments under the State Plan or waiver in the State, including State 
and Federal law enforcement agencies. In the proposed rule, we 
emphasized that Medicaid RACs were not intended to, and would not, 
replace any State program integrity or audit initiatives or programs. 
We proposed under Sec.  455.508(b) that an entity that wanted to enter 
into a contract with a State to perform the functions of a Medicaid RAC 
must agree to coordinate its audit recovery efforts with other 
entities.
    In the proposed rule, we stated that although overlapping or 
multiple provider audits may be necessary, we hoped to minimize the 
likelihood of overlapping audits. Section 1902(a)(42)(B)(ii)(IV)(cc) of 
the Act directs States to assure CMS that they will coordinate Medicaid 
RAC audit activity with an array of other entities that also conduct 
audits of Medicaid providers. Providers are currently subject to audits 
by the States' routine program integrity audits, CMS' Medicaid 
Integrity Contractors' (MICs) audits, as well as audits conducted by 
other State and Federal entities. For example, the MICs perform audits 
of providers, on behalf of CMS, in order to identify overpayments. 
Payment Error Rate Measurement (PERM) audits are ongoing CMS audits 
that measure improper payments in the Medicaid and Children's Health 
Insurance Program and error rates for each program. As we stated in the 
proposed rule, we anticipate working both internally and with the 
States to minimize this administrative burden on Medicaid providers.
    In addition to the obligation to coordinate auditing efforts to 
reduce the overburdening of Medicaid providers, we also wanted to 
ensure coordination between Medicaid RACs and law enforcement 
organizations so that suspected cases of fraud and abuse were processed 
through the appropriate channels. Law enforcement organizations may 
conduct audits or investigations of Medicaid providers in addition to 
Federal and State agencies. Those organizations include, but are not 
limited to, the HHS-OIG, the U.S. Department of Justice, including the 
Federal Bureau of Investigation, State Medicaid Fraud Control Units 
(MFCUs), other Federal and State law enforcement agencies, as 
appropriate, and CMS. We concluded that States are in the best position 
to coordinate audit activities.
    We also proposed at Sec.  455.508(b) that a Medicaid RAC must 
report fraud or criminal activity to the appropriate law enforcement 
officials whenever it has reasonable grounds to believe that such 
activity has occurred.

III. Analysis of and Responses to Public Comments

    We received 76 timely comments on the November 10, 2010 proposed 
rule (75 FR 69037) from State associations, hospitals, medical 
associations, providers, managed care organizations, and contingency 
fee contractors. We reviewed each commenter's comments and grouped 
related comments. After associating like comments, we placed them in 
categories based on subject matter. Summaries of the public comments 
received and our responses to those comments are set forth below.

A. General

    Comment: One commenter requested clarification and asked CMS to 
consider addressing the fundamental differences between Medicaid RACs 
and Medicare RACs.
    Response: Medicaid RACs are State funded, designed, procured, 
operated and administered programs authorized by section 6411 of the 
Affordable Care Act to identify underpayments and overpayments and to 
recover overpayments to Medicaid providers, on a contingency fee basis. 
Medicare RACs are regionally operated contractors that are federally 
funded, procured, operated and administered programs authorized 
permanently by section 302 of the TRHCA to identify underpayments and 
overpayments and to recoup overpayments under parts A and B of the 
Medicare program. The Congress provided for payments to the Medicare 
RACs on a contingency fee basis for correcting overpayments and 
identifying underpayments. In constructing this final rule, we took 
into consideration these fundamental differences between the Medicaid 
and Medicare programs along with feedback from commenters on how these 
differences can be addressed as well as how best practices from the 
Medicare RAC program can be incorporated.
    Comment: One commenter asserted that CMS should seek input from 
States concerning reporting metrics and that a cooperative approach to 
this requirement should provide CMS with the data needed for oversight 
of the program but not be overly burdensome to the States.
    Response: We agree with the comment regarding reporting metrics. We 
anticipate working with States to develop performance metrics and will 
issue sub-regulatory guidance regarding specific reporting criteria 
when appropriate.
    Comment: One commenter indicated that the Medicaid RAC program 
would be further enhanced by developing consistent objective criteria 
for States to follow and this information should be publicly available 
to establish a baseline for the community.
    Response: We agree that the Medicaid RAC program should have 
consistent and objective criteria. As a result of comments from 
stakeholders, we considered and are finalizing the following 
provisions:
     State coordination of recovery audit efforts with other 
auditing entities (Sec.  455.506(c)).
     State reporting of fraud and/or abuse, as defined by Sec.  
455.2, to its MFCU or other appropriate law enforcement agency (Sec.  
455.506(d)).
     State established limit on the number and frequency of 
medical records requested by a RAC (Sec.  455.506(e)).
     The entity must hire a minimum of 1.0 FTE Contractor 
Medical Director who is a Doctor of Medicine or Doctor of Osteopathy in 
good standing with the relevant State licensing authorities and has 
relevant work and educational experience. A State may seek to be 
excepted, in accordance with Sec.  455.516, from requiring its RAC to 
hire a minimum of 1.0 FTE Contractor Medical Director by submitting to 
CMS a written request for CMS review and approval (Sec.  455.508(b)).
     A requirement that RACs hire certified coders unless the 
State determines that certified coders are not required for the 
effective review of Medicaid claims (Sec.  455.508(c)).
     The RAC must work with the State to develop an education 
and outreach program component, including notification of audit 
policies and audit protocols (Sec.  455.508(d)).
     Mandatory RAC customer service measures, including: 
Providing a toll-free customer service telephone number in all 
correspondence sent to providers and staffing the toll-free number 
during normal business hours from 8:00 a.m. to 4:30 p.m. in the 
applicable time zone (Sec.  455.508(e)(1)); compiling and maintaining 
provider approved addresses and points of contact

[[Page 57813]]

(Sec.  455.508(e)(2)); mandatory acceptance of provider submissions of 
electronic medical records on CD/DVD or via facsimile at the providers' 
request (Sec.  455.508(e)(3)); and notifying providers of overpayment 
findings within 60 calendar days (Sec.  455.508(e)(4)).
     A three-year maximum claims look-back period (Sec.  
455.508(f)).
     Timely referral of suspected cases of fraud and/or abuse 
by the Medicaid RAC to the State (Sec.  455.508(h)).
     Return of contingency fees within a reasonable timeframe 
as prescribed by the State if a Medicaid RAC determination is reversed 
at any level of appeal (Sec.  455.510(b)(3)).
    Comment: One commenter indicated that parallel Medicare and 
Medicaid RAC standards are consistent with CMS' aim of harmonization of 
the anti-fraud activities of the Medicare and Medicaid programs under 
the Center for Program Integrity (CPI).
    Response: We agree with the commenter. Medicaid RAC programs are, 
by statute, administered differently than Medicare RAC programs. 
However, we have concluded that many aspects of the Medicaid RAC 
program can operate in alignment with the Medicare RAC program 
including the following: Staffing requirements (Sec.  455.508(a), (b), 
and (c)); State and RAC development of an education and outreach 
program, including notification of audit policies and protocols (Sec.  
455.508(d)); minimum customer service measures including: Providing a 
toll-free customer service telephone number in all correspondence sent 
to providers and staffing the toll-free number during normal business 
hours from 8:00 a.m. to 4:30 p.m. in the applicable time zone (Sec.  
455.508(e)(1)); compiling and maintaining provider approved addresses 
and points of contact (Sec.  455.508(e)(2)); mandatory acceptance of 
provider submissions of electronic medical records on CD/DVD or via 
facsimile at the providers' request (Sec.  455.508(e)(3)); notifying 
providers of overpayment findings within 60 calendar days (Sec.  
455.508(e)(4)); a 3 year maximum claims look-back period (Sec.  
455.508(f)); and a State established limit on the number and frequency 
of medical records requested by a RAC (Sec.  455.506(e)).
    Comment: Several commenters indicated that processes should be 
developed to minimize provider burden to the greatest extent possible 
in connection with the identification of improper payments. 
Additionally, the commenters stated that the final rule should 
incorporate increased accountability and transparency provisions which 
ultimately became part of the permanent Medicare RAC program.
    Response: Again, we have concluded that many aspects of the 
Medicaid RAC program can operate in alignment with the Medicare RAC 
program, consistent with State law, thereby minimizing provider burden 
including the following: Staffing requirements (Sec.  455.508(a)), (b), 
and (c)); State and RAC development of an education and outreach 
program, including notification of audit policies and protocols (Sec.  
455.508(d); minimum customer service measures including: Providing a 
toll-free customer service telephone number in all correspondence sent 
to providers and staffing the toll-free number during normal business 
hours from 8:00 a.m. to 4:30 p.m. in the applicable time zone (Sec.  
455.508(e)(1)); compiling and maintaining provider approved addresses 
and points of contact (Sec.  455.508(e)(2)); mandatory acceptance of 
provider submissions of electronic medical records on CD/DVD or via 
facsimile at the providers' request (Sec.  455.508(e)(3)); notifying 
providers of overpayment findings within 60 calendar days (Sec.  
455.508(e)(4)); a 3 year maximum claims look-back period (Sec.  
455.508(f)); and a State established limit on the number and frequency 
of medical records requested by a Medicaid RAC (Sec.  455.506(e)). 
States are obligated to coordinate auditing efforts to reduce the 
overburdening of Medicaid providers.
    Comment: One commenter expressed concern with the implementation of 
a ``Medicare based audit program'' due to budget deficits in the States 
and pressure to look for opportunities to find savings in the already 
underfunded Medicaid program.
    Response: We understand the commenter's concerns. However, the 
Affordable Care Act requires the implementation of a Medicaid RAC 
program, with certain exceptions as permitted by the Secretary. Because 
the Affordable Care Act requires States to contract with RACs on a 
contingency fee basis, out-of-pocket expenses should be minimized. 
Therefore, the majority of the program costs will be offset by 
overpayment recoveries. Further, Medicaid RACs are part of a 
significant initiative to reduce waste and improper payments and recoup 
the improper payments. Accordingly, we believe that the Medicaid RAC 
program will lead to significant savings for States, as indicated in 
Section VI. of this final rule, titled ``Regulatory Impact Analysis.''
    Comment: One commenter urged CMS to balance the goal of recovery of 
funds improperly paid with the ``respectful treatment of the 
overwhelming number of Medicaid providers who continue to provide 
healthcare services at substantially less than market rates and who 
diligently attempt to abide by all applicable regulations and payment 
policies.'' Another commenter suggested that providers would no longer 
participate in Medicaid and its clients would no longer have access to 
care.
    Response: We agree that Medicaid providers deserve to receive 
respectful treatment from CMS and we understand the commenters' 
concerns regarding the burden of additional audits on providers. In the 
proposed rule, we specifically emphasized that States and their RACs 
must undertake coordination efforts to reduce the potential 
overburdening of Medicaid providers, as well as ensuring that suspected 
cases of fraud and abuse are processed through the appropriate 
channels. We emphasized that it is the State's obligation to ensure 
that RACs do not duplicate or compromise the efforts of other entities 
performing audits. In the final rule, we require at Sec.  455.506(c) 
that States must coordinate the recovery audit efforts of their RACs 
with other auditing entities.
    Comment: One commenter stated that the Department of Health and 
Human Services (HHS) should better target program integrity dollars to 
efforts that have the most opportunity for success.
    Response: We believe that the Medicare and Medicaid RAC programs 
are an investment in successful program integrity efforts. In FY 2010, 
Medicare RACs identified and corrected $92.3 million in combined 
overpayments and underpayments. Eighty-two percent of all RAC 
corrections were collected overpayments, and 18 percent were identified 
underpayments that were refunded to providers. We expect that States 
will realize a similar ratio of overpayments to underpayments in 
connection with the implementation of the Medicaid RAC program, and 
will examine the trends among the States over several years.
    Comment: One commenter indicated that HHS should clarify whether it 
is considering or recommending to the Congress that it eliminate the 
Audit Medicaid Integrity Contractor (MIC) and Review of Provider MIC 
effort since it appears to be duplicative of the Medicaid RAC program.
    Response: We disagree that the work of MICs, both Audit and Review 
of Provider, is duplicative of Medicaid RACs. As stated previously, 
Federal MICs are better positioned to address certain Medicaid program

[[Page 57814]]

vulnerabilities than State-administered RACs.
    Comment: One commenter recommended that CMS require States to 
provide transparency in coding/billing rules and guidelines, share 
screening guidelines for medical necessity determinations, and provider 
education. According to the commenter, this can ensure provider success 
as well as develop a framework for auditing bodies to follow. This 
commenter believes that existing State rules and guidelines are often 
vague or unwritten. Therefore, audits should not be allowed except 
where the State has promulgated clear criteria.
    Response: We agree that States should be as transparent as possible 
with regard to their Medicaid RAC programs. While we are not requiring 
States to provide coding/billing guidelines, we are requiring RACs to 
work with the State to develop a provider education and outreach 
program, including notification of audit policies and protocols for 
auditing bodies and providers to have clearly defined roles and 
expectations (Sec.  455.508(d)).
    Comment: One commenter indicated that allowing contingency fees to 
be based on actual recoveries puts a ``tremendous strain on a company's 
cash flow.'' The commenter indicated that a company has to prepare for 
a long lead time between providing the service of identifying a 
recovery and being paid after a governmental agency has made the effort 
to collect the recovery and then process the payment. This commenter 
further stated that the company providing the service has no input or 
control over the collection process and must rely on the good faith of 
the agency to process payments in a timely and efficient manner.
    Response: We disagree with this comment because we do not believe 
that there is credible evidence to suggest that any State agency would 
intentionally withhold compensation from one of its contractors. As 
envisioned, a State and a RAC would voluntarily enter into a 
contractual agreement with provisions protecting both parties' 
interests. Thus, the agency would agree to pay the RAC according to the 
contractual agreement. As a general rule, contingency fee contractors 
should be aware of the financial risk of working on a contingency fee 
basis. In addition, States have an incentive to collect overpayments as 
soon as possible. Moreover, the RAC can recoup overpayments directly 
from providers if its contract with the State is structured to permit 
RAC collection of overpayments.
    Comment: One commenter expressed concern that the proposed rule 
does not reflect the potential savings associated with the correction 
of repeated provider billing errors. Thus, the current rule does not 
incentivize a RAC to help a State stop systemic overpayments as that 
would eliminate the RAC's contingency fee. This commenter suggested 
that HHS consider some method to reward a RAC for identifying and 
reporting solutions to a State which would end overpayments that occur 
from system error or other administrative problems on an ongoing basis.
    Response: While we encourage States to work with their RACs to 
identify potential State vulnerabilities or other similar problem 
areas, a RAC reward for the activities is outside the scope of the 
proposed and final rules. Generally, a Medicaid RAC is required to 
review post-payment claims for the purpose of identifying and 
collecting overpayments as well as identifying underpayments. Sections 
1902(a)(42)(B)(i) and (ii)(I)(aa) of the Act require RACs to be 
compensated on a contingency fee basis for the identification and 
recovery of overpayments, to the extent it is consistent with State 
law. The statute does not require Medicaid RACs to identify State 
administrative issues. We encourage States to evaluate identified 
overpayments to determine if trends are apparent and whether solutions 
can be developed to address noted vulnerabilities.
    Comment: Several commenters indicated that the final rule should 
require CMS, State Medicaid agencies (SMAs), and RACs to use program 
``fixes'' to educate providers as well as implement payment system 
changes to avoid billing mistakes before they are made.
    Response: We agree and have included, in this final rule, a 
requirement for States and their RACs to develop an education and 
outreach program at Sec.  455.508(d), including notification to 
providers of audit policies and protocols. We believe that States 
should implement additional process improvements to their payment 
systems to the extent possible. Those improvements should not 
substitute for program integrity initiatives or programs to ensure that 
proper payments are made to providers.
    Comment: One commenter suggested that CMS place oversight of the 
State Medicaid RAC programs and Medicare RAC contractors within the CMS 
CPI. Based on its core function and experience base, CPI is uniquely 
positioned to oversee the Medicare and Medicaid RACs because its duties 
are to perform Medicare and Medicaid program integrity activities.
    Response: While we appreciate the commenter's suggestion, the 
Medicaid RACs will be procured, administered and operated by the States 
according to State laws and regulations. Additionally, there will be no 
privity of contract between CMS and the Medicaid RACs. We recently 
provided support and technical assistance to the States in the form of 
sub-regulatory guidance, all-State call forums, webinars, and a video 
entitled ``Medicaid RACs: Are You Ready?'' We will continue to provide 
technical support and assistance to States after publication of this 
final rule. The appropriate CMS component to oversee the Medicare RAC 
program is outside the scope of this final rule.
    Comment: One commenter indicated that it was fundamentally opposed 
to contingency fees in Medicare and Medicaid auditing. According to the 
commenter, this type of behavior has the overwhelming tendency to push 
auditors ``to take a chance'' and inappropriately deny claims.
    Response: We understand the concerns of the commenter. However, the 
statute requires Medicaid RACs to be paid on a contingency fee basis 
for the identification and recovery of overpayments. Contingency fee 
contracting is a type of payment methodology that has been a standard 
practice accepted among private healthcare payers for more than 20 
years. In the final rule, we clarified that Medicaid RACs will only 
review post-payment claims for overpayments and underpayments. 
Accordingly, the Medicaid RACs will not deny claims.
    Comment: One commenter expressed concern that the proposed rule 
does not indicate that CMS is aware of abuses to providers. As support, 
the commenter cited anecdotes experienced by providers during the 
Medicare RAC Demonstration period. According to the commenter, CMS was 
advised of the ``horrific costs incurred by providers in fighting 
denials, particularly in California, and the extremely high percentage 
of denials overturned * * * but tremendous cost had been incurred and 
the damage was done in terms of reputation, reallocation of resources, 
etc.''
    Response: We disagree with the comment. While we are aware of 
issues in California, we are not aware of explicit ``abuses to 
providers.'' We have attempted to address the concerns of providers and 
incorporate the lessons learned from the Medicare RAC Demonstration 
period into the permanent Medicare RAC program, including, but not 
limited to, requiring

[[Page 57815]]

the Medicare RAC to document their ``good cause'' for reviewing a claim 
and requiring each Medicare RAC to hire a minimum of 1.0 Full Time 
Equivalent (FTE) physician Medical Director to oversee the program. In 
addition, we have attempted to incorporate those lessons learned in the 
Medicare RAC program to the development of the Medicaid RAC program.
    Comment: One commenter expressed disappointment that the proposed 
rule does not contain best practices from the Medicare RAC 
Demonstration and recommends that CMS reconsider its proposed Medicaid 
RAC program policies in the final rule.
    Response: We agree with the spirit of the comment. As a result of 
numerous comments from stakeholders, we are making modifications to the 
proposed Medicaid RAC program in this final rule. For example, we are 
requiring in this final rule that each Medicaid RAC hire a minimum of 
1.0 FTE Contractor Medical Director who is a Doctor of Medicine or 
Doctor of Osteopathy. A State may request an exception, in accordance 
with Sec.  455.516, from requiring its RAC to hire a minimum of 1.0 FTE 
Contractor Medical Director by submitting written justification and 
receiving approval from CMS. We finalize this provision at Sec.  
455.508(b). We are also requiring Medicaid RACs to hire certified 
coders unless the State determines that certified coders are not 
required for the effective review of Medicaid claims. We finalize this 
provision at Sec.  455.508(c). Additionally, we are requiring State and 
RAC development of an education and outreach program for providers, 
including notification of audit policies and protocols (Sec.  
455.508(d)); minimum customer service measures, including those 
measures found in the Medicare RAC program such as: Providing a toll-
free customer service telephone number in all correspondence sent to 
providers and staffing the toll-free number during normal business 
hours from 8:00 a.m. to 4:30 p.m. in the applicable time zone (Sec.  
455.508(e)(1)); compiling and maintaining provider approved addresses 
and points of contact (Sec.  455.508(e)(2)); mandatory acceptance of 
provider submissions of electronic medical records on CD/DVD or via 
facsimile at the providers' request (Sec.  455.508(e)(3)); notifying 
providers of overpayment findings within 60 calendar days (Sec.  
455.508(e)(4)); a 3 year maximum claims look-back period (Sec.  
455.508(f)); and a State-established limit on the number and frequency 
of medical records requested by a RAC (Sec.  455.506(e)). States may 
request exceptions to Sec.  455.508(f) through the SPA process, and 
RACs may request from States, exceptions to Sec.  455.506(e).
    Comment: One commenter recommended that States should implement the 
RAC program, through the use of ``regional RACs'' to minimize provider 
burden and to maximize consistency and efficiency.
    Response: We agree that regional Medicaid RACs can be an innovative 
strategy for States to share resources. There is nothing in the statute 
that would preclude a group of States from joining together to contract 
with a Medicaid RAC. There has been some State interest in forming/
procuring a regional RAC. We encourage their efforts. However, we will 
not mandate that States adopt this strategy.
    Comment: One commenter asserted that requiring close oversight of 
the RAC program will be challenging due to budget constraints.
    Response: We understand the commenter's concerns. However, the 
Medicaid RACs are part of a significant initiative to reduce improper 
payments and recoup the overpayments that have occurred.
    Comment: One commenter requested that CMS provide ``extremely tight 
monitoring'' of Medicaid RAC review, auditing behavior and denial 
patterns if CMS interprets section 6411 of the Affordable Care Act to 
mandate contingency fees regarding the identification and recoupment of 
overpayments.
    Response: Section 1902(a)(42)(B)(ii)(II)(aa) of the Act mandates 
that RACs be paid on a contingency fee basis for the identification and 
recoupment of overpayments. We will oversee State implementation of 
Medicaid RAC programs to ensure compliance with the Act and these 
regulations, but do not anticipate the need to, as the commenter 
suggests, engage in ``extremely tight monitoring'' at this point. 
States have attested through their SPAs that they will implement a 
Medicaid RAC program consistent with this final rule (unless a State 
has been granted an exception).
    Comment: Several commenters suggested that ``[t]he audit should 
include all of Medicaid, and not be restricted to narrow areas. This 
will ensure the maximum benefit of program recoveries and preventive 
actions on the broadest scope possible.''
    Response: We believe that States should have the ability to direct 
the audit targets, but that, so long as consistent with State 
direction, the RACs should have the ability to audit the entire 
Medicaid program.
    Comment: Several commenters questioned CMS' authority to require 
States to continue existing program integrity efforts. Most of these 
commenters recommended that CMS exempt States that have Medicaid 
Integrity Programs or similar audit programs from the requirement to 
establish RAC programs. These commenters argued that there is no 
statutory authority for CMS to compel States to maintain levels of 
funding and activity for a duplicate program, and questioned the 
assertion that States have no option to choose to either be audited by 
a Federal MIC or establish a Medicaid RAC program. Several commenters 
also expressed concern that the continuation of existing program 
integrity efforts greatly reduces flexibility and creates duplicative 
audits and review processes which may ultimately impact provider 
participation and access to care. Finally, one commenter recommended 
that CMS remove the requirement to continue existing program integrity 
activities completely.
    Response: Continuation of existing program integrity activities is 
important to ensure a comprehensive State program integrity program 
that includes more than a claims auditing program, such as the Medicaid 
RAC program. Other critical components of a Medicaid integrity program 
include Surveillance and Utilization Review (SUR) unit activities, MMIS 
system monitoring, and fraud prevention and detection activities, 
including coordination with law enforcement.
    We disagree that the Medicaid RAC program is duplicative of the 
Federal national audit program, in which Federal MICs conduct audits of 
Medicaid providers. In particular, while RACs are an efficient way to 
identify payment errors, they are not the most effective approach to 
identify or prevent fraudulent practices. Federal MICs can focus on 
audit issues that may be less advantageous for a contingency-fee based 
contractor. In addition, fraudulent schemes may not lead to overpayment 
recoveries, which provide the source of RAC fees. Moreover, Medicaid 
RAC programs are poised to address State-specific issues stemming from 
the individual characteristics of each State's Medicaid program (for 
example, special payment structures under a Medicaid demonstration) and 
will focus on the needs and vulnerabilities associated with a 
particular State. In contrast, Federal MICs are poised to address 
vulnerabilities on a regional and national basis. These regional and 
national trends would likely go undetected by an individual Medicaid

[[Page 57816]]

RAC. Accordingly, the national audit program is complementary to a 
State Medicaid RAC program.
    We are not exempting States that have Medicaid integrity programs 
from establishing a Medicaid RAC program. Although there is no specific 
requirement in the Affordable Care Act regarding the continuation of 
program integrity efforts, the Congress directed CMS to promulgate 
regulations to carry out section 6411 of the Affordable Care Act with 
full awareness of the various program integrity initiatives for which 
it had given previous authority and that are currently in place in 
States. Congress did not relax any of those previously authorized 
program integrity activities in the Affordable Care Act. We take this 
to mean that Congress intended this policy to supplement previously 
authorized program integrity activities at both the State and Federal 
levels. We also believe that States should play a significant role in 
coordinating the audit activities of their respective integrity 
programs, RACs, and any other auditing entities under contract with the 
State. We are very concerned about provider participation and 
beneficiary access to care as well as minimizing the potential for 
multiple audits of the same provider. However, States should not 
supplant existing State program integrity initiatives with a Medicaid 
RAC program because of the fundamentally different and complementary 
approaches of the two audit programs.

B. Implementation Date

    Comment: Several commenters expressed concern that ``States must 
fully implement their Medicaid RAC programs by April 1, 2011.'' While 
some commenters recommended specific alternative implementation dates 
ranging between July 1, 2011 and January 1, 2012, the majority of the 
commenters asserted that April 1, 2011, did not allow States enough 
time to complete the procurement process, or allow States that require 
legislative authority to obtain approval for contracting with RACs. One 
commenter requested clarification as to the meaning of ``fully 
implement'' by April 1, 2011. Another commenter suggested voluntary 
implementation, on the part of States, from the present date until 
January 1, 2012.
    Response: Although we proposed an implementation date of April 1, 
2011, the date was contingent upon the rule being finalized. We 
recognize the need to provide a reasonable period of time between 
publication of the final rule and the date for required implementation 
of the Medicaid RAC program to ensure States' compliance with the final 
rule. Accordingly, absent an exception, States will be required to 
implement their RAC programs by January 1, 2012.
    Comment: One commenter asked if there will be a penalty if a State 
does not implement a RAC program.
    Response: When a State elects to participate in the Medicaid 
program, it is required to comply with its State Plan, as well as the 
requirements imposed by the Act and applicable Federal regulations. 
Section 1902(a)(42)(B)(i) of the Act requires States to implement RAC 
programs, which is consistent with States' commitment to promote 
program integrity. Additionally, States are required by section 
1903(a)(7) of the Act to administer funding necessary for the proper 
and efficient administration of the State Plan or waiver of the plan. 
If the Secretary deems that a Medicaid RAC program is necessary to 
ensure the integrity and the efficiency of a State's Medicaid program, 
a State's failure to implement the program may violate section 
1903(a)(7) of the Act. A potential consequence of a State's failure to 
implement a RAC program is the loss of FFP. If a State is unable to 
implement a RAC program, then that State should request from CMS an 
exception either from a specific Medicaid RAC program requirement(s) or 
a complete exception from implementing the RAC program. However, as 
stated in the proposed rule, we will grant complete exceptions from the 
Medicaid RAC program or exceptions to RAC requirements only rarely and 
only under the most compelling of circumstances.
    Comment: One commenter recommended that CMS adopt a phase-in 
strategy similar to the Medicare program to ensure that the provider 
community can actively participate in outreach programs.
    Response: We provided early guidance for States with regard to the 
creation and implementation of a Medicaid RAC program. States already 
have the ability to request delayed implementation of RAC programs 
through the Medicaid SPA process. Additionally, we provided support and 
technical assistance to the States in the form of sub-regulatory 
guidance, all-State call forums, webinars and an informative video 
entitled ``Medicaid RACs: Are You Ready?'' We fully anticipate 
continuing to provide technical assistance after the publication of the 
final rule. Therefore, we are not adopting a global phase-in strategy.

C. Program Requirements

    Comment: Numerous commenters inquired about the overall program 
approach of the Medicaid RAC program. One commenter indicated that it 
interpreted the Affordable Care Act to read that Medicaid RACs should 
be established in the same manner as CMS currently contracts with 
Medicare RACs, and with the same program requirements. Several 
commenters suggested that CMS should standardize program elements of 
the Medicare RACs into Medicaid RAC programs. Several commenters 
expressed their concerns that a variation in Medicaid RAC program 
requirements between bordering States would cause an undue burden on 
providers that operate nationally or in multiple States.
    Response: Consistent with the flexibility afforded States in the 
design and operation of their Medicaid programs, we did not prescribe 
every element of the Medicaid RAC program in the proposed rule. We 
received many comments encouraging CMS to adopt measures in the 
Medicaid RAC program that could operate in alignment with Medicare RAC 
requirements. We considered the effect of aligning Medicare provisions 
upon individually State-run programs and existing State laws and 
regulations and balanced that with the spirit of the statute. 
Accordingly, in the final rule, we are requiring certain specific 
program elements that are consistent with the program elements 
established by the Medicare RAC program. These program elements include 
the following:
     Requiring the entity to hire a minimum of 1.0 FTE 
Contractor Medical Director who is a Doctor of Medicine or Doctor of 
Osteopathy in good standing with the relevant State licensing 
authorities and has relevant work and educational experience. A State 
may seek to be excepted, in accordance with Sec.  455.516, from 
requiring its RAC to hire a minimum of 1.0 FTE Contractor Medical 
Director by submitting to CMS a written request for CMS review and 
approval (Sec.  455.508(b));
     Requiring the entity to hire certified coders unless the 
State determines that certified coders are not required for the 
effective review of Medicaid claims (Sec.  455.508(c));
     Requiring the development of an education and outreach 
program component, including notification to providers of audit 
policies and protocols (Sec.  455.508(d));
     Requiring RAC customer service measures including: 
Providing a toll-free customer service telephone number in all 
correspondence sent to providers

[[Page 57817]]

and staffing the toll-free number during normal business hours from 
8:00 a.m. to 4:30 p.m. in the applicable time zone (Sec.  
455.508(e)(1)); compiling and maintaining provider approved addresses 
and points of contact (Sec.  455.508(e)(2)); mandatory acceptance of 
provider submissions of electronic medical records on CD/DVD or via 
facsimile at the providers' request (Sec.  455.508(e)(3)); notifying 
providers of overpayment findings within 60 calendar days (Sec.  
455.508(e)(4));
     3-year maximum claims look-back period (Sec.  455.508(f));
     State established limit on the number and frequency of 
medical records requested by a RAC (Sec.  455.506(e));
     State coordination of recovery audit efforts with other 
auditing entities (Sec.  455.506(c)); and
     Return of contingency fees within a reasonable timeframe 
as prescribed by the State, if a Medicaid RAC determination is 
overturned at any level of appeal (Sec.  455.510(b)(3)). As noted 
below, States will have flexibility as to timing of payment.
    In addition, we strongly encourage States to adopt specific program 
elements that are part of the permanent Medicare RAC program within the 
flexibility States have to design and implement their RAC programs in 
the following areas:
     Medical necessity reviews;
     Extrapolation of audit findings;
     External validation of accuracy of RAC findings; and
     Types of claims audited.
    For contingency fees, States maintain the flexibility of paying 
contingency fees either from amounts identified and recovered, but not 
fully adjudicated, or after the overpayment was fully adjudicated and 
all appeals available to the provider were exhausted. As noted above, 
the RAC will be required to return the contingency fee, within a 
reasonable timeframe as prescribed by the State that corresponds to the 
amount of the overpayment if an adverse determination is overturned at 
any level of appeal.
    Program elements where we will grant States complete flexibility 
regarding the design, procurement, administration and operation of 
their RAC programs, largely because of the requirements of State laws, 
are as follows:
     Underpayment methodology;
     State appeals process;
     Contingency fee rates (States have complete flexibility in 
the contingency fee rates they pay, exclusive of FFP. However, we will 
provide FFP only for amounts that do not exceed the then-highest 
contingency fee rate paid to Medicare RACs);
     State exclusion of claims;
     Bundling of procurements; and
     Coordination of the collection of RAC overpayments.
    With regard to the providers serving beneficiaries in multiple 
States that expressed concern about the variation among Medicaid RAC 
program elements, we believe that a strong education and outreach 
campaign developed by the States and RACs and required as a part of 
every Medicaid RAC program will help alleviate the concerns that were 
expressed.
    As we described in more detail, in sections II. and III.G. of this 
final rule, we are granting States the flexibility to design their 
appeals processes, but States are required by section 
1902(a)(42)(B)(ii)(III) of the Act to have an adequate process for 
entities to appeal adverse RAC determinations.
    Comment: One commenter suggested that Medicaid RAC program goals be 
created based on the error rate established by the Payment Error Rate 
Measurement (PERM) program.
    Response: PERM addresses specific error measures in the Medicaid 
program. Under section 1902(a)(42)(B)(i) of the Act, the Medicaid RACs 
shall identify underpayments and overpayments and shall recoup 
overpayments. Thus, there is no authority under Federal law for 
Medicaid RAC programs to apply any measure except to ensure that States 
make no improper payments to providers.
    Comment: One commenter inquired whether existing patient 
identifiers can be used so that files can be readily retrieved by the 
provider.
    Response: We do not intend for States to deviate from processes 
that are already in place to readily identify claims. We encourage 
States to work with their contractors to include the necessary fields 
to effectively identify overpayments and/or underpayments.
    Comment: Several commenters stated that during the Medicare RAC 
Demonstration, many providers experienced inappropriate and arbitrary 
RAC denials. These commenters indicated that the RAC neither informed 
providers of the types of issues they were auditing, nor did they 
provide a rationale for adverse determinations. Additionally, 
commenters reported RACs audited claims using the wrong payment codes 
and audited claims from several years ago. According to commenters, 
this led to provider appeals, 64 percent of which were decided in the 
favor of the provider.
    Response: As stated previously, we are applying numerous lessons 
learned from the Medicare RAC demonstration. We are requiring in this 
final rule that each Medicaid RAC must hire a minimum of 1.0 FTE 
Contractor Medical Director who is a Doctor of Medicine or Doctor of 
Osteopathy in good standing with the relevant State licensing 
authorities and has relevant work and educational experience. A State 
may seek to be excepted, in accordance with Sec.  455.516, from 
requiring its RAC to hire a minimum of 1.0 FTE Contractor Medical 
Director by submitting to CMS a written request for CMS review and 
approval. We finalize this provision at Sec.  455.508(b). We are also 
requiring Medicaid RACs in this final rule to hire certified coders 
unless the State determines that certified coders are not required for 
the effective review of Medicaid claims. We finalize this provision at 
Sec.  455.508(c). Finally, we are requiring that there be a 3 year 
maximum claims look-back period. We finalize this provision at Sec.  
455.508(f).
    Comment: One commenter inquired whether Medicaid RACs are required 
to comply with the reopening regulation located at Sec.  405.980 
similar to Medicare RACs, which requires a RAC to have good cause 
before it reopens a claim.
    Response: Section 405.980 applies to administrative appeals under 
the Medicare program. States have different administrative appeal 
processes from the Medicare program. Accordingly, we did not require 
States to comply with the reopening regulation as set forth in the 
Medicare RAC program. As stated previously, States will retain the 
flexibility to design, procure, operate, and administer their RAC 
programs in accordance with State laws, regulations, and policies.
    Comment: One commenter suggested that patients not receive a letter 
regarding a Medicaid RAC audit until the appeal process has ended and a 
determination is final, similar to the Medicare program.
    Response: The Medicaid RAC program is designed to review claims 
submitted by providers of items and services or other individuals 
furnishing items and services for which payment has been made under 
section 1902(a) of the Act. Accordingly, States have the flexibility to 
decide the issue of patient notification of final claims resolution.
    Comment: Several commenters stated that the best way to reduce 
common billing and coding mistakes is through targeted education and 
outreach, rather than onerous audits performed by outside contractors 
with incentives to deny claims. These commenters asserted that 
education and outreach

[[Page 57818]]

efforts are insufficient across the Medicare and Medicaid programs.
    Response: We agree that targeted education and outreach is one way 
of reducing common billing and coding mistakes. Accordingly, we have 
finalized at Sec.  455.508(d), that States and their RACs are required 
to develop a education and outreach program as part of their Medicaid 
RAC programs. This includes, at a minimum, notification of audit 
policies and protocols.
    Comment: Several commenters recommended the exclusion of medical 
necessity reviews from the Medicaid RAC program.
    Response: We disagree with the commenters. Providers are required 
to furnish medically necessary services in State Medicaid plans and 
medical necessity reviews by Medicaid RACs are permitted to the extent 
they are consistent with State laws and regulations.
    Comment: Several commenters suggested that if medical necessity 
reviews are permitted in Medicaid RAC programs, then CMS should issue 
key oversight provisions in the final rule to mitigate incentives for 
aggressive and/or inaccurate medical necessity review denials.
    Response: We disagree that we should issue oversight provisions 
regarding medical necessity reviews in the Medicaid RAC program. 
Providers are required to furnish medically necessary services in 
accordance with State Medicaid plans, and thus medical necessity 
reviews by Medicaid RACs are permitted to the extent the reviews are 
consistent with State laws and regulations. In those cases, we 
encourage States to adopt measures reflected in the Medicare RAC 
program sub-regulatory guidance. We intend to continue providing 
technical assistance to States that will inform them of best practices 
from the Medicare RAC program. Accordingly, we decline to issue 
oversight provisions in the final rule regarding medical necessity 
reviews.
    Comment: Several commenters recommended that if medical necessity 
reviews are permitted in the Medicaid RAC program and an improper 
payment is identified, providers should be allowed to re-bill for the 
lower appropriate claim amount.
    Response: If a Medicaid RAC identifies an improper payment as a 
result of a medical necessity review, or any RAC review, the issue of 
whether a provider is permitted to re-bill a corrected claim is 
governed by State law, regulation, and policy which set time limits on 
the submission of providers' claims.
    Comment: One commenter recommended increased physician involvement 
in medical necessity reviews.
    Response: In the Medicare RAC program, no physician involvement is 
required in medical necessity reviews. We require that registered 
nurses (RNs) must be utilized, and that the Medicare RAC generally, 
employ a Medical Director. Similarly, we have finalized at Sec.  
455.508(b), that each RAC must hire a minimum of 1.0 FTE Contractor 
Medical Director who is a Doctor of Medicine or Doctor of Osteopathy in 
good standing with the relevant State licensing authorities and has 
relevant work and educational experience. A State may seek to be 
excepted, in accordance with Sec.  455.516, from requiring its RAC to 
hire a minimum of 1.0 FTE Contractor Medical Director by submitting to 
CMS a written request for CMS review and approval. In addition, States 
that elect to permit medical necessity reviews in their Medicaid RAC 
programs should develop criteria consistent with their own State laws 
and regulations.
    Comment: One commenter recommended that CMS establish reporting 
mechanisms to monitor contractor accuracy when reviewing claims for 
medical necessity in the Medicaid RAC program.
    Response: If States elect to include medical necessity reviews in 
their Medicaid RAC program, we encourage the States to monitor the 
reviews for accuracy. We have finalized Sec.  455.502(c) and Sec.  
455.514(b) which require State reporting. Additionally, we will issue 
sub-regulatory guidance, generally, on reporting and performance 
metrics for Medicaid RACs.
    Comment: One commenter recommended that CMS should establish 
appropriate guidelines for Medicaid RAC medical necessity reviews, and 
require the RACs to have qualified personnel with both the clinical and 
regulatory experience to review medical necessity review claims.
    Response: We disagree that CMS should establish guidelines for 
medical necessity reviews conducted by Medicaid RACs. States must 
follow the guidance that is provided in State Medicaid plans, State 
law, regulation, and policy. In the final rule at Sec.  455.508(b), 
however, we are requiring that each RAC must hire a minimum of 1.0 FTE 
Contractor Medical Director who is a Doctor of Medicine or Doctor of 
Osteopathy in good standing with the relevant State licensing 
authorities and has relevant work and educational experience. A State 
may seek to be excepted, in accordance with Sec.  455.516, from 
requiring its RAC to hire a minimum of 1.0 FTE Contractor Medical 
Director by submitting to CMS a written request for CMS review and 
approval.
    Comment: Several commenters suggested that Medicaid RACs should 
conduct sample medical necessity audits to support the data identifying 
the pattern of errors that will be targeted through the audits.
    Response: As previously stated, if States elect to include medical 
necessity reviews in their Medicaid RAC programs, we encourage the 
States to monitor the reviews for accuracy.
    Comment: Several commenters recommended that final validation of 
medical necessity review denials should be signed off by a physician.
    Response: In the Medicare RAC program, a physician's approval is 
not required in the validation of a medical necessity review denial. 
States have the flexibility to determine the parameters for medical 
necessity reviews. Therefore, we are not requiring final validation of 
medical necessity review by a physician.
    Comment: Several commenters recommended that the RACs be required 
to submit a rationale for each medical necessity review to the SMA for 
review and approval.
    Response: Similar to the Medicare RAC program in which the agency 
formed a ``New Issue Review Board'' which approves audit issues prior 
to widespread review, we encourage the formation of State review teams 
for Medicaid RACs that can approve new audit issues prior to review. We 
will provide technical assistance to States who decide to include 
medical necessity reviews in their Medicaid RAC programs.
    Comment: One commenter recommended that the SMA be required to 
share training materials with providers that are used by Medicaid RACs 
to conduct a medical necessity review.
    Response: Although we will not require States to share Medicaid RAC 
training materials with providers, we encourage States and SMAs, 
consistent with their laws, regulations, and policies, to make every 
effort to ensure transparency in the Medicaid RAC program. 
Additionally, we have finalized Sec.  455.508(d), which requires an 
education and outreach component in every Medicaid RAC program 
including, at a minimum, notification to providers of audit policies 
and protocols.
    Comment: One commenter recommended that CMS exclude medical 
necessity reviews in States where prior authorization programs

[[Page 57819]]

require medical necessity reviews prior to payment approval.
    Response: To the extent that medical necessity reviews are 
consistent with Medicaid State Plans, State laws or regulations, 
medical necessity reviews are permitted. Accordingly, we did not adopt 
the commenter's recommendation.
    Comment: One commenter suggested that CMS and SMAs use RAC audit 
findings to educate providers and implement payment system fixes to 
avoid billing mistakes before they are made.
    Response: We agree with the comment. If Medicaid RACs identify 
program vulnerabilities as a result of their findings, we encourage 
RACs to share this information with States so that they can implement 
corrective action, such as pre-payment edits or other similar system 
fixes. States can also use RAC findings to develop provider education 
in an attempt to prevent billing errors.
    Comment: Several commenters expressed concern that all staff 
conducting automated or complex reviews must demonstrate knowledge of 
the State's published Medicaid guidelines and coding criteria for the 
dates and types of services.
    Response: We believe that States should make the relevant Medicaid 
coverage guidelines and coding criteria available as part of the 
procurement process. This can be done in detail within the request for 
proposal or by providing the necessary links where guidelines and 
criteria are located for the various program types.
    Comment: A commenter requested that the Medicaid RAC Statement of 
Work (SOW) exclude Evaluation and Management (E & M) Services from RAC 
review.
    Response: States that contract with a RAC engage the RAC for the 
purpose of reviewing claims submitted by providers for items or 
services for which payment has been made under the Medicaid program. We 
expect that E & M Services, that is, those services provided by 
physicians and non-physician practitioners to evaluate patients and 
manage their care, will be included within the scope of Medicaid RAC 
review.
    Comment: A commenter suggested having an internal State agency 
staff member review claims before auditing by the Medicaid RAC.
    Response: We do not oppose States setting up processes to ensure 
the validity of claims before a determination is made as to whether a 
claim is an overpayment or underpayment. Because of the uniqueness of 
each State Medicaid program, the States should have the flexibility to 
design their Medicaid RAC programs specific to their individual program 
needs.
    Comment: One commenter strongly recommended hiring professionally 
trained and certified coders, who have the appropriate skill sets that 
would facilitate improved reviews and reduce duplicative work in 
reviewing records correctly.
    Response: We agree with the commenter. Accordingly, we have 
included Sec.  455.508(c) in this final rule which requires Medicaid 
RACs to hire certified coders unless the State determines that 
certified coders are not required for the effective review of Medicaid 
claims.
    Comment: Several commenters suggested that the final rule require 
each Medicaid RAC to have a minimum of 1.0 FTE physician Medical 
Director who is currently licensed; has relevant work experience in the 
health insurance industry; has extensive knowledge of Medicaid coverage 
and payment rules; and has appropriate clinical experience practicing 
medicine. Other commenters suggested that CMS not require Medicaid RACs 
to hire physician Medical Directors, but require that the appropriate 
level of medical expertise be staffed by the RAC to review medical 
records. The commenters also suggested that the medical personnel not 
have a record of adverse disciplinary actions.
    Response: We agree with those commenters who suggested that the 
Medicaid RACs should each hire a Medical Director who is a Doctor of 
Medicine or a Doctor of Osteopathy and has relevant work and 
educational experience. Accordingly, we have finalized at Sec.  
455.508(b) that each Medicaid RAC must hire a minimum of 1.0 FTE 
Contractor Medical Director who is a Doctor of Medicine or Doctor of 
Osteopathy in good standing with the relevant State licensing 
authorities and has relevant work and educational experience. A State 
may seek to be excepted, in accordance with Sec.  455.516, from 
requiring its RAC to hire a minimum of 1.0 FTE Contractor Medical 
Director by submitting to CMS a written request for CMS review and 
approval. We also require Medicaid RACs at Sec.  455.508(a) to employ 
personnel who are trained medical professionals, as defined by the 
State, in good standing with the relevant State licensing authorities, 
where applicable, to review Medicaid claims.
    Comment: One commenter requested that CMS consider clarifying the 
language in the final rule to include State policies and provider 
handbooks, where Medicaid RACs would review post-payment claims for 
overpayments and underpayments consistent with State laws and 
regulations.
    Response: States have a certain amount of flexibility to design 
their Medicaid RAC program according to their needs. We believe that 
States' current practices regarding the processing of claims, including 
the use of policies and provider handbooks, should not differ in the 
Medicaid RAC program. Accordingly, each State should provide its RAC 
with all available resources to help facilitate claim review.
    Comment: One commenter requested that CMS clarify the types of 
technical abilities that an entity wishing to perform as a Medicaid RAC 
must demonstrate, as referenced in proposed Sec.  455.508 of the 
regulation, and incorporate other examples of technical abilities in 
addition to, trained medical professionals in the final rule.
    Response: We expect that RACs will have the ability to review 
claims submitted by providers of items and services for which payment 
has been made under section 1902(a) of the Act as required by Sec.  
455.506(a). We have finalized Sec.  455.508(a), which requires RACs to 
employ trained medical professionals, as defined by the State, to 
review Medicaid claims. These trained medical professionals could 
include, for example, nurses or physical therapists. States have the 
discretion to determine the types of medical professionals they require 
based upon their individual Medicaid RAC program needs.
    Comment: One commenter requested that CMS recognize that not all 
recovery efforts require trained medical professionals; their 
experience with claims review includes the significant input of non-
medical trained professionals, including CPAs, coding professionals, 
investigators, and accountants who are able to identify inappropriate 
payments that arise out of non-clinical issues.
    Response: We appreciate the comment and recognize that the review 
of claims could involve a variety of disciplines to ensure the 
identification of inappropriate payments. However, we have finalized at 
Sec.  455.508(a), (b), and (c) that Medicaid RACs must hire trained 
medical professionals, as defined by the State, to review Medicaid 
claims, each RAC must hire a minimum of 1.0 FTE Contractor Medical 
Director who is a Doctor of Medicine or Doctor of Osteopathy in good 
standing with the relevant State licensing authorities and has relevant 
work and educational experience. A State may seek to be excepted, in 
accordance with Sec.  455.516, from requiring its RAC to hire a

[[Page 57820]]

minimum of 1.0 FTE Contractor Medical Director by submitting to CMS a 
written request for CMS review and approval. In addition, the Medicaid 
RAC must hire certified coders (unless the State determines that 
certified coders are not required for the effective review of Medicaid 
claims).
    Comment: A commenter suggested that CMS use the Medicare definition 
of ``good cause'' found in our regulation at Sec.  405.986 as a floor 
in its final regulation for the Medicaid RAC program. This commenter 
also suggested that providers should have the right to challenge a lack 
of good cause to review a claim by the Medicaid RACs. Another commenter 
requested that CMS require Medicaid RACs to document good cause for 
claim review.
    Response: RACs are required to review Medicaid claims. States will 
have the flexibility to establish requirements regarding the 
documentation of good cause to review a claim. Additionally, States may 
consider establishing requirements regarding the documentation of good 
cause to review a claim if they do not already have this requirement. 
In addition to those program elements specifically required, we 
encourage States to replicate the Medicare practices that would be 
beneficial to their Medicaid RAC programs, including, without 
limitation, documentation of good cause. However, we will not require 
States to document good cause because that requirement applies to the 
Medicare administrative appeals process. Each State has already assured 
CMS via the State Plan amendment process that it has in place an 
administrative appeals infrastructure whereby a provider may avail 
itself of its due process rights to appeal an adverse Medicaid RAC 
determination. States, therefore, must follow their own administrative 
appeals processes, which may or may not require documentation of good 
cause.
    Comment: One commenter requested that CMS institute an issue 
approval process similar to the process now provided in the Medicare 
RAC program.
    Response: In general, issues reviewed by the Medicare RACs are 
approved by CMS prior to widespread review. CMS uses a New Issue Review 
Board to provide oversight in conjunction with issues that are reviewed 
by the Medicare RACs. States may opt to establish an issue review board 
similar to the Medicare RAC program in which they consider topics for 
audit review. States will have the flexibility to determine the issues 
that are relevant to their respective Medicaid programs which will be 
subject to Medicaid RAC review.
    Comment: One commenter suggested that CMS require Medicaid RACs to 
hold ``meet and greet'' forums.
    Response: We recognize that each State has different considerations 
and must tailor its Medicaid RAC activities to the uniqueness of its 
own State. Accordingly, we will not require Medicaid RACs to hold 
``meet and greet'' forums. However, we believe that States should 
promote transparency in their respective RAC programs. A ``meet and 
greet'' forum is an example of one way a State can promote transparency 
in its RAC program by allowing providers to interact with the 
contractor's personnel.
    Comment: Several commenters asked that CMS require the following 
customer service measures that will assist providers in ensuring the 
timely submission of sufficient documentation to support the services 
billed and generally increase the efficiency of the process:
    1. Implement timeframes for RAC determinations and notification of 
the same.
    2. Require RACs to obtain correct provider addresses and points of 
contact.
    3. Require RACs to give extensions to providers if RAC provider 
notices are sent to a wrong address or other extenuating circumstances.
    4. Require RACs to maintain websites and post audit issues.
    5. Require RACs to maintain provider portals of customer service 
information.
    6. Require RACs to provide a toll-free phone number in case of 
questions.
    7. Require RACs to respond to providers in a timely manner.
    8. Require RACs to give providers a rationale for denials.
    9. Require RACs to send correspondence to providers in clearly 
marked envelopes.
    10. Implement deadlines for submission of medical records and 
clearly indicate those deadlines in an Additional Documentation Request 
(ADR) letter and indicate in that letter the suggested documentation 
that will assist RACs in adjudicating the claim.
    11. Initiate contact with the provider who is the focus of the 
audit before issuing an overpayment determination for failure to submit 
documentation.
    12. Accept provider submission of medical records on CD/DVD or via 
facsimile.
    Response: After consideration of these numerous comments, we are 
requiring at Sec.  455.508(e), that Medicaid RACs provide minimum 
customer service measures including: Providing a toll-free customer 
service telephone number in all correspondence sent to providers and 
staffing the toll-free number during normal business hours from 8:00 
a.m. to 4:30 p.m. in the applicable time zone(Sec.  455.508(e)(1)); 
compiling and maintaining provider approved addresses and points of 
contact(Sec.  455.508(e)(2)); mandatory acceptance of provider 
submissions of electronic medical records on CD/DVD or via facsimile at 
the providers' request (Sec.  455.508(e)(3)); notifying providers of 
overpayment findings within 60 calendar days (Sec.  455.508(e)(4)). 
States should also rely upon internal processes and procedures for 
notification requirements and identify specific timeframes for required 
responses between the Medicaid RAC and providers, if possible.
    Comment: Several commenters asked that the proposed rule require 
each Medicaid RAC to include a toll-free customer service telephone 
number in all correspondence sent to providers.
    Response: We agree and have finalized at Sec.  455.508(e) the 
requirement that Medicaid RACs must provide minimum customer service 
measures including: Providing a toll-free customer service telephone 
number in all correspondence sent to providers and staffing the toll-
free number during normal business hours from 8:00 a.m. to 4:30 p.m. in 
the applicable time zone (Sec.  455.508(e)(1)).
    Comment: One commenter asked if the notification of findings of 
overpayments or underpayments would include information on how 
overpayments may be repaid/offset, time limits for repayment without 
interest, and information on timeliness of additional payments and 
methods of additional payments.
    Response: We have finalized at Sec.  455.508(e)(4), that RACs must 
notify providers of overpayment findings within 60 calendar days. Also, 
at Sec.  455.510(c)(3), we require States to notify providers of 
underpayments that are identified by the RACs. Each State will have the 
discretion to determine any additional information that it wants to 
include in provider notifications.
    Comment: One commenter asked CMS to require States and their RACs 
to give advance notice to providers of audit focus areas in preparation 
for reviews, as occurs in the Medicare RAC program.
    Response: States have a certain degree of flexibility to design 
their Medicaid RAC programs to fit their individual needs. We believe 
that States should promote transparency in their RAC programs. States 
requiring RACs to give advanced notice to providers of audit areas in 
preparation of a review is an

[[Page 57821]]

example of how States can facilitate transparency.
    Comment: One commenter asked CMS to require States to be 
transparent with regard to their coding/billing rules and guidelines as 
well as the screening guidelines that are used for making medical 
necessity determinations.
    Response: We encourage States to make coding/billing rules and 
guidelines available to the extent possible to promote transparency.
    Comment: Some commenters recommended that CMS develop a Medicaid 
RAC national SOW, similar to the Medicare RAC program.
    Response: We disagree with the comment. The proposed Medicaid RAC 
program will not be one national program, like Medicare; rather it will 
be more than 50 State-specific programs. In this context, it would be 
nearly impossible to standardize the SOW for the Medicaid RAC program, 
as Medicare does. We have previously stated that as a result of 
comments, we have reconsidered the proposal to allow States complete 
flexibility regarding most aspects of their RAC programs, and have 
finalized at Sec.  455.506 and Sec.  455.508 certain requirements for 
States and their RACs to better align with Medicare RACs. With regard 
to Medicaid RAC program elements where we encourage States to adopt 
those measures that were incorporated into the permanent Medicare RAC 
program, we will continue to provide technical assistance after the 
publication of the final rule.
    Comment: Several commenters expressed concern about allowing the 
RAC to develop or apply its own coverage, payment, or billing policies.
    Response: States establish Medicaid coverage, payment and billing 
policies. The contract established with the RAC should address how the 
RAC will audit claims based on those established policies. Whether or 
not RACs develop or apply their own coverage, payment or billing 
policies is a contract issue resolved between States and their RACs.
    Comment: Commenters expressed concern that small and solo practice 
physicians are already overwhelmed as a result of requests for records 
by other audit programs. Other commenters suggested that CMS require 
the RACs to assume the cost of copying and mailing, as well as allow 
for the electronic submission of records.
    Response: We agree with the commenters with regard to limiting the 
number of medical records that may be requested by a Medicaid RAC. 
Accordingly, we have finalized at Sec.  455.506(e) that States must set 
limits on the number and frequency of medical records to be reviewed by 
the RACs, subject to requests for exceptions from RACs. With regard to 
the costs of copying and mailing, as well as the electronic submission 
of records, we require at Sec.  455.508(e)(3) mandatory acceptance of 
provider submissions of electronic medical records on CD/DVD or via 
facsimile at the provider's request.
    Comment: One commenter requested guidance regarding the parameters 
associated with potential conflicts of interests that may develop as a 
result of the same contractor performing services on behalf of 
providers, for example, coding and billing as well as seeking to 
perform RAC audits of these same providers in which they acted as 
consultants.
    Response: We indicated in the proposed rule that States should be 
cognizant of the potential for conflicts of interest, and should take 
steps to identify and prevent conflicts of interest. These conflicts of 
interest may arise among contractors or their subcontractors that 
perform audit related services for providers and then seek to perform 
audit recovery services on behalf of the State.
    Comment: One commenter requested that the Medicaid RAC obtain 
approval from CMS to audit new issues and to post CMS-approved issues 
on the Medicaid RAC's website prior to the claims review similar to the 
current Medicare RAC process.
    Response: The Medicaid RAC program differs from the Medicare RAC 
program in that it is a State-run program. Accordingly, specific areas 
of RAC review should be determined by the State in conjunction with its 
RAC. We recognize that there could be issues that are unique to a 
particular State in terms of areas that should be the focus of an 
audit. Therefore, we believe States are in the best position to make 
this determination.
    Comment: One commenter requested that CMS clarify whether RAC 
contracts must be for a period of 5 years, similar to the term for 
Medicare RAC contracts.
    Response: As stated earlier, States will have the flexibility to 
set periods of performance in their respective Medicaid RAC contracts 
that fit their program needs and are consistent with State law.
    Comment: One commenter requested that CMS require States to use a 
validation contractor to independently examine Medicaid RAC 
vulnerability and claim determinations, and to issue annual accuracy 
scores.
    Response: While we will not require States to engage a validation 
contractor, we believe that States should set targets for validation of 
the accuracy of RAC determinations and measure those targets 
accordingly. In addition, we plan on developing performance metrics in 
conjunction with the States to assist with determining the accuracy of 
RAC reviews.
    Comment: One commenter requested that CMS require Medicaid RACs to 
accept electronic documentation submission in response to RAC audits.
    Response: As part of the customer service measures, we are 
requiring Medicaid RACs at Sec.  455.508(e)(3) to accept electronic 
submissions of medical record documentation to facilitate provider 
response in connection with RAC audit requests, without compromising 
the security and privacy of that data, unless the State requests and 
receives an exception from CMS.
    Comment: One commenter suggested that CMS include additional 
provisions in the final rule that will serve to protect independent 
community pharmacies against abusive auditors and audit practices by 
requiring RACs to accept the records of a hospital, physician, or other 
authorized practitioner that are made available by the pharmacy to 
validate pharmacy records and prescriptions for confirming the accuracy 
of Medicaid claims filed by the pharmacy.
    Response: We disagree that it is necessary to include additional 
provisions to protect independent pharmacies against abusive audit 
practices. States will have the flexibility to design their Medicaid 
RAC programs consistent with their laws, regulations, and policies.
    Comment: One commenter requested that CMS include licensed 
pharmacists or a company representative in the RAC auditing process.
    Response: We decline to require Medicaid RACs to hire licensed 
pharmacists or company representatives. However, States have the 
flexibility to require Medicaid RACs to hire licensed pharmacists or 
company representatives if they so choose. We are finalizing staffing 
requirements at Sec.  455.508 (a), (b) and (c).
    Comment: One commenter suggested that CMS require Medicaid RACs to 
form panels comprised of practicing physicians representing various 
specialties, which can advise RACs on medical issues.
    Response: We do not oppose States requiring Medicaid RACs to form 
panels of practicing physicians who represent various specialties that 
can advise them on medical issues. We encourage States to adopt 
measures that will promote transparency and improved

[[Page 57822]]

communication among States, Medicaid agencies, Medicaid RACs, and 
providers.
    Comment: One commenter suggested that CMS require each Medicaid RAC 
auditor to be trained on Medicaid payment and coverage policy relating 
to all target areas approved by the State, billing and re-billing 
protocols, and the Medicaid appeals process. Each RAC auditor should 
also be required to demonstrate proficiency in these areas prior to 
conducting audits.
    Response: We understand the concerns of the commenter regarding the 
need to have highly trained personnel. At Sec.  455.508(a), we require 
that Medicaid RACs hire trained medical professionals, as defined by 
the State, to review Medicaid claims.
    Comment: One commenter urged CMS to designate a percentage of 
recovered program dollars to improve education, increase pre-payment 
claim edits to eliminate payment of duplicate claims and those 
obviously submitted in error (for example, age-specific services 
provided to a patient outside the designated age range), and to provide 
continuous outreach with information on newly discovered and commonly 
occurring billing errors in both the Medicare and Medicaid programs.
    Response: We agree with the commenter that education and outreach 
is a necessary element to Medicaid RAC programs. Accordingly, we 
include in this final rule at Sec.  455.508(d), the requirement that 
States and RACs develop an education and outreach program, including 
notification to providers of audit policies and protocols. We will not 
require States to designate a percentage of recovered program dollars 
to improve education and increase pre-payment claim edits.
    Comment: A commenter recommended that CMS consider relief in the 
presence of a disaster, whether widespread or in an individual 
location, in the way of an extension of the deadline for receipt of 
records or refund, acceptance of reconstructed records or exemption 
from review for records that were completely destroyed, and/or delay of 
reviews for up to 6 months.
    Response: States should already have policies and procedures in 
place for handling unanticipated events when they occur, including 
provisions for requests of records.
    Comment: Several commenters requested CMS to exclude payments made 
to disproportionate share hospitals (DSH) or special hospital payments 
from the scope of Medicaid RAC review in the final rule.
    Response: We do not believe that DSH payments or special hospital 
payments should be excluded in the final rule. States have the 
flexibility to determine whether those payments should be the focus of 
RAC review.
    Comment: One commenter suggested that CMS require States to publish 
Medicaid and Medicare RAC audit reports for public viewing.
    Response: We believe that States should be as transparent as 
possible with regard to their Medicaid RAC programs. While we will not 
require States to publish Medicaid audit reports, we encourage States 
to consider making those reports available for public viewing.

D. Definitions

    Comment: One commenter requested that CMS offer a definition of 
``overpayment.''
    Response: For purposes of the Medicaid RAC program, we believe that 
States should define ``overpayment'' consistent with 42 CFR 433.304 
which defines ``overpayment'' as ``the amount paid by a Medicaid agency 
to a provider which is in excess of the amount that is allowable for 
services furnished under section 1902 of the Act and which is required 
to be refunded under section 1903 of the Act.''
    Comment: One commenter indicated that the proposed rule does not 
include a definition of ``underpayment.'' In addition, this commenter 
suggested that the definition of underpayment could range from: (a) 
Broad and include a service that was never billed by a provider, to (b) 
narrow and reflect an error that was made in the reimbursement 
calculation.
    Response: For purposes of the Medicaid RAC program, we believe that 
States should define ``underpayment'' consistent with their State law 
and/or plans. In the Medicare RAC program, an ``underpayment'' is 
generally defined as an amount paid to a provider or supplier for items 
or services furnished to a Medicare beneficiary at a lesser amount due 
and payable under the Act, implementing regulations, and policies.

E. Contingency Fees

    Comment: One commenter inquired whether RAC determinations include 
cost-based adjustments or cost-based settlements. This commenter also 
wanted to know whether contingency fees would be paid to a Medicaid RAC 
for those determinations.
    Response: We understand that certain States use cost reports for 
reimbursement of Medicaid claims. Accordingly, States need the 
flexibility to structure their RAC programs to permit review of cost-
based services to identify and recover potential overpayments as well 
as identify underpayments. Therefore, contingency fees are payable to a 
Medicaid RAC for the identification and recovery of overpayments from 
cost-based service providers. With regard to whether a RAC 
determination can include cost-based settlements, we believe the State 
has the authority to make adjustments to a provider's cost report and/
or cost-based settlements based upon a RAC determination.
    Comment: One commenter indicated that the proposed rule fails to 
require RACs to return their contingency fee if a denial is overturned 
at any stage of the appeals process. Another commenter suggested that 
allowing States to determine at what stage in the Medicaid RAC process, 
post-recovery, that the RACs will receive contingency fees preserves an 
unacceptable risk of improper incentives which might otherwise 
encourage a Medicaid RAC to prematurely or even improperly identify and 
recover funds from a provider. Another commenter suggested that RACs 
should be paid upon recovery rather than after adjudication.
    Response: With regard to the timing of RAC payments, we are 
finalizing the requirement at Sec.  455.510(b)(2) that States must have 
the flexibility to determine at what stage of the audit process their 
RACs may receive contingency fees for the collection of overpayments 
from Medicaid providers. In addition, if the provider appeals the 
overpayment determination and the determination is reversed at any 
level of the appeals process, we are also requiring Medicaid RACs to 
return their contingency fees within a reasonable timeframe as 
prescribed by the State, as reflected in this final rule at Sec.  
455.510(b)(3). For example, a State should specify in its contract with 
the Medicaid RAC the timeframe in which the State expects the RAC to 
return the contingency fee, that is, repayment will occur on the next 
applicable invoice. As we indicated in the proposed rule, payments to 
RACs may not be made based upon amounts merely identified but not 
recovered or amounts initially recovered from providers but that are 
subsequently repaid due to determinations made in appeals proceedings. 
Accordingly, if a State pays a contingency fee to a RAC based upon 
amounts recovered prior to the conclusion of the appeals process that 
is available to a provider, then the RAC must return the portion of the 
contingency fee that corresponds to the amount of the overpayment that 
is reversed at any level of appeal. We do not believe that this 
improperly

[[Page 57823]]

incentivizes a RAC to identify and recover funds from a provider.
    Comment: One commenter suggested that CMS' illustration regarding 
the timing of payment to the RAC that would permit payment to the RAC 
when it recovers an overpayment but would subsequently require 
reimbursement by the RAC if the recovery is overturned on appeal, is 
directly contrary to CMS' interpretation of ``payments to contractors 
may not be made based upon amounts merely identified but not recovered, 
or amounts that may initially be recovered but that subsequently must 
be repaid due to determinations made in appeals proceedings.''
    Response: We disagree with the comment. The illustration mentioned 
by the commenter is consistent with the Act which requires the amount 
paid to a RAC to be from the overpayment amount recovered. If a State 
pays a RAC prior to the adjudication of the appeals process, then the 
RAC must refund the amount paid by the State within a reasonable 
timeframe as prescribed by the State, in connection with the 
overpayment in the event the overpayment is reversed at any level of 
appeal. For example, a State should specify in its contract with the 
Medicaid RAC the timeframe in which the State expects the RAC to return 
the contingency fee, that is, repayment will occur on the next 
applicable invoice.
    Comment: One commenter indicated that the cap on contingency fees 
creates an unnecessary administrative burden on States with smaller 
Medicaid programs which may not be able to attract qualified 
contractors at the rate provided for in the proposed rule. 
Specifically, the commenter stated that it is administratively 
burdensome to pay for the excess with State only funds or request and 
receive an exception to the cap. Commenters further indicated that the 
market should determine an equitable contingency fee rate on a State by 
State basis. Another commenter indicated that limiting contingency 
rates will create the unintended consequence of limiting recoveries. 
This commenter was concerned that artificial rate caps would preclude 
an auditing firm from uncovering complex improper payments because it 
will not be able to do so profitably. Alternatively, another commenter 
suggested raising the cap to 18 percent but CMS should continue to have 
an exception process. Finally, other commenters indicated that strict 
limits should be set on the amount of contingency fees.
    Response: We believe that the contingency fee rates for identifying 
and collecting overpayments should be reasonable and determined by each 
State, taking into account factors, for example, the level of effort to 
be performed by the RAC and the size of the State's Medicaid 
population. We recognize that each State has different considerations 
and must tailor its Medicaid RAC activities to the unique factors of 
its own State. Nevertheless, based upon our experience with the 
Medicare RACs, we believe that the contingency fee paid to a State 
Medicaid RAC should not be in excess of the highest fee paid to a 
Medicare RAC unless the State can provide sufficient justification. The 
Medicaid RAC contingency fee limit may be adjusted periodically to 
maintain parity with the Medicare RAC contingency fee cap.
    Comment: One commenter requested that CMS use guidance as reflected 
in the Medicare RAC SOW to pay contingency fees to identify 
underpayments.
    Response: We disagree with the commenter. Section 
1902(a)(42)(B)(ii)(II) of the Act requires States to pay Medicaid RACs 
for the identification of underpayments from amounts recovered and ``in 
such amounts as the State may specify.'' Therefore, States have 
discretion to pay RACs for the identification of underpayments so long 
as the payments are from amounts recovered. In FY 2010, the Medicare 
RACs identified and corrected $92.3 million in combined overpayments 
and underpayments. Eighty-two percent of all RAC corrections were 
collected overpayments, and 18 percent were identified underpayments 
that were refunded to providers. We expect that States will realize a 
similar ratio of overpayments to underpayments in connection with the 
implementation of the Medicaid RAC program. That is, CMS requires at 
Sec.  455.510(c)(2) that States must ``adequately'' incentivize the 
detection of underpayments identified by the RACs. We will evaluate 
individual States' indicators of adequacy, using the Medicare RAC 
benchmark, and will examine the trends among the States over several 
years.
    Comment: One commenter requested clarification regarding whether 
the contingency fee percentage may vary according to a specific 
Medicaid RAC focus area of review.
    Response: We do not object to a State using a tiered structure for 
contingency fee payments to its Medicaid RAC, so long as the maximum 
fee percentage does not exceed the highest fee we pay to the Medicare 
RACs. We will not pay FFP for amounts paid to RACs above the highest 
fee paid to Medicare RACs, unless the State requests and is granted an 
exception to that maximum rate. Any tiered structure must also ensure 
that the Medicaid RACs are incentivized to identify underpayments as 
well as overpayments.
    Comment: One commenter requested clarification of CMS' expectations 
with regard to fees paid for the identification of underpayments when a 
State lacks the legal authority to pay fees for the action. This 
commenter recommended that CMS consider including alternatives that 
achieve the goal to incentivize the identification of underpayments.
    Response: If a State is legally prohibited from requiring a RAC to 
identify underpayments, then a State may submit to CMS a written 
request for an exception related to this requirement.
    Comment: One commenter opposed any exception to an increase in the 
FFP limit as a result of an exception to pay a Medicaid RAC a 
contingency fee that is higher than the Medicare RAC contingency fee. 
The commenter maintains that the contingency fee structure is 
inappropriate for any RAC program because it ``perversely incentivizes 
RACs to engage in bounty hunting, which leads to increased expenses and 
administrative burdens for providers.'' In addition, this commenter 
stated that allowing the State to obtain exceptions for the maximum FFP 
is needless and exacerbates the predatory nature of RAC audits.
    Response: The statute requires Medicaid RACs to be paid on a 
contingency basis for the identification of overpayments. Thus, States 
do not have an option with regard to the method of payment for the 
identification of overpayments for their RACs unless State law 
prohibits the arrangement. We also recognize that certain States may 
need an exception to the contingency fee cap. For example, States with 
small Medicaid populations may need to pay a much larger contingency 
fee rate to attract RAC contractors to work in their State. 
Accordingly, under certain circumstances, a State may request 
authorization to pay a RAC a higher contingency fee than the maximum 
amount for which FFP is paid. Therefore, we disagree that exceptions to 
pay a RAC a higher contingency than the Medicare RAC contingency fee 
rate of 12.5 percent are never justified.
    Comment: Several commenters suggested that the proposed contingency 
fee structure imposes no disincentive on RACs for pursuing situations 
where there is little or no solid evidence of an overpayment. The 
commenters recommended that payments to RACs should: (1) Be made only 
upon conclusion of all provider appeals; and (2) not compensate RACs 
for the time

[[Page 57824]]

required for appeals to be exhausted. A few commenters also suggested 
that RACs should be required to pay a penalty to compensate providers 
for claims ultimately determined to be unfounded or falsely identified.
    Response: As previously stated, we have surveyed States that have 
RAC-like programs which utilize a contingency fee payment structure and 
have not learned of any circumstances in which RACs were improperly 
incentivized to recover overpayments from Medicaid providers. In 
addition, our evaluation of the Medicare RAC program provides a basis 
for contingency payments to RACs for the identification and recovery of 
overpayments. Therefore, we will not compel States to require RACs to 
pay a penalty to providers for claims ultimately determined to be 
unfounded. With regard to the timing of payments to RACs, States need 
the flexibility to determine the most appropriate payment methodology 
given the uniqueness of its own State. Accordingly, States should 
decide when it is most appropriate to pay Medicaid RACs for their work.
    Comment: Several commenters suggested that because the law provides 
a strong financial incentive for RACs to focus on overpayments and not 
the identification of underpayments, CMS should require States to apply 
the same contingency fee schedule for overpayments to underpayments. 
One commenter stated that the ``small, flat fee'' for underpayments is 
unacceptable. This commenter also suggested that CMS should require 
States to increase their underpayment fee when RACS are not applying a 
balanced approach to identifying underpayments and overpayments.
    Response: With regard to underpayments, we have proposed that a 
State may choose to pay its RAC a contingency fee for the 
identification of underpayments, similar to Medicare RACs, or a State 
may opt to establish a set fee or some other structure for the 
identification of underpayments. We believe that States should have the 
flexibility to determine the best payment structure consistent with 
their State Plans. We also included language in the final rule at Sec.  
455.10(c)(2) indicating that States must adequately incentivize their 
RACs to identify underpayments. In FY 2010, 82 percent of all Medicare 
RAC corrections were collected overpayments, and 18 percent were 
identified underpayments that were refunded to providers. We expect 
that States will realize a similar ratio of overpayments to 
underpayments in connection with the implementation of the Medicaid RAC 
program. We will evaluate individual States' indicators of adequacy, 
using the Medicare RAC benchmark, and will examine the trends among the 
States over several years.
    Comment: One commenter suggested that CMS clarify that 
underpayments discovered through RAC audits are only payable if claims 
are filed by the provider within prescribed timeframes.
    Response: Generally, RACs are required to review post-payment 
claims. If a Medicaid claim is not timely filed by a provider, then it 
would seem that the claim is not payable. Accordingly, these claims 
should not be subject to RAC review. If a RAC identifies an 
underpayment and the time for re-filing a claim has passed in 
accordance with State law, we believe the State has the discretion to 
determine whether the provider may re-file the claims with the correct 
information.
    Comment: One State commenter indicated that the proposed rule does 
not state that underpayments must be reimbursed. This commenter stated 
that providers are responsible for reviewing their remittance advice to 
determine if they were paid correctly. Further, any adjustments must be 
made within specific timeframes. This commenter stated that requiring 
States to reimburse providers for underpayments outside of existing 
timeliness rules is not appropriate.
    Response: The Act mandates that RACs be compensated for the 
identification of underpayments to providers. While the statute is 
silent regarding the remittance of underpayments to providers as a 
result of RAC identification of the underpayments, we are concerned 
about provider participation in the Medicaid program as well as States 
making proper payments to providers. Accordingly, we believe that 
States should compensate all providers for any identified underpayments 
to the extent possible and consistent with State law. States must 
notify providers of underpayments that are identified by their Medicaid 
RACs. We have included this requirement in this final rule at Sec.  
455.510(c)(3).
    Comment: One commenter appreciated the flexibility extended to 
States regarding the fees paid to RACs for the identification of 
underpayments. The commenter, however, disagreed with CMS' approach 
with regard to the possibility of additional rulemaking should CMS deem 
it necessary as a result of future CMS review of data, indicating that 
RACs are not appropriately incentivized to identify underpayments. This 
commenter believes any further Federal regulation of underpayment 
identification will create an undue burden on the States and requested 
that it be removed from consideration.
    Response: We appreciate the comment. However, the burden of 
potential future rulemaking is outside the scope of this final rule. 
Nevertheless, further rulemaking may be necessary to achieve the 
statutory mandate for Medicaid RACs to identify underpayments. 
Accordingly, we have maintained this language in this final rule.
    Comment: Several commenters suggested that CMS should require SMAs 
to: (1) Monitor the volume of underpayment audits conducted by the 
RACs; (2) increase the underpayment fee if a RAC is not applying a 
balanced approach to identifying underpayments and overpayments; and 
(3) include information on the general methods used to identify 
Medicaid underpayments in the RAC annual report as well as the steps 
taken to ensure a balance between underpayment and overpayment review. 
Another commenter recommended that the Medicaid RAC be required to 
submit annual reports that include information on methods used to 
identify underpayments, the number of underpayments identified, and any 
steps taken to ensure that underpayments are addressed.
    Response: As stated in the proposed rule, we expect to monitor the 
methodologies and amounts paid by States to Medicaid RACs to identify 
underpayments. We may consider future rulemaking depending on the data 
we review regarding RAC incentive to pursue underpayments. At this 
time, we are not requiring States to submit annual reports. However, we 
plan to issue sub-regulatory guidance on future reporting requirements. 
Accordingly, we will consider the commenters' suggestions regarding the 
data elements for an annual report. At this time, we will not require 
States to increase the fee paid to RACs for the detection of 
underpayments.
    Comment: One commenter requested clarification as to whether States 
can choose to issue payments only to certain providers based upon 
underpayments that are identified by the RAC versus identified 
underpayments of all providers. This commenter also mistakenly asserted 
that Medicaid RACs are only paid for dollars recovered on overpayments 
and suggested that RACs also be paid for the identification of 
underpayments.
    Response: States are required to pay RACs for the identification of 
overpayments as well as the identification of underpayments.

[[Page 57825]]

Although the statute is silent regarding actual payments to providers 
as a result of RAC identification of underpayments, we believe that 
States should compensate all providers for any identified underpayments 
consistent with State law.
    Comment: One commenter suggested that Medicaid RACs should be 
required to identify underpayment determinations and ensure that the 
underpayments are remitted to providers in a timely fashion. In 
addition, this commenter suggested that the States and/or CMS should 
ensure that Medicaid RACs have the system capability to identify 
underpayments before they begin auditing claims.
    Response: The Act requires States to establish programs to contract 
with a Medicaid RAC for the purpose of, in relevant part, identifying 
underpayments. Accordingly, the task of identifying underpayments 
should be included in the SOW that is part of the contract between a 
State and its RAC. Therefore, we will assume that a State has verified 
that its RAC has the capability to identify underpayments even before a 
RAC has begun auditing claims. With regard to remittance of 
underpayments, it is the State that is responsible for the payment, not 
the RAC. The RAC is required to identify, not remit, an underpayment. 
Although we recognize that the State has discretion with regard to 
timing of the remittance of underpayments, we encourage States to remit 
identified underpayments to providers within a reasonable timeframe.
    Comment: One commenter pointed out that the proposed rule indicates 
that ``CMS contracts with Medicare RACs to identify and recover 
overpayments from Medicare providers, and to identify and pay 
underpayments to Medicare providers.'' (Emphasis added). This commenter 
requested that CMS clarify this statement given that he has not found 
any other reference to RACs making payments to Medicare providers for 
identified underpayments.
    Response: We agree with the commenter. Medicare RACs do not pay 
underpayments to Medicare providers. The Medicare program pays 
underpayments to providers.
    Comment: One commenter disagrees with CMS' proposed approach to 
publishing the maximum Medicaid RAC contingency fee consistent with the 
schedule of publishing the maximum Medicare RAC contingency fee every 5 
years. The next update is scheduled for 2013. Specifically, the 
commenter stated that because fee structures can change over the life 
of a contract, CMS should publish any modifications to the Medicare RAC 
payment methodology and contingency rates within 30 days of the 
modification as opposed to the existing 5-year schedule. In addition, 
another commenter suggested not requiring the States to conform to the 
Medicare timetable because Medicaid RACs will be tailored to each 
State's needs and States need the ability to set rates and increases 
that are not restricted by Medicare requirements.
    Response: While we proposed to publish the maximum Medicaid RAC 
contingency fee consistent with the highest Medicare RAC fee, a State 
is not precluded from increasing the rate paid to its RAC outside of 
that schedule if necessary. To the extent that a State needs to 
increase the rate paid to its RAC before the expiration of the 
scheduled 5-year Medicare RAC contingency fee, the State can submit a 
SPA describing that an increase is required to reflect whether the 
State is paying the amount above the Medicare rate with State-only 
funds, or is requesting matching FFP.
    Comment: One commenter suggested removing the contingency fee cap 
because it will allow States to pursue individualized RAC programs that 
align the fees with the complexity and scale of the workload and allow 
smaller States to garner a larger field of bidders from which to 
choose. Another commenter indicated that States need the flexibility to 
establish contingency fees separately from Medicare due to the 
difficulty States will have in reacting to the changes associated with 
the implementation of a RAC program in light of various State budgeting 
and contracting/procurement constraints. In addition, a commenter 
suggested that States need the ability to set rates and increases that 
are not restricted by Medicare requirements because the Medicaid RAC 
program needs to be tailored to each State's needs. Therefore, 
commenters suggested not requiring the States to conform to the higher 
Medicare contingency fee rate cap.
    Response: Based upon our experience with the Medicare RACs, we 
believe that the contingency fee paid to a State Medicaid RAC should 
not be in excess of the highest fee paid to a Medicare RAC unless the 
State can provide sufficient justification. We recognize that States 
with small Medicaid populations may need to pay a much larger 
contingency fee rate to attract the RAC contractors to work in their 
State. For example, if a State receives a proposal from a prospective 
contractor for a contingency fee that is higher than the maximum 
contingency fee set by CMS for Medicare RACs but it accurately reflects 
the scope of work to be performed in that particular State, then the 
State should submit a request for an exception to CMS for 
consideration.
    Comment: One commenter believes that the Affordable Care Act does 
not specifically mandate that a State Medicaid RAC contingency fee be 
linked to the Medicare RAC maximum contingency fee. One commenter 
stated that the contingency fee cap is not in the best interests of the 
Federal Government, the State or the taxpayer, and is not consistent 
with the law. Commenters suggested letting the competitive procurement 
process define the contingency fee percentage limit for Medicaid, as 
was done for the Medicare RAC program at its inception. One commenter 
requested that State contingency-based recovery contracts competitively 
procured at a higher percentage rate be ``grandfathered'' in at those 
higher rates with a State commitment to transition to the lower 
percentage limit with the next procurement cycle.
    Response: Section 1902(a)(42)(B)(i) of the Act requires States to 
``establish a program under which the State contracts (consistent with 
State law and in the same manner as the Secretary enters into contracts 
with recovery audit contractors under section 1893(h) [of the Act], 
subject to such exceptions or requirements as the Secretary may require 
. * * *'' Although the Act does not specifically set the State Medicaid 
RAC contingency fee, we believe that the contingency fee paid to a 
State Medicaid RAC should not be in excess of the highest fee paid to a 
Medicare RAC unless the State can provide sufficient justification that 
it is consistent with the statute. If a State cannot procure a 
contractor at the 12.5 percent rate, then a State can request an 
exception from CMS. For those States that may already have a RAC-like 
program in place in which the contingency fee is higher than the 
Medicare rate, we will work with these States to establish an 
acceptable resolution, which may or may not include ``grandfathering'' 
in the higher rate.
    Comment: One commenter requested clarification with regard to the 
process associated with State requests for approval to pay a RAC a 
contingency fee that is higher than the 12.5 percent cap set by CMS. 
This commenter questioned how CMS will assure nationwide consistency on 
contingency rate approval decisions if States have to submit their 
requests for approval to the appropriate CMS Regional Office(s). Other 
commenters wanted clarification regarding the general exception 
process.

[[Page 57826]]

    Response: Generally, State requests for approval for exceptions 
from the requirements of the RAC program, including higher contingency 
fees, are made using the SPA process and are determined by the 
Secretary, through delegated authority provided to CMS. CMS, through 
partnerships between CPI, the Center for Medicaid, CHIP and Survey & 
Certification (CMCS), and individual CMS Regional Offices, reviews and 
considers requests for exceptions. CMS strives to ensure consistency to 
the extent possible with regard to responses to State exception 
requests. We will review all relevant facts and circumstances 
surrounding requests for an exception. If a State's request for a 
higher contingency fee is denied, the decision is appealable to the 
Departmental Appeals Board. State commenters with additional questions 
regarding the process associated with exceptions to the RAC program, 
including questions about the SPA process, should contact their CMS 
Regional Office.
    Comment: One commenter expressed concern that CMS will be injecting 
itself into a State's decision-making process on a Federal mandate by 
denying a State's request for using a higher contingency rate and the 
associated FFP.
    Response: Generally, when a State completes a new State Plan 
preprint page or SPA because of changes in its Medicaid program, it 
must be approved by CMS in order for the State to receive Federal 
matching funds. This holds true for the majority of changes to a 
Medicaid program when FFP is at issue, not just with regard to the 
Medicaid RAC program. We have the authority to approve a SPA when FFP 
is at issue. If we deny a SPA or elements thereof, then the State has 
the right to appeal the decision.
    Comment: One commenter recommended that States be given the 
flexibility to deploy the most appropriate procurement process for 
their individual State so long as they are within the legal confines of 
State and Federal procurements laws and regulations, including bundling 
Medicaid RAC procurements with other services or combining multiple 
States with one RAC vendor. Another commenter requested that the 
bundling of RAC services with other recovery services--such as a TPL 
contractor--should not be permitted because it will limit competition 
by excluding the most qualified Medicaid RAC firms. This commenter 
suggested that TPL contractors may not have the skill set to 
effectively handle complex reviews.
    Response: We expect that all States will procure a RAC contractor. 
If a State feels that its unique situation may preclude it from meeting 
this expectation, a State must submit a request for an exception to 
CMS. However, if a State is interested in ``bundling'' its RAC 
procurement with other services performed by an existing contractor, 
then the State must execute a separate task order outlining the 
requirements of the RAC program with the existing contractor. If a 
number of States are interested in combining resources and utilize one 
contractor for their respective RAC programs, we do not object if there 
are no conflicts of interest and the arrangement comports with Federal 
and State law.
    Comment: One commenter suggested that States should be permitted to 
apply for an exception from the RAC program to the extent that a State 
is unable to attract and acquire a RAC vendor.
    Response: States are required to procure a RAC contractor. To the 
extent that a State is having difficulty procuring that contractor, 
then that State should contact CMS to discuss a potential resolution, 
which may include additional time to procure a qualified contractor. It 
is unlikely that we will grant an exception from the entire RAC program 
as a result of a State needing additional time to procure a RAC vendor.
    Comment: One commenter requested public access to the payment rates 
furnished to Medicaid RACs, similar to the public availability of 
Medicare RAC payment rates.
    Response: We decline to require States to publicly post their 
Medicaid RAC payment rates. However, we encourage States to make this 
information available to the extent possible to promote transparency.
    Comment: One commenter requested that CMS allow States to engage in 
contractual agreements with RACs that limit RAC reimbursements to an 
amount less than the total amount recovered, but to grant States 
flexibility in meeting this requirement. This would include allowing 
States to recover from the provider both the amount of the overpayment 
and the contingency fee when overpayments have been identified.
    Response: Section 1902(a)(42)(B)(i) of the Act mandates that 
payments made to RACs ``shall be made to such contractor only from 
amounts recovered'' and that the payments ``shall be made on a 
contingent basis.'' Allowing States to recover the contingency fee for 
the RAC from the provider is inconsistent with the language in the 
statute. To the extent that State law prohibits it from complying with 
the statute, then the State should submit a request for an exception to 
CMS for consideration.
    Comment: One commenter indicated that a large number of pharmacy 
claims being audited include those claims that are questionable due to 
administrative or clerical errors. This commenter suggested that 
providers should only be expected to pay the part of the claim that is 
determined to be an overpayment, not the ``clean'' portion of the claim 
or those resulting portions of the claim that are the result of 
technical or administrative errors.
    Response: Medicaid RACs are statutorily mandated to audit Medicaid 
claims for the purpose of identifying and recouping overpayments as 
well as identifying underpayments. We would expect a provider to return 
any identified overpayment to the State Medicaid program. To the extent 
there are additional errors associated with the claim that do not 
relate to the RAC's required purpose, the issue is outside the scope of 
the proposed rule.
    Comment: One commenter requested clarification about the following 
statement in the proposed rule: ``States must ensure that they do not 
pay in total RAC fees more than the total amount of overpayments 
collected.'' Specifically, the commenter inquired whether this is in 
the aggregate across all audits during a particular time period or if 
it applies to one particular audit.
    Response: States must track the aggregate of claims that are 
identified as overpayments to appropriately calculate the contingency 
fees owed to the RAC. States must also account for the costs associated 
with the identification of underpayments. States must ensure that they 
do not pay in total RAC fees more than the total amount of overpayments 
collected.

F. Coordination

    Comment: Several commenters expressed concern regarding the 
duplication of audits. These commenters suggested that CMS should 
prohibit Medicaid RACs from conducting audits on claims that are 
already under review by a Medicaid Integrity Contractor or other entity 
in the final regulation. Commenters also suggested that Medicaid RACs 
should be required to use a RAC data warehouse to identify any claims 
that are being reviewed by the RAC or other Medicaid audit program. In 
addition, the commenters suggested that the final regulation should 
exclude from RAC review, claims in which payment has been denied and/or 
withdrawn.

[[Page 57827]]

    Response: We are concerned about minimizing the potential for 
multiple audits of the same provider. We recognize the need to minimize 
the burden on providers associated with responding to multiple audit 
requests, to the extent possible. States and their RACs are statutorily 
mandated to coordinate auditing efforts with those of other entities 
conducting audits of providers receiving payments for Medicaid claims. 
We have finalized this requirement at Sec.  455.506(c). Under certain 
limited instances, overlapping audits may be necessary or otherwise 
unavoidable. For example, if a claim has been reviewed by a Medicaid 
RAC, and it suspects fraud, then that claim must be referred to law 
enforcement for review. However, in an effort to limit duplicate audit 
activity, we have included language in this final rule at Sec.  
455.508(g) indicating that Medicaid RACs should not audit a claim that 
has already been audited or is currently being audited by another 
entity, including the Medicare RACs. However, we decline to require 
States to create or use a data warehouse at this time. First, we are 
not aware of the existence of a data warehouse containing State 
Medicaid claims data. We are aware that States that have existing RAC-
like programs have systems in place to achieve coordination. For 
example, one SMA reviews a list of claims to ensure that there are no 
open audits or referrals, whereas another SMA screens cases and meets 
monthly with its MFCU in an effort to achieve coordination. Second, we 
are aware that States have limited resources and cannot mandate the 
creation of a data warehouse. Ultimately, we believe that States need 
the flexibility to determine the best method of achieving coordination 
with the resources available to them. With regard to the review of 
denied claims, the Act requires Medicaid RACs to review Medicaid claims 
for overpayments. Accordingly, we do not see the need to change the 
regulation to incorporate denied claims in the final rule. With regard 
to claims that have been filed and subsequently withdrawn by the 
provider, we believe that the claims, to the extent that no payment has 
been made, should not be the subject of RAC review.
    Comment: One commenter suggested that CMS should provide 
centralized access to claims data or State policies to limit the burden 
on States.
    Response: There is no centralized repository of Medicaid claims 
data. We have and will continue to work with States to provide 
technical assistance to help States comply with implementation 
requirements and lessen the burden on States.
    Comment: One commenter recommended coordination between vendors 
when requesting records from hospitals.
    Response: We are aware of the potential for overlapping audits of 
the same provider by multiple auditing entities and are concerned about 
minimizing the potential for multiple audits of the same provider. 
States have the flexibility to achieve coordination within a reasonable 
timeframe. Coordination among auditing entities in a State is 
achievable. We have learned that States that already have RAC-like 
programs have systems in place to coordinate the efforts of auditing 
entities to minimize provider burden. In addition, we are working to 
assist States with coordination of their auditing efforts with those of 
other entities.
    Comment: In anticipation of the proposed implementation date of 
April 1, 2011, one commenter suggested that CMS should allow States 
additional time to accomplish certain tasks to ensure effective 
implementation of RAC contracts, including coordination of audit 
activity. Specifically, this commenter indicated that there must be 
time for careful consideration of how duplicate audit activity will be 
avoided.
    Response: We are aware of the potential for overlapping audits of 
the same provider by multiple auditing entities and are concerned about 
minimizing the potential for multiple audits of the same provider. In 
response to several commenters, we have delayed implementation of this 
final rule until January 1, 2012. Therefore, States have an opportunity 
to achieve coordination within a reasonable timeframe. Coordination 
among auditing entities in a State is achievable. Indeed, we have 
learned that States that already have RAC-like programs have systems in 
place to coordinate the efforts of auditing entities to minimize 
provider burden.
    Comment: One commenter inquired whether RACs are required to 
coordinate their auditing efforts with other entities that conduct 
cost-based audits for settlement.
    Response: The statute requires a State and any contractors under 
contract with the State to coordinate their recovery audit efforts with 
other contractors or entities performing audits of entities receiving 
payments under the State Plan or waiver in the State. Accordingly, at 
the direction of the State, a RAC is required to coordinate its 
auditing efforts with those of other auditing entities, including those 
performing cost-based audits of Medicaid claims.
    Comment: One commenter suggested that CMS should include a 
provision in the final rule requiring CMS and the State to monitor the 
coordination efforts of States and their RACs to ensure that the 
coordination is taking place.
    Response: We have already surveyed the coordination efforts of 
States that have a RAC-like program in place. We are very interested in 
learning about the different methods of coordination that will be 
utilized by the States. Although we decline to put a monitoring 
requirement in the final rule, we plan to do this on an informal basis. 
In addition, as discussed in our responses to other comments, we expect 
the State to play a vital role with regard to coordination of entities 
seeking to audit providers who receive payments under the State 
Medicaid Plan or waiver in the State. We have included language in this 
final rule requiring States to coordinate the recovery audit efforts of 
their RACs with other auditing entities at Sec.  455.506(c).
    Comment: Several commenters suggested that proposed Sec.  455.508 
lack specificity with regard to oversight of RAC eligibility 
requirements. These commenters also expressed concern about the 
administrative burden associated with having to respond to multiple 
requests for the same documentation from different auditors in a given 
period of time.
    Response: The State, not CMS, determines whether its RAC has the 
ability to perform the requirements outlined in Sec.  455.508. CMS is 
not involved in the RAC selection process. With regard to the 
coordination of audits, we are concerned about minimizing the potential 
for multiple audits of the same provider. We recognize the need to 
minimize the burden on providers associated with responding to multiple 
audit requests, to the extent possible. States and their RACs are 
required to coordinate auditing efforts with other entities conducting 
audits of Medicaid claims. We finalize this requirement at Sec.  
455.506(c). However, we have also included language in this final rule 
at Sec.  455.508(g) indicating that Medicaid RACs should not audit 
claims that have already been subject to audit or that are currently 
being audited by another entity. We recognize that subsequent reviews 
of claims by other auditing entities may be necessary or otherwise 
unavoidable. Finally, we hope to develop a system to facilitate State 
coordination among auditing entities.
    Comment: One commenter suggested that once a claim has been 
reviewed by an auditing entity, that claim should not be subject to 
review by another auditing

[[Page 57828]]

entity. For example, if a claim is selected for review by a Medicaid 
RAC contractor and the claim has previously been reviewed by a State's 
internal audit department or fraud unit, then the claim should be 
exempt from any RAC review. Similarly, if a RAC reviews a claim, then a 
State internal audit department should not subsequently review that 
claim or include it in a universe of claims that are part of any audit 
extrapolation.
    Response: Generally, if a claim is already subject to review and an 
overpayment is collected as a result of the audit process, then the 
claim should not be subsequently reviewed by another auditing entity 
for the same purpose. We have included language in the final rule at 
Sec.  455.508(g). However, there are circumstances in which claims may 
be the subject of multiple reviews, including, but not limited to, 
potential fraud. Accordingly, the claims at issue may be subject to 
subsequent review.
    Comment: One commenter agreed with CMS' approach to allow States 
the flexibility to coordinate the collection of overpayments identified 
by the RAC rather than the RAC itself collecting the overpayment. The 
commenter currently collects the overpayments from providers and 
requested CMS approval to continue to collect the overpayments.
    Response: We appreciate the commenter's support and inquiry. 
Generally, States utilize the SPA process to seek our approval 
regarding any change to their Medicaid programs. States interested in 
the changes should contact CMS directly with regard to its SPA.
    Comment: One commenter recommended that CMS allow States to 
contract with RACs to only identify overpayments and underpayments and 
not require the collection of any identified overpayments.
    Response: RACs are not required to collect identified overpayments. 
We specified in the proposed rule at Sec.  455.506(b) that States have 
the discretion to coordinate the recoupment of overpayments with their 
RACs. We recognized that States may not be able to delegate the 
collection of overpayments to contractors and, therefore, granted 
States the flexibility of coordinating the collection of overpayments. 
We are finalizing Sec.  455.506(b) as proposed.
    Comment: One commenter requested guidance from CMS with regard to 
the role of Medicare RACs and Medicaid RACs in reviewing claims for 
dually eligible beneficiaries, those enrolled in both the Medicare and 
Medicaid programs.
    Response: Medicaid RACs are not prohibited from reviewing claims 
for dually eligible beneficiaries. However, to the extent possible we 
want to minimize provider burden and if the claims were already 
reviewed by a Medicare RAC, then the Medicaid RAC should not review the 
claims. We note that there is little financial incentive for Medicaid 
RACs to review claims involving dually eligible beneficiaries since 
Medicare is the primary payer on claims for dual eligibles. 
Additionally, many States already use TPL contractors to identify 
overpayments involving eligibility issues.
    Comment: One commenter suggested that States should have the 
flexibility to coordinate with other State and Federal agencies 
performing audits of providers who receive payment in connection with 
services furnished to Medicaid beneficiaries. Other commenters 
suggested coordination between auditing companies when requesting 
records from hospitals.
    Response: States and their RACs are required to coordinate their 
auditing efforts with other entities that perform audits of providers 
that receive payments under the State Medicaid Plan. We believe that 
States have a significant role in coordinating the auditing efforts of 
their respective integrity programs, RACs, and any other auditing 
entities under contract with the State as well as any Federal agency 
seeking to audit a State's Medicaid providers. To the extent a State 
plays an active role in coordinating the efforts of the various 
entities seeking to review Medicaid claims, we believe that this will 
help to minimize the potential for multiple requests for records from 
different auditing entities.
    Comment: One commenter requested that CMS delay implementation of 
the final rule until coordination issues are resolved.
    Response: We disagree with the comment. Implementation of the final 
rule is not contingent on coordination of auditing entities. As 
previously discussed, we are very concerned about minimizing provider 
burden associated with responding to multiple audits and are working to 
develop a system for States to help facilitate coordination. 
Additionally, we note that the new effective date for the rule will be 
January 1, 2012, due in part, to the additional time it will take for 
States to be prepared for implementation.
    Comment: One commenter inquired whether States are required to 
exclude Payment Error Rate Measurement (PERM) claims from Medicaid RAC 
review.
    Response: Section 1902(a)(42)(B)(i) of the Act mandates that States 
and their RACs coordinate their ``recovery audit efforts with other 
contractors or entities performing audits of entities receiving 
payments under the State plan or waiver in the State * * * .'' The Act 
requires the State and its RAC to coordinate with the PERM contractor. 
PERM uses a random sample of claims to develop the error rates. 
Accordingly, if certain claims have already been audited by the PERM 
contractor, then the State, to the extent possible, should not subject 
the same claims to a subsequent audit by its Medicaid RAC. However, we 
recognize that the PERM contractor may in fact include claims in its 
sample that were previously audited by the Medicaid RAC since the PERM 
is measuring the error rate of payments that do not meet statutory, 
regulatory or administrative requirements.
    Comment: One commenter who participated in the CMS Webinar 
``Contract Template: Statements of Work,'' in which coordination with 
other entities such as CMS and OGC was discussed, inquired about the 
meaning of ``OGC'' and what the State is supposed to coordinate with 
those entities.
    Response: ``OGC'' is an acronym for the Office of the General 
Counsel, which is the legal advisor to the Department of Health and 
Human Services. Coordination with OGC is not necessary, as OGC does not 
conduct audits of Medicaid claims. With regard to coordination, States 
and their RACs are required to coordinate their auditing efforts with 
other entities that perform audits of providers that receive payments 
under the State Medicaid plan. We believe that States have a 
significant role in coordinating the auditing efforts of their 
respective integrity programs, RACs, and any other auditing entities 
under contract with the State as well as any Federal agency that is 
conducting potential fraud reviews or seeking to review State Medicaid 
providers.
    Comment: One commenter asked if an Audit Medicaid Integrity 
Contractor already requested records from a provider for certain claims 
but did not complete the review at CMS direction, whether the claims 
should be suppressed from review by a Medicaid RAC.
    Response: Generally, if there were no audit findings associated 
with the review of certain claims, then the claims may be subject to 
additional review unless the State determines that there is no basis 
for the audit of the claims.
    Comment: One commenter noted that allowing States to contract with 
more

[[Page 57829]]

than one RAC poses the risk of duplicate audits of the same provider. 
This commenter, therefore, suggested that the proposed rule should be 
modified to ensure that when a State contracts with more than one RAC, 
the State and its RACs should be required to coordinate their efforts 
to prevent duplication of audits.
    Response: We agree with the comment and are making this change in 
this final rule at Sec.  455.506(c).
    Comment: Several commenters recommended that States be allowed to 
manage the reporting and referral of potential fraud to law 
enforcement. They proposed that RACs would report suspected fraud to 
States and the States would then refer it to the appropriate law 
enforcement entities such as the ``MFCUs, SMA, Federal OIG and local 
law enforcement.'' The States would be able to provide a more 
comprehensive referral to law enforcement by providing information on 
past interaction with or conduct by the provider in question. They 
indicated that State coordination of fraud and/or abuse is consistent 
with Federal and State laws and regulations.
    Response: We agree that States are in the best position to know of 
potentially fraudulent activities by providers in their States. 
Accordingly, we have specified in this final rule at Sec.  455.506(d) 
that States, not RACs, have the responsibility to make referrals of 
suspected fraud to the MFCU or other appropriate law enforcement 
agency.
    Comment: Several commenters requested that CMS reconsider the scope 
of work and/or expertise of the Medicaid RAC to distinguish fraud or 
criminal activity from erroneous billing. These commenters believe that 
suspicion of fraud and criminal activity should be referred for further 
investigation by other MICs with expertise to determine whether or not 
a referral to law enforcement is appropriate.
    Response: We understand the concerns of commenters. We believe that 
States should determine whether there is a sufficient basis for a fraud 
referral to their State MFCUs or other appropriate law enforcement 
agency. Accordingly, we are making this change in this final rule at 
Sec.  455.506(d).
    Comment: One commenter indicated that CMS' proposed standard of 
``reasonable grounds'' concerning law enforcement referrals in proposed 
Sec.  455.508 of the regulation, is subject to variable interpretation 
and could result in inappropriate referrals. This commenter stated that 
CMS must clearly define the term ``reasonable grounds'' and include 
examples of same.
    Response: Based upon the comments received, we have changed the 
responsibility of making fraud referrals to law enforcement from the 
Medicaid RACs to the States. We have reflected this change in this 
final rule at Sec.  455.506(d). We believe that this is consistent with 
existing Federal regulations that govern State referrals of fraud and 
abuse, as defined by Sec.  455.2, to the appropriate law enforcement 
agency as well as require the State to adhere to certain fraud referral 
standards. In addition, we have removed the language regarding 
``reasonable grounds'' from this final rule. We have also included in 
this final rule at Sec.  455.508(h) that Medicaid RACs must refer 
suspected cases of fraud and/or abuse to the State in a timely manner. 
We expect States to provide clear definitions of timely referrals in 
its contract with the RAC or other applicable guidance.
    Comment: One commenter recommended that CMS adopt the 
recommendations in the OIG Medicare RAC Referral Report. That report 
outlined a number of recommendations including requiring Medicare RACs 
to receive mandatory training on the identification and referral of 
fraud.
    Response: We disagree with the commenter. In the permanent Medicare 
RAC program, we provided RACs with a presentation about fraud in 
Medicare, the definition of fraud, and examples of potential Medicare 
fraud. The OIG stated in its report that because Medicare RACs do not 
receive their contingency fee for cases they refer and are determined 
to be fraud, there may be a disincentive for RACs to refer to cases of 
potential fraud. Medicaid RACs are a State operated program, whereas 
the Medicare RACs are a national program. Accordingly, the 
responsibility of making fraud referrals should belong to the State 
instead of the Medicaid RAC, as initially proposed. We have finalized 
this change at Sec.  455.506(d).
    Comment: One commenter requested the removal of the requirement of 
immediate referral for suspicion of fraud to law enforcement from the 
final rule. The commenter suggested the requirement exceeds the 
authority of the statute. The commenter continued that he/she did not 
believe that the determination of what may constitute reasonable 
grounds for referral is within the purview of Medicaid RACs, or that 
RACs should be required to make the referrals.
    Response: We agree that the Medicaid RACs should not have the 
responsibility to make fraud referrals and that the responsibility 
belongs to the State. Accordingly, we have made the change in this 
final rule by adding new subparagraph Sec.  455.506(d). In addition, we 
have included in this final rule at Sec.  455.508(h) that the Medicaid 
RAC must refer suspected cases of fraud and/or abuse to the State in a 
timely manner, as defined by the State. We expect States to provide 
clear definitions of timely referrals in the contract with its RAC or 
other applicable guidance.
    Comment: One commenter requested clarification on how States and 
Medicaid RACs will be notified of efforts initiated by the OIG or 
criminal investigations to facilitate coordination of efforts. The 
commenter expressed concern that routine RAC activities such as record 
requests may alert providers and subsequently jeopardize 
investigations.
    Response: We have finalized that States are required to make 
referrals of suspected fraud and/or abuse to the MFCU or other 
appropriate law enforcement agency at Sec.  455.506(d). We believe the 
States play a significant role with regard to coordination generally, 
and should share information regarding investigative activities or 
other auditing efforts in the States with their RACs to the extent 
possible. However, nothing in this final rule requires the Office of 
Inspector General or other law enforcement authorities to disclose 
investigative information to Medicaid RACs.

G. Appeals Process

    Comment: One commenter asked about the error rate associated with 
the RACs finding improper payments that ultimately are reversed on 
appeal. Another commenter asked about the frequency with which an 
organization believes a RAC has made an error but does not want to go 
through the appeal process.
    Response: We presume that the commenter was inquiring about data 
from the Medicare RAC program. In the Medicare RAC program, we have 
contracted with a validation contractor that does an accuracy review 
for CMS. That contractor reviews a sample of claims each month 
(overpayments and no findings) to determine if the Medicare RAC was 
making accurate decisions. In the Medicare RAC Demonstration, only 8.2% 
of all claims with an improper payment were overturned on appeal. We do 
not have specific data with regard to providers that decline to appeal 
Medicare RAC determinations or that believe that a RAC determination 
was made in error.
    Comment: One commenter asked who bears the cost of the appeal if an 
adverse Medicaid RAC determination is appealed. Specifically, the 
commenter

[[Page 57830]]

inquired as to whether the State would be able to claim FFP for the 
cost of the appeal if the appeal reversed the RAC determination. The 
commenter also wanted to know if the determination is upheld, whether 
the provider could include the costs in its cost report.
    Response: The cost of a State's appeal would be an allowable 
administrative cost under the State's Cost Allocation Plan. If a State 
is establishing a new appeals process for RAC determinations, the State 
may have to amend its Cost Allocation Plan to cover the new appeals 
process. A provider's appeal costs are administrative costs that are 
not allowable under Medicaid.
    Comment: One commenter asked how long the appeal process would take 
an organization to go through.
    Response: We are not mandating a single appeals process that all 
States must use for RAC appeals, therefore the length of time for a 
provider's appeal in a given State will differ, based on the nature of 
the State's appeals process and the issues on appeal. However, under 
section 1902(a)(42)(B)(ii)(III) of the Act, all States must have an 
appeals process in place for providers to appeal adverse RAC 
determinations.
    Comment: A few commenters asked whether they must seek CMS approval 
if they intend to use their existing appeals process, or if the 
requirement to submit to CMS a proposal describing the appeals process 
which must be approved prior to implementation of the RAC programs 
applied only when the State intended to establish a separate RAC 
appeals process or when the State did not currently have an appeals 
process in place.
    Response: The proposed rule provided States with 2 options for 
their appeals process from which States may choose as they deem 
appropriate: (1) Either take advantage of an existing appeals process, 
or (2) establish a separate appeals process for RAC determinations. The 
proposed rule also required States to submit a proposal describing the 
appeals process, which we would approve prior to the State implementing 
its RAC program. In this final rule, we now clarify that we will only 
require a description and prior approval of any new RAC appeals process 
that a State will use, not any existing appeals process.
    Comment: One commenter encouraged CMS to prohibit any ability for 
States to establish a new appeals process. The commenter believed a new 
appeals process would be problematic for those providers that have 
entities in more than one State, as each would have to comply with more 
than one process to submit appeals on a timely basis.
    Response: We are not mandating a single appeals process that all 
States must use for RAC appeals. Given that each State has provided us 
with assurances through the SPA process that it will comply with the 
statutory requirement to provide an adequate appeals process for 
entities to appeal adverse RAC determinations, it would be unreasonably 
burdensome on the States for us to impose a single appeals process for 
RAC appeals. We are not prohibiting States from establishing a new 
appeals process for RAC appeals. States will have the flexibility to 
determine what form of appeals process best suits their respective RAC 
programs. We are aware that responding to multiple States' processes 
could be a challenge for providers that are enrolled in multiple 
States' Medicaid programs. However, the providers would have been 
involved with the RACs' overpayment determination processes and should 
have received notice of appeals timeframes.
    Comment: One commenter noted that the language of the preamble to 
the proposed rule refers to ``ensuring providers adequate due process 
rights'' while the proposed regulation at Sec.  455.512 only provides 
for general appeal rights with no mention of due process. The commenter 
recommends strengthening the rule by changing Sec.  455.512 to read 
``States shall provide appeal rights that ensure adequate due process 
under State law or administrative procedures to Medicaid providers that 
seek review of an adverse Medicaid RAC determination.''
    Response: We appreciate the commenter's concerns, however we note 
that section 1902(a)(42)(B)(ii)(III) of the Act only refers to ``an 
adequate process for entities to appeal any adverse determination.'' To 
allow the States maximum flexibility and to accommodate differences in 
State laws regarding due process, we are not prescribing specific 
requirements for an appeals process for adverse RAC determinations. 
Instead, consistent with the statutory language, we are requiring 
States to provide an adequate appeals process. Therefore, we decline to 
revise Sec.  455.512 in accordance with the commenter's request.
    Comment: A commenter asked whether the RAC program contractor 
activities may include legal defense of an appealed overpayment 
determination, or, in other words, whether the State may contractually 
obligate the RAC to defend its findings in the administrative appeal. 
The commenter also asked whether the State specific requirements must 
be articulated in the SPA.
    Response: When designing their RAC programs, States have the 
discretion to require their RACs by contract to appear in the State's 
administrative or judicial appeals hearings to defend the RACs' 
overpayment findings. The Medicaid SPA does not require a detailed 
description of the State's RAC program. However, in this final rule, we 
are finalizing at Sec.  455.502(c) the requirement that the State 
report to CMS elements describing the effectiveness of the State's RAC 
program, including, but not limited to, general program descriptors 
(for example, contract periods of performance, contractors' names) and 
metrics (for example, number of audits conducted, recovery amounts, 
number of cases referred for potential fraud). CMS will provide sub 
regulatory guidance to States related to performance metrics, State 
reporting requirements and other milestones contained in the RAC 
program.
    Comment: A commenter asked CMS to add clarifying language in 42 CFR 
part 455 subpart F that the SMA and not the RAC is the final arbiter of 
whether an overpayment or underpayment has been discovered.
    Response: When an overpayment is discovered it is governed by Sec.  
433.316 of the regulation. To the extent that an overpayment discovered 
in the course of a RAC audit is not the result of fraud, it would be 
subject to Sec.  433.316(c). The issue is not which party is the final 
arbiter of the overpayment, but which party has taken the action that 
results in the overpayment being discovered. The party that discovered 
the overpayment would depend upon the process established in the 
State's RAC contract and which action occurs first in time: From whom 
communications with providers are initiated, that is SMA or the RAC, 
and whether the RAC initiates recoupment proceedings.
    Comment: One commenter requested that CMS reconsider its position 
that States could share a part of recovery from a civil or criminal 
fraud proceeding with a RAC. The commenter was concerned that CMS might 
unintentionally create strong incentives (through the prospect for 
multiple damages) that RACs would presume potential fraud where 
unfounded. The commenter suggested that even without an incentive under 
the Medicare RAC demonstration, RACs often inaccurately determined the 
existence of overpayments, with 64 percent of contested cases 
overturned on appeal, and cited the June 2010, ``CMS Update to the RAC 
Demonstration Report.''

[[Page 57831]]

    Response: We proposed that nothing would preclude a State from 
agreeing to pay a RAC a contingency fee from funds recovered and 
returned to the State as the State share of an overpayment (or 
restitution) at the close of the civil or criminal proceeding. It would 
be within the State's discretion to design a RAC program that paid a 
contingency fee to a RAC on this basis, that is, if the RAC contributed 
to the recovery and the recovery was fully adjudicated. We are 
sensitive to the potential for creating an incentive for contingency 
fees for fraud recoveries. However, given that a fully adjudicated 
fraud recovery could take several years, we believe the potential pay-
off for the RAC would be outweighed by the delay in the payment. We 
recognize that the Medicare RAC Demonstration program experienced a 
moderate overturn rate and are hopeful that States will be able to 
design programs that take the Medicare RAC experience, including 
overturn rate, into consideration to reduce the burden on the providers 
and State Medicaid programs.
    Comment: One commenter urges CMS to modify the proposed rule to 
permit only the second option that CMS proposed for structuring 
payments to RACs in which a State pays a RAC only when the recovery 
amount is fully adjudicated and all appeals available to the provider 
have been concluded. Adoption of the second option, the commenter 
argues, is not only consistent with the expressed interpretation of the 
statute by CMS, it is also sound policy, as it would incentivize 
Medicaid RACs to conduct their audits with greater care to avoid errors 
that would generate appeals. The commenter believes the first option in 
which a State pays a RAC when the RAC recovers an overpayment and the 
State requires reimbursement by the RAC if the recovery is overturned 
on appeal is inconsistent with the language of section 
1902(a)(42)(B)(ii)(I) of the Act, which requires that payment must be 
made only from amounts recovered.
    Response: As we stated in the proposed rule, we interpret the 
statute to mean that (a) payments may not exceed the total amounts 
recovered, and (b) payments may not be made based upon amounts merely 
identified but not recovered, or amounts that may initially be 
recovered but that subsequently must be repaid due to determinations 
made in appeals proceedings. Therefore, under (a), because the payment 
is a contingency fee it is relative to the amounts recovered; and under 
(b), the identified amounts must be recovered for the contingency fee 
to be paid to the RAC, or the contingency fee must be recouped from the 
RAC if a recovered overpayment is found at any level of appeal to not 
have been overpaid by the provider. While some RACs may find the second 
contingency fee option to be a disincentive to committing errors when 
performing audits, we think that a delay of as long as two years to be 
paid the contingency fee would act as a disincentive to contracting 
with the States at all. We are permitting the States the most 
flexibility in designing their RAC programs, which includes the timing 
of payment to their RACs.
    Comment: One commenter noted that the level of provider appeals 
related to RAC determinations could, according to the commenter, 
``drive substantial program costs.'' The commenter asked for 
clarification as to whether the expenses related to the additional 
appeals will be subtracted from the Federal share to be refunded.
    Response: As stated above, a State's appeal costs would be an 
allowable administrative cost under the State's Cost Allocation Plan. A 
provider's appeal costs are administrative costs that are not allowable 
under Medicaid.
    Comment: Several commenters recommended a discussion period between 
RACs and the providers prior to the commencement of the right to appeal 
to avoid inaccurate determinations of overpayments. During the 
discussion period, the providers could provide RACs with information 
necessary to make an accurate determination. The commenters noted that 
when the discussion period was implemented in the Medicare RAC program, 
providers and RACs avoided the time and expense of going through the 
appeals process. The commenters suggested that SMAs would participate 
when issues arose regarding RACs' interpretation of the State Plan and 
other Medicaid payment policies. One commenter recommended a discussion 
period of 25 days. Another commenter suggested that CMS and the States 
should monitor how Medicaid RACs observe the discussion period so that 
it is not treated as a mere formality but, rather, a meaningful 
opportunity for the parties to address any errors in the determination.
    Response: We appreciate the commenters' suggestions and are 
cognizant of the lessons we might learn from the Medicare RAC program, 
as well as other audit programs. Providers that submit additional 
information to auditors during the discussion or comment period may 
avoid subsequent appeals or they may find that the auditor's findings 
will stand. Section 1902(a)(42)(B) of the Act establishes a State RAC 
program, which we are interpreting to grant States the flexibility to 
design programs, consistent with their State laws and that meet the 
needs of their States. We will not mandate that States use discussion 
periods, either at all or of any specified duration. However, we 
encourage States to require a discussion or comment period prior to a 
RAC's audit becoming final, as is commonplace in audits. If a State 
chooses to implement a discussion or comment period in its RAC program, 
we recommend but do not require that the State monitor the RAC's 
compliance with that discussion or comment period requirement.
    Comment: Several commenters suggested that we should require each 
State to prescribe a clear appeals process that is robust and provides 
for multiple levels of appeal. Some commenters urged us to prescribe 
specific requirements for Medicaid appeals.
    Response: We are not mandating a single appeals process that all 
States must use for RAC appeals nor dictating the manner of the appeals 
processes that the States must implement for RAC appeals. In the event 
that, through the SPA process, a State proposed a process that did not 
provide entities with an adequate opportunity to appeal adverse RAC 
determinations, we would engage in discussions with the State about its 
appeals process until the State was able to provide assurances that its 
appeals process was compliant with section 1902(A)(42)(B)(ii)(III) of 
the Act. Given that each State has provided us with assurances that it 
will comply with the statutory requirement to provide an adequate 
appeals process for entities to appeal adverse RAC determinations, it 
would be unreasonably burdensome on the States for us to impose a 
single appeals process for RAC appeals.
    Comment: Several commenters objected that our proposed rule failed 
to prevent RACs from recouping funds associated with denials under 
appeal. The commenters also objected that the proposal failed to 
require RACs to return their contingency fee if a denial is overturned 
at any stage of the appeals process. The commenters believe that CMS' 
silence on these important issues in the proposed rule will result in 
overzealous and inappropriate denials on the part of the Medicaid RACs, 
and urge that RACs must not be able to recoup funds until the appeals 
process is exhausted and must not receive their contingency fee in 
cases where the denial is overturned.
    Response: We proposed 2 payment options to provide States with the 
most flexibility in designing their RAC programs: (1) States may pay 
RACs from

[[Page 57832]]

amounts identified and recovered, but not fully adjudicated, but the 
RAC would be required to return any contingency fee that corresponded 
to the amount of an overpayment overturned on appeal; or, (2) States 
could pay the RAC after the overpayment was fully adjudicated, that is 
after the exhaustion of all appeals available to the provider. We 
disagree that we failed to require RACs to return their contingency fee 
if a denial is overturned during the appeals process. In the first 
option as we described it in our proposal, the RAC would be required to 
return any portion of the contingency fee that corresponded to the 
amount of the overpayment overturned at any level of appeal.
    The commenters are concerned that the opportunity for a contingency 
fee will act as an incentive to the RACs to find overpayments, even if 
those are later overturned on appeal and the RACs must return the 
contingency fee. We believe that the possibility of a contingency fee 
being overturned would be outweighed by the likelihood that the State 
would not be able to attract a RAC for its RAC program, were the State 
limited to payment of the contingency fee after exhaustion of appeals. 
The appeals process can take years and a RAC would go unpaid for all 
its cases in the initial years while providers exhausted their appeal 
rights.
    Comment: Several commenters noted that the proposed rule does not 
require the Medicaid RAC to provide any data on the number of claims 
appealed and the number of denials overturned during the appeals 
process. The commenters recommend that these data be captured on a 
timely basis and urge that the data be used to hold RACs accountable 
for inappropriate denials. The commenters also urge that information on 
appeal turnover rates be shared with the public. Two of the commenters 
also suggested that RACs with a turnover rate of 25 percent or greater 
per year should be subject to a monetary penalty.
    Response: Whether States should require RACs to provide any data on 
the number of claims appealed or the number of denials overturned 
during the appeals process, or any penalty to be assessed for high 
appeal turnover rates is within the discretion of the States when 
designing their RAC programs. Whether to release Medicaid RAC appeal 
turnover rates is subject to each State's laws and rules. We proposed 
that the States provide us with elements describing the effectiveness 
of the RAC programs, including general program descriptors (contract 
periods of performance, contractors' names, etc.) and program metrics 
(number of audits conducted, recovery amounts, number of cases referred 
for potential fraud, etc.). We will issue sub-regulatory guidance to 
the States regarding the data to be provided.
    Comment: One commenter suggested that CMS set minimum appeal rights 
that all States must incorporate into their appeals processes. The 
commenter suggested that a standardized Medicaid RAC appeals process 
include the following minimum elements:
    1. A clearly defined appeals process describing the providers' 
rights and responsibilities, including the right to submit documentary 
evidence and to be heard in person.
    2. A minimum discussion period, such as 120 days, to rebut the RAC 
response.
    3. A multi-tiered appeals process which provides for an independent 
review.
    4. A process by which recoupment is delayed until the appeals 
process is finished or has reached a certain stage.
    5. A description of how interest will be applied to overpayment 
determinations.
    6. Timeframes regarding appeal deadlines, providing supporting 
documentation, and issuing review decisions.
    7. Detailed decisions describing the basis for upholding the 
overpayment determination and informing the provider of further appeal 
rights and deadlines.
    8. Agreements between the State, the Medicaid RAC, and any other 
entities involved in the Medicaid RAC process to ensure the timely and 
accurate flow of information.
    9. Penalties for noncompliance with time frames that should apply 
to both the provider and the entity adjudicating the RAC appeal.
    Response: States will have the flexibility to design their RAC 
programs, including the content of and signatories to agreements 
regarding the States' RAC programs, as well as whether there will be a 
discussion or comment period, and what interest will apply to 
overpayments. We are finalizing that States have two options to pay 
contingency fees to RACs: States may pay RACs from amounts identified 
and recovered, but not fully adjudicated, but the RAC would be required 
to return any contingency fee that corresponded to the amount of an 
overpayment overturned at any level of appeal within a reasonable 
timeframe as prescribed by the State; alternatively, the State may pay 
the RAC after the overpayment is fully adjudicated, that is after the 
exhaustion of all appeals available to the provider. We leave the 
States with the flexibility to select the option that works better for 
their programs.
    Comment: One commenter suggested specific recommendations that if 
the current State appeals process is at the Administrative Law Judge 
level only, CMS should impose requirements on the States to implement a 
tiered appeals process to allow review by an independent, non-
government entity as a first or second level of appeal. In addition, 
CMS should require establishment of timeframes both for providers to 
submit their appeals, prior to recoupment, and for those entities 
reviewing the appeals to conclude their work and report the outcome to 
the providers.
    Response: We are neither mandating a single appeals process that 
all States must use for RAC appeals, nor are we dictating the manner of 
the appeals processes that the States must implement for RAC appeals, 
including details as timeframes for any part of the appeals process.
    Comment: One commenter appreciated our proposed requirement that 
State Medicaid RACs must use trained medical professionals, and that 
the RAC programs must have an adequate appeals process and coordinate 
with other auditors and law enforcement.
    Response: We appreciate the comment. We are finalizing the 
following requirements: States must require their RACs to employ 
trained medical professionals, as defined by the State, to review 
Medicaid claims at Sec.  455.508(a); States must provide appeal rights 
under State law or administrative procedures to Medicaid providers that 
seek review of an adverse Medicaid RAC determination at Sec.  455.512; 
and that States must make referrals of suspected fraud and/or abuse to 
the MFCU or other appropriate law enforcement agency at Sec.  
455.506(d).
    Comment: One commenter recommended that we develop a robust and 
consistent infrastructure to support the Medicaid RAC appeals process, 
including publishing information about the process online, to reduce 
confusion and ambiguity experienced by providers.
    Response: While we are sensitive to the challenges of multiple 
States' audits and appeals for providers serving in multiple States' 
Medicaid programs, we have no plans at this time to establish or 
implement any online data repository regarding State Medicaid RAC 
appeals processes.
    Comment: One commenter encouraged States to utilize their existing 
appeals processes rather than to

[[Page 57833]]

establish new Medicaid RAC appeals processes that would require a 
learning curve. The commenter also encouraged CMS to establish 
timeframes for the RACs to respond to providers during the appeals 
processes. The commenter believed that the RACs should be held 
accountable in their response period to ensure timeliness in addressing 
denials.
    Response: The States have the flexibility either to take advantage 
of an existing appeals process or to establish a separate appeals 
process for RAC determinations. It is within the States' discretion 
which option they choose. We are not dictating the manner of the 
appeals processes, including timeframes for RAC responses during the 
appeals process.
    Comment: One commenter noted that Medicare RACs demonstrated a lack 
of sufficient review of claims, understanding, and due diligence to 
take the appropriate amount of time and ensure their information is 
accurate before submitting a denial letter to the provider. Therefore, 
the commenter suggested that CMS hold RACs accountable and require them 
to conduct due diligence, ensuring accurate and timely denial letters 
are submitted to providers under audit.
    Response: We are applying the lessons we have learned in the 
Medicare RAC program; however, the States have a certain degree of 
flexibility to design their RAC programs, including the development of 
RAC audit protocols and the content of its findings. However, we agree 
with the commenter that the RAC should timely notify providers of its 
overpayment findings. We have finalized at Sec.  455.508(e)(4) that 
RACs must notify providers of its overpayment findings within 60 
calendar days.
    Comment: One commenter suggested that patients not receive a letter 
regarding an audit until the appeals process has ended and the 
determination is final. The commenter also recommended that CMS publish 
written policies and procedures of all processes to promote consistency 
and provider knowledge, as well as proper understanding of these 
processes.
    Response: In the course of routine Medicaid provider audits, 
Medicaid beneficiaries are contacted to verify receipt of services. 
Accordingly, we decline to restrict SMAs in the ordinary conduct of 
audits. Additionally, Medicaid RACs are individually State operated, 
administered and procured programs. Therefore, CMS will not publish 
written policies and procedures about State processes.
    Comment: A few commenters supported our proposed approach to allow 
States to use existing appeals structures.
    Response: We appreciate the commenters' support.
    Comment: One commenter had several recommendations for the audit 
and appeals process regarding notices to providers during the audit; 
notifications of findings of overpayments or underpayments; time limits 
for repayment; and information on the right to rebut the findings and 
the right to appeal. The commenter specifically recommended that the 
notice to providers should explain the right to appeal, specific 
requirements for appealing, and the effect of an appeal on the timing 
of repayment or offset and applicable interest; and that contact 
information should be provided for both rebuttal and appeal inquiries.
    Response: Each State has a certain degree of flexibility with 
regard to the design of its RAC program, including whether to use an 
existing appeals process or to establish an alternate appeals process 
for RAC determinations. We are not mandating those details as part of 
the content of the RAC's findings. However, we believe that the RAC 
should timely notify providers of its overpayment findings. We have 
finalized at Sec.  455.508(e)(4) that RACs must notify providers of its 
overpayment findings within 60 calendar days.
    Comment: One commenter requested that CMS require the Medicaid RAC 
process mirror the Medicare RAC program to alleviate the stress of 
managing audits in multiple States and ensure the process is more 
seamless for providers. The commenter also requested that CMS require 
an independent decision maker such as an Administrative Law Judge at 
some level of the appeal process to protect providers and the Medicaid 
program, providing oversight and an unbiased opinion.
    Response: We are sensitive to the challenge that audits in multiple 
States can present to providers that serve multiple States' Medicaid 
programs. Nevertheless, we are neither mandating a single appeals 
process that all States must use for RAC appeals, nor are we dictating 
the manner of the appeals processes that the States must implement for 
RAC appeals, including who will be the decision makers in their appeals 
processes. Given that each State has provided us with assurances 
through the SPA process that it will comply with the statutory 
requirement to provide an adequate appeals process for entities to 
appeal adverse RAC determinations, it would be unreasonably burdensome 
on the States for us to impose a single appeals process for RAC 
appeals.
    Comment: One commenter recommended that CMS conduct a thorough 
review of State appeals processes and establish some level of 
consistency across States, and include provisions that will require 
adequate documentation of those processes including establishing time 
frames in which documentation should be provided by RACs to providers 
who are interested in filing an appeal. The commenter also recommended 
that CMS include provisions that would require States to keep appeal 
processes independent of RAC activities. The commenter was concerned 
that because RAC fees are based on the amount of the overpayment 
collected, RACs have an added incentive to avoid potential provider 
appeals. The commenter suggested that all appeals processes should be 
done by the State and not the RAC or other entities that may have an 
interest in the outcome of the appeal.
    Response: Each State has a certain degree of flexibility in the 
design of its RAC program, and we are not mandating a single appeals 
process that all States must use for RAC appeals, nor are we dictating 
the manner of the appeals processes, including timeframes for providing 
documentation to providers for filing an appeal and how the appeals 
process would be structured. We are requiring that the States operate a 
RAC program that meets the requirements of the statute, including 
providing an adequate appeals process: section 1902(a)(42)(B)(ii)(III) 
of the Act requires an adequate appeals process for providers to appeal 
any adverse Medicaid RAC determinations. While we appreciate the 
commenter's concerns that RAC activities be separate from the appeals 
process, we are not mandating the structure of each State's RAC 
program.
    Comment: One commenter recommended clarification of the rule 
describing providers' rights to appeal and that we require peer review 
of overpayments.
    Response: Each State has a certain degree of flexibility to design 
its RAC program, including whether to use an existing appeals process 
or to establish an alternate appeals process for RAC determinations and 
how the appeals process will function in that State. While we are 
requiring that States require their RACs to employ trained medical 
professionals, as defined by the State, to review medical claims, it is 
within the States' discretion to determine whether to use medical 
professionals to review Medicaid RACs'

[[Page 57834]]

findings prior to the recoupment of overpayments.
    Comment: One commenter recommended that due to an already 
overburdened system, we should require the establishment of a concrete 
timeframe for the record requests, the actual audit, and the appeals 
process.
    Response: We are sensitive to the demands of audits on States' and 
providers' time. However, States have the flexibility with regard to 
the design of its Medicaid RAC appeals processes. Therefore, we are not 
mandating those details as timeframes for records requests, the 
duration of the audit, or the appeals process.
    Comment: One commenter noted that the State would have a 
disincentive to establish a vigorous, unbiased appeals process because 
it is required to return the Federal share under Sec.  433.312 even if 
the State is unable to recover the overpayment from the provider.
    Response: Under section 1903(d)(2)(C) of the Act and Sec.  433.312, 
the State will have a year to attempt to recover an overpayment from a 
provider, except in cases of fraud where the time period may be longer. 
Then, the State must return the Federal share regardless of whether it 
does in fact recover the overpayment. However, if a determination is 
overturned on appeal, the State can request a refund of the Federal 
share through processes outlined in Sec.  433.320. Thus, we disagree 
with the commenter that there is a disincentive for States to establish 
a vigorous, unbiased appeals process. States are required under section 
1902(a)(42)(B)(ii)(III) of the Act to establish an adequate process for 
providers to appeal adverse RAC determinations. We are confident that 
States will afford providers vigorous and unbiased appeals processes.
    Comment: One commenter suggested that CMS review each State's 
appeals process to determine its reasonableness. The commenter 
recommended that timeframes for filing appeals and making decisions on 
the appeals should allow providers to more easily keep track of all the 
levels of reconsideration and review as well as timely filing dates for 
all the appeal levels. CMS should very closely monitor the different 
appeals systems and remain alert to the concerns of providers if 
unreasonableness, inconsistency and unnecessary complexity overwhelm 
provider efforts to be compliant.
    Response: Each State has the flexibility to design its Medicaid RAC 
appeals process, including whether to use an existing appeals process 
or to establish an alternate appeals process for RAC determinations. 
While we are requiring States to submit a description and obtain prior 
approval of any new RAC appeals process that a State will use (not any 
existing appeals process), we are not dictating the manner of the 
appeals process that the States must implement for RAC appeals.

H. Payment--General/Federal Share/Administrative Match

    Comment: One commenter asserted that CMS should require States to 
implement automatic positive payment adjustments to providers through 
the ``X12 835 transaction process.''
    Response: This comment is outside of the scope of the proposed 
regulation. Therefore, we decline to accept this suggestion.
    Comment: One commenter asked for clarification regarding what 
activities are eligible for administrative matching.
    Response: Section 1903(a) of the Act directs payment of FFP, at 
different matching rates, for amounts ``found necessary by the 
Secretary for the proper and efficient administration of the State 
plan.'' The Secretary is the final arbiter of which activities fall 
under this definition. Claims held under this authority must be 
directly related to the administration of the Medicaid program.
    Comment: A few commenters requested and/or recommended an enhanced 
FFP rate for implementing the Medicaid RAC program. Other commenters 
recommended an enhanced FFP match of 90 percent, and one commenter 
recommended a rate of 75 percent.
    Response: Because enhanced Federal match was not specifically 
authorized by the Affordable Care Act, activities associated with the 
procurement, operation and administration of a Medicaid RAC do not 
qualify for enhanced Federal match.
    Comment: One commenter requested that CMS clarify whether a State's 
statute allows the State to directly receive the overpayment instead of 
delegating the collection responsibility to the RAC.
    Response: In the proposed rule, we acknowledged the differences 
among the States and territories regarding the issue of coordinating 
with Medicaid RACs for the collection of overpayments. We stated that 
the statute requires Medicaid RACs to collect overpayments, but some 
States may not be legally able to delegate the collection of 
overpayments to contractors. Accordingly, we finalize at Sec.  
455.506(b) that States will have the discretion to coordinate the 
collection of overpayments with their Medicaid RACs.
    Comment: One commenter suggested that there is a need for a 
standard traceable recovery identifier to be used from beginning to end 
to allow for reconciliation.
    Response: We recommend that States explore efficient and innovative 
processes to detect and/or prevent improper payments. However, we do 
not require States to implement uniform processing systems for payments 
to providers.
    Comment: One commenter requested that CMS clarify the budget and 
accounting standards that States must comply with when accounting for 
transactions with Medicaid RACs.
    Response: Estimates of Federal funds on overpayments should be 
included in the Form CMS-37 reports, following the requirements for 
reporting of collections and overpayments, not collected within one 
year, as required by Sec.  433.312. States should already have an 
accounting process in place to record overpayments when discovered, as 
well as the Federal share received, and for recording collections and 
reporting collections on the Form CMS-64 as they occur, and reporting 
outstanding overpayments at the end of the one-year period. States 
should follow those same accounting standards and procedures to account 
for Medicaid RAC overpayments and collections and the required 
reporting as indicated above, although they should be identified as RAC 
overpayments and collections to facilitate determination and reporting 
of RAC fees.
    Comment: One commenter requested that CMS clarify when CMS expects 
repayment of the Federal share of overpayments. The commenter stated 
that CMS should give States up to one year to remit the Federal share 
of the funds recovered. Providing States with up to one year to remit 
funds will allow States the opportunity to recoup funds from future 
payments.
    Response: Under section 1903(d)(2) of the Act, States have up to 
one year to recover overpayments before an adjustment is made in the 
Federal payment to the State to account for that overpayment. The 
Federal share of collections should be reported when received, if 
collected within the one-year period. At the end of that period, the 
Federal share of the uncollected overpayment amount must be refunded to 
the Federal government.
    Comment: One commenter requested clarification regarding proposed 
language provided at sections 1902(a)(42)(B)(ii)(IV)(bb) and 1903(d) of 
the Act as it applies to amounts recovered under the Medicaid RAC 
program. There, the commenter noted

[[Page 57835]]

that ``[w]e propose that a State must refund the Federal share of the 
net amount of overpayment recoveries after deducting a RAC's fee 
payments.'' The commenter wanted CMS to assure that there is no 
potential conflict with interpretation of language from page 75 FR 
69041 of the proposed rule discussing repayment of the Federal portion. 
Additionally, the commenter wanted clarification that the Federal share 
should be refunded from overpayments or amounts actually recovered.
    Response: The reporting will identify the overpayment recoveries 
received and the RAC fees paid, which will ensure that the fees do not 
exceed the recoveries. Additionally, overpayments for which the one-
year period for collection has expired will be reported to repay the 
Federal share.
    The reporting on the recoveries (collections) will distinguish 
between recoveries reported within the one-year period to collect 
(refunded on the current report) and collections for overpayments 
previously refunded due to the expiration of the one-year period (not 
refunded on the current report as the amount was previously refunded). 
The Federal share of overpayment amounts collected within one year from 
discovery is to be refunded when collected (recovered); the Federal 
share of overpayment amounts not collected at the end of the one-year 
period must be refunded at that time.
    Comment: One commenter indicated that Sec.  433.312 requires States 
to refund the Federal share of overpayments, regardless of whether the 
State actually recovers the overpayments from providers. This commenter 
sought clarification that there was no conflict with other sections of 
the proposed rule which stated that RACs are paid from amounts 
``actually recovered from the provider after all appeals and 
negotiations are finalized, and not on amounts identified.''
    Response: We do not believe that these provisions are in conflict. 
One concept involves the return of FFP to the Federal Government, 
whereas the other pertains to the timing of payment to a RAC by a 
State. In the proposed rule, we indicated that the requirement for 
States to refund the Federal share of overpayments applied to 
overpayments that are identified by the RAC. Therefore, if a Medicaid 
RAC identifies an overpayment, the State is required to refund the 
Federal share of the overpayment amount if not collected by the 
expiration of the one-year period. The State's obligation to return FFP 
is independent of its obligation to compensate a RAC for the work it 
performs. That occurs when an overpayment is collected and a 
corresponding contingency fee is paid to the RAC.
    Comment: One commenter indicated that the initial identification of 
overpayment amounts may be subject to change because findings are often 
reversed or revised after additional information is obtained, and some 
findings are thrown out through the appeals process. If the RAC 
contractor is not paid until overpayments are actually recovered, it 
makes sense that the Federal portion of those recovered funds would be 
repaid to the Federal government after an appeals process is completed.
    Response: The refunding of the Federal share is governed by the 
overpayment regulation at Sec.  433.312, as discussed above. If the 
appeals process changes the overpayment amount after the expiration of 
the one-year period for collection and the State reported that 
overpayment, the overpayment amount can then be adjusted on the Form 
CMS-64.9ORAC for reporting RAC overpayments that have not been 
collected at the end of the one-year period.
    Comment: One commenter recommended that the final rule should be 
updated to reflect how recoveries are handled via a payment plan.
    Response: If a State provides a payment plan which recovers the 
total overpayment within one year from discovery, the recoveries are 
reported as received. If the payment plan exceeds the one-year period, 
the recoveries are refunded as collected during the one-year period and 
then the balance is refunded on the overpayments schedule. Subsequent 
recoveries of that balance would be reported for the purpose of showing 
that fees paid do not exceed recoveries, but would not be refunded as 
it would have already been refunded through the reporting on the 
overpayment schedule.
    Comment: One commenter recommended that CMS remove reference to 
payment when addressing RAC fees in proposed section 
1902(a)(42)(B)(ii)(IV)(bb) of the Act: ``We propose that a State must 
refund the Federal share of the net amount of overpayment recoveries 
after deducting a RAC's fee payments . * * * In other words, a State 
would take the RAC's fee `off the top' before calculating the Federal 
share of the overpayment recovery to be returned to CMS.''
    Response: We are uncertain what the commenter is suggesting 
regarding removing the reference to payment when addressing the RAC 
fee. The statute requires that the RAC ``program is carried out in 
accordance with such requirements as the Secretary shall specify 
including * * * that section 1903(d) [of the Act] shall apply to 
amounts recovered under the program.'' In the proposed rule we 
indicated that the ``State would take a RAC's fee payment `off the top' 
before calculating the Federal share of the overpayment recovery to be 
returned to CMS''. We clarify the reporting in this final rule. In 
order to adequately identify recoveries and fees paid, States must 
report both the overpayment recoveries and associated fees using the 
same Federal share (FMAP rate) that is applicable to the overpayments. 
Similarly, the fees paid for identifying underpayments will be reported 
at the same FMAP rate appropriate to the payment of that underpayment 
amount, or the current FMAP rate if the underpayment is not paid.
    Comment: One commenter recommended that the reconciliation process 
with historical data should be visible to both the RAC and the 
provider.
    Response: States have certain flexibilities in which to design, 
procure, administer, and operate their RAC programs. While we decline 
to adopt the commenter's recommendation, we encourage States to adopt 
measures that will promote transparency and efficiency in the Medicaid 
RAC program.
    Comment: One commenter suggested that CMS revise its proposed 
methodology for RAC payment to permit State flexibility, allowing 
States the option to claim contingency fees for RACs consistent with 
current administrative FFP claiming protocols for existing TPL and non-
TPL overpayment recovery contracts. The State believes that requiring 
States to run an accounting process for RAC contingency fees that may 
differ from existing non-RAC overpayment recovery contingency fee 
claiming processes is administratively burdensome and invites 
opportunity for error.
    Response: In the proposed rule, we considered requiring States to 
treat RAC contingency fees at the administrative rate of 50 percent. 
However, we determined that the language in the legislation supported 
treating the fees at the FMAP rate applicable to the recovery. This 
provides a higher benefit for States than treating the fees at the 
administrative rate.
    Comment: One commenter indicated that the proposed rule does not 
specify that providers must request reimbursement for underpayments. 
The commenter further indicated that providers must be responsible and

[[Page 57836]]

accountable for their claims and the State should not be required to 
make payments without the provider submitting a claim.
    Response: As previously stated, we are concerned about provider 
participation in the Medicaid program as well as States making proper 
payments to providers. We believe that States should compensate 
providers for identified underpayments, consistent with State law. We 
are requiring States, in this final rule at Sec.  455.510(c)(3), to 
inform providers about underpayments that are identified by their 
Medicaid RACs.
    Comment: One commenter indicated that its Medicaid Management 
Information System (MMIS) only retains claims available for adjustment 
for two years. Additionally, it asserted that adjudicating claims or 
adjustments outside of the regulated time frames creates technical 
accounting and recording problems.
    Response: We understand the commenter's concerns. However, 
consistent with Sec.  433.322, States are required to maintain a 
separate record of all overpayment activities for each provider in a 
manner that satisfies the retention and access requirements of 45 CFR 
part 74, subpart D. However, we are finalizing at Sec.  455.508(f) that 
the maximum look-back period for claims review is three years. If a 
State's MMIS system only retains adjustable claims data for only two 
years, a State may request an exception from CMS through the SPA 
process. We believe this flexibility also enables States to address 
concerns pertaining to adjudication and adjustments.

I. Exceptions

    Comment: Several commenters recommended that CMS clarify its 
position on whether Medicaid RACs will review Medicaid managed care 
claims. Most, if not all, of these commenters recommended that CMS 
provide guidance exempting Medicaid managed care claims from review by 
Medicaid RACs, and focus only on fee-for-service claims. However, one 
commenter indicated that it interpreted the proposed rule to include 
Medicaid managed care claims within the scope of Medicaid RAC review. 
The commenter made several recommendations, including restating 
previous recommendations for Parts C and D of the Medicare program.
    Response: While the proposed rule was silent on the issue of 
whether managed care claims would be included in the scope of review by 
the Medicaid RACs, we clarify in the final rule that States may exclude 
Medicaid managed care claims from review by Medicaid RACs. We are 
finalizing at Sec.  455.506(a)(1) that Medicaid RACs will only be 
required to review fee-for-service claims until that time as a 
permanent Medicare managed care RAC program is fully operational or a 
viable State Medicaid model is identified, at which point, we may 
engage in future rulemaking with regard to the review of managed care 
claims by Medicaid RACs.
    Comment: One commenter suggested that CMS include an exemption for 
Medicaid payments made from the ``CMMI or other delivery system reform 
programs.''
    Response: We appreciate the commenter's suggestion regarding the 
Center for Medicare and Medicaid Innovation (CMMI) and other delivery 
reform programs CMS is implementing. States have the discretion to 
exclude review of claims that are submitted in connection with payment 
or delivery system reform programs until the time a viable RAC model is 
identified.
    Comment: One State recommended that CMS' final rule should exempt 
Medicaid RAC programs in States with less than 125,000 enrolled 
Medicaid beneficiaries. Additionally, other commenters suggested that 
States with low PERM error rates will experience limited recoveries 
from the RAC program. Therefore, the States should be exempt from 
establishing Medicaid RAC programs. Another commenter requested an 
exception to proposed Sec.  455.510(b)(3) and Sec.  455.510(b)(4) for 
States with low numbers of Medicaid providers and beneficiaries and/or 
expenditures. Finally, one commenter expressed its concern about 
repetitive audits leading to diminished provider access. The commenter 
continued that it will not be able to attract a RAC for less than 12.5 
percent, the contingency fee cap.
    Response: The Secretary has discretionary authority to grant 
exceptions from program requirements and complete exemptions from 
establishing a Medicaid RAC program, to a State, upon a State's 
submission of justification for its request. States were advised that 
they may request exceptions through the SPA process. We emphasize that 
complete exceptions will be granted rarely and under exceptional 
circumstances. States are timely notified as to whether their requests 
will be granted prior to the expiration of the 90 day clock.

J. ICR Comments

    Comment: One commenter anticipated that the appeals process will 
consume 100-200 hours per case at a minimum, rather than the 60 hours 
that we estimated.
    Response: We appreciated the comment, but each State's appeals 
process will vary, as will individual cases. Therefore, we have 
provided estimates in our analysis to capture this variance.
    Comment: One commenter asked for details on the elements that must 
be reported to CMS, and also for clarification on how and when the 
elements must be reported.
    Response: Section 455.502(c) of the final rule requires States to 
report to CMS certain elements regarding the effectiveness of their RAC 
programs. These elements include, but are not limited to, general 
program descriptors and program metrics to evaluate the effectiveness 
of their Medicaid RAC programs. We are currently developing these 
elements, and will share them with States via sub-regulatory guidance.
    Comment: One commenter estimated the full reporting requirement to 
take each State 10 through 15 hours per month to query, aggregate, and 
submit the data to CMS.
    Response: We understand the burden associated with this requirement 
includes the time and effort put forth by the State to aggregate data 
to report on the effectiveness of its RAC program.

K. RIA Comments

    Comment: Several commenters disagreed with our assertion in the 
proposed rule that most providers will experience limited financial 
impact from the Medicaid RAC program. The commenters stated that their 
member organizations have expended significant resources responding to 
RAC requests and many have hired additional staff to meet the demands 
of the Medicare RAC program. They anticipate that their costs will be 
exacerbated if the Medicaid RAC rule is not revised to incorporate 
policies necessary to avoid aggressive and overzealous RAC denials.
    Response: CMS has closely examined many of the lessons learned from 
the Medicare RAC demonstration in parallel with the current provisions 
of the permanent Medicare RAC program, and incorporated those best 
practices into this final rule. As a result, we believe this will limit 
the burden and associated financial impact on providers. We also 
clarify that Medicaid RACs will conduct audits of Medicaid providers 
for overpayments and underpayments, and not deny payments. In addition, 
we finalize a number of provisions that address providers' concerns, 
including those related to overzealous RAC auditors. For example, at 
Sec.  455.506(c), we finalize that States must coordinate

[[Page 57837]]

the recovery audit efforts of their RACs with other auditing entities. 
At Sec.  455.506(e), we require States to set limits on the number and 
frequency of medical records to be reviewed by the RACs, subject to 
requests for exceptions from RACs. At Sec.  455.508 (a), (b) and (c), 
we prescribe mandatory staffing requirements for RACs. At Sec.  
455.508(d), we require States and their RACs to develop an education 
and outreach program which includes notification to providers of audit 
policies and protocols. At Sec.  455.508(e), we require RACs to provide 
several mandatory customer service measures in their programs. At Sec.  
455.508(f), we prescribe a maximum look back period of 3 years from the 
date of the claim. At Sec.  455.508(g), we prohibit RACs from auditing 
claims that have already been audited or that are currently being 
audited by another entity. At Sec.  455.510(b)(3), we finalize that if 
a provider appeals a RAC overpayment determination and that 
determination is reversed, at any level, the RAC must return the 
contingency fees associated with that payment. We expect that these 
provisions will encourage RACs to perform their work with diligence and 
restraint. At Sec.  455.510(c)(2) and (c)(3), we require States to 
adequately incentivize RACs to detect underpayments and notify 
providers about underpayments that are identified by RACs, 
respectively. Lastly, we finalize at Sec.  455.512, the requirement for 
States to provide an adequate appeals process for providers. We are 
sensitive to the challenge that responding to audits and appeals in 
multiple States can present to providers that participate in multiple 
States' Medicaid programs.
    Comment: One commenter requested that CMS reconsider its statement 
that the proposed rule will have no significant impact on Medicaid 
providers and consider the resources and time that providers must 
devote to Medicaid RAC requests for medical records, appeals, etc. The 
commenter noted that CMS should also consider the exponential impact of 
this program when combined with other audit programs. The commenter 
urged CMS to take steps in the final rule to minimize these costs.
    Response: We are aware of the challenge of responding to multiple 
requests for audits for providers that serve in State Medicaid 
programs. Under section 1902(a)(42)(B)(ii)(IV)(cc) of the Act, States 
must coordinate their audit efforts with other contractors and entities 
performing audits or providers, including efforts with law enforcement. 
In an effort to minimize provider burden, we have included in this 
final rule at Sec.  455.508(g) that Medicaid RACs should not audit 
claims that have already been audited or are currently being audited by 
another entity as well as a provision at Sec.  455.506(e) requiring the 
State to set limits on the number and frequency of medical records to 
be reviewed by its RAC (subject to RAC requests for an exception to 
this requirement). Lastly, as detailed in the previous response, this 
final rule modeled several requirements on RACs based on the lessons 
learned from providers' past experience with the Medicare RAC 
demonstration. As a result, we believe this will limit the financial 
impact on providers.

IV. Provisions of the Final Regulations

    After consideration of the comments reviewed and further analysis 
of specific issues, we are adopting the provisions of the proposed rule 
as final with several revisions. Those provisions of the final rule 
that differ from the proposed rule are as follows:
     States may exclude Medicaid managed care claims from 
review by Medicaid RACs (Sec.  455.506(a)(1)).
     States must coordinate the recovery audit efforts of their 
Medicaid RACs with other auditing entities (Sec.  455.506(c)).
     States must make referrals of suspected fraud and/or abuse 
to the MFCU or other appropriate law enforcement agency (Sec.  
455.506(d)).
     States must set limits on the number and frequency of 
medical records to be reviewed by the Medicaid RACs subject to requests 
for exceptions made by the RACs (Sec.  455.506(e)).
     Each RAC must hire a minimum of 1.0 FTE Contractor Medical 
Director who is a Doctor of Medicine or Doctor of Osteopathy in good 
standing with the relevant State licensing authorities and has relevant 
work and educational experience. A State may seek to be excepted, in 
accordance with Sec.  455.516, from requiring its RAC to hire a minimum 
of 1.0 FTE Contractor Medical Director by submitting to CMS a written 
request for CMS review and approval (Sec.  455.508(b)).
     RACs must hire certified coders unless the State 
determines that certified coders are not required for the effective 
review of Medicaid claims (Sec.  455.508(c)).
     RACs must work with the State to develop an education and 
outreach program (including notification of audit policies and 
protocols) (Sec.  455.508(d)).
     RACs must provide minimum customer service measures 
including: Providing a toll-free customer service telephone number in 
all correspondence sent to providers, and staffing the toll-free number 
during normal business hours from 8:00 a.m. to 4:30 p.m. in the 
applicable time zone (Sec.  455.508(e)(1)); compiling and maintaining 
provider approved addresses and points of contact (Sec.  
455.508(e)(2)); mandatory acceptance of provider submissions of 
electronic medical records on CD/DVD or via facsimile at the providers' 
request (Sec.  455.508(e)(3)); notifying providers of overpayment 
findings within 60 calendar days (Sec.  455.508(e)(4)).
     RACs must not review claims that are older than 3 years 
from the date of the claim, unless it receives approval from the State 
(Sec.  455.508(f)).
     RACs should not audit claims that have already been 
audited or that are currently being audited by another entity (Sec.  
455.508(g)).
     If a provider appeals a Medicaid RAC overpayment 
determination and the determination is reversed, at any level, then the 
Medicaid RAC must return its contingency within a reasonable timeframe 
as prescribed by the State (Sec.  455.510(b)(3)).
     States must adequately incentivize the detection of 
underpayments (Sec.  455.510(c)(2)).
     States must notify providers of underpayments that are 
identified by the Medicaid RACs (Sec.  455.510(c)(3)).
     States must provide appeal rights under State law or 
administrative procedures to Medicaid providers that seek review of an 
adverse Medicaid RAC determination (Sec.  455.512).
    In addition to the inclusion of provisions in the final rule that 
differ from the proposed rule, we are retaining the following 
provisions, described below, as published in the proposed rule.
    We have retained proposed ``Subpart F--Medicaid Recovery Audit 
Contractors Program'' that will implement section 1902(a)(42)(B) of the 
Act, which sets forth provisions relating to States establishing 
recovery audit contractor programs in which States will contract with 1 
or more Medicaid RACs to audit Medicaid claims and to identify 
underpayments and identify and recover overpayments. We are also 
retaining the following sections:

A. Purpose (Sec.  455.500)

    In Sec.  455.500, we set forth the purpose of the new subpart F. 
The regulations will implement section 1902(a)(42)(B) of the Act that 
establishes the Medicaid RAC program.

B. Establishment of Program (Sec.  455.502)

    In Sec.  455.502(a), we establish the Medicaid RAC program as a 
measure for States to promote the integrity of the Medicaid program. At 
Sec.  455.502(b), we

[[Page 57838]]

require that States enter into contracts with one or more RACs to carry 
out the activities described in Sec.  455.506. At Sec.  455.502(c), we 
require that States report on certain elements describing the 
effectiveness of their Medicaid RAC program.

C. Definitions (Sec.  455.504)

    In Sec.  455.504(a), we define the Medicaid RAC program as a 
recovery audit contractor administered by a State to identify 
overpayments and underpayments and recoup overpayments. At Sec.  
455.504(b), we define the Medicare RAC program as a recovery audit 
contractor program administered by CMS to identify overpayments and 
underpayments and recoup overpayments.

D. Activities to be Conducted by Medicaid RACs and States (Sec.  
455.506)

    At Sec.  455.506(b), States will have discretion over the manner in 
which they coordinate with Medicaid RACs' for the recoupment of 
overpayments.

E. Eligibility Requirements for Medicaid RACs (Sec.  455.508)

    At Sec.  455.508(a), we provide that an entity must have the 
technical capability to carry out the activities described in Sec.  
455.506, including employing trained medical professionals to review 
Medicaid claims. At Sec.  455.508(i), we provide that RACs must meet 
other requirements as the State may require.

F. Payments to RACs (Sec.  455.510)

    At Sec.  455.510(a), fees paid to RACs must be made only from 
amounts recovered. At Sec.  455.510(b), we require the State to 
determine the contingency fee rate paid to a Medicaid RAC for the 
identification and recovery of overpayments. At Sec.  455.510(b)(1), we 
require that the contingency fee paid to Medicaid RACs be based on a 
percentage of the recovered overpayment amount. At Sec.  455.510(b)(2), 
States must determine at what stage of the audit process Medicaid RACs 
will receive their contingency fee. At Sec.  455.510(b)(4), except as 
provided in paragraph (b)(5), we will not provide FFP for any amount of 
contingency fee that exceeds the then highest contingency fee rate paid 
to a Medicare RAC. At Sec.  455.510(b)(5), on a case-by-case basis, we 
will review and consider substantially justified requests from States 
to pay Medicaid RAC(s) a contingency fee higher than the highest 
Medicare RAC contingency fee. At Sec.  455.510(c)(1), we require that 
States determine the fee paid to Medicaid RACs to identify 
underpayments.

G. Federal Share of State Expense for the Medicaid RAC Program (Sec.  
455.514)

    At Sec.  455.514(a), funds expended by States to carry out the 
Medicaid RAC program must be considered necessary for the proper and 
efficient administration of the States Plan or waivers of the Plan. 
Additionally, in Sec.  455.514(a), the Federal share of State expenses 
does not include fees paid. At Sec.  455.514(b), FFP is available to 
States for administrative costs of operation and maintenance of 
Medicaid RACs, subject to CMS' reporting requirements.

H. Exceptions From Medicaid RAC Programs (Sec.  455.516)

    At Sec.  455.516, States that seek to be excepted from any of the 
requirements of the Medicaid RAC program must submit to CMS a written 
justification for the request and obtain CMS approval.

I. Applicability to the Territories (Sec.  455.518)

    At Sec.  455.518, the provisions in Sec.  455.500 through Sec.  
455.516 are applicable to Guam, Puerto Rico, U.S. Virgin Islands, 
American Samoa and the Commonwealth of the Northern Mariana Islands.

V. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995, we are required to 
provide 30-day notice in the Federal Register and solicit public 
comment before a collection of information requirement is submitted to 
the OMB for review and approval. To fairly evaluate whether an 
information collection should be approved by OMB, section 3506(c)(2)(A) 
of the Paperwork Reduction Act of 1995 requires that we solicit comment 
on the following issues:
     The need for the information collection and its usefulness 
in carrying out the proper functions of our agency.
     The accuracy of our estimate of the information collection 
burden.
     The quality, utility, and clarity of the information to be 
collected.
     Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    We solicited public comment on each of these issues for the 
following sections of this document that contain information collection 
requirements (ICRs):

A. ICRs Regarding State Submission of Certain Elements Describing the 
Effectiveness of Their Medicaid RAC Programs (Sec.  455.502)

    Section 455.502(c) requires States to submit certain elements 
describing the effectiveness of their Medicaid RAC programs. These 
elements include, but are not limited to general program descriptors 
and program metrics that will evaluate effectiveness. The burden 
associated with this requirement will be the time and effort put forth 
by the State to aggregate data to report on the effectiveness of its 
RAC program. We estimate it will take each State 2 hours to perform 
this task. The estimated annual burden for this requirement is 112 
hours (56 States x 2 hours) at an estimated cost of $3,778.88 ($33.74/
hr labor x 112 hours). The work will be performed by a mid-level 
analyst whose salary is the average hourly salary as determined by the 
Bureau of Labor Statistics as of December 2010, not seasonally 
adjusted. This hourly wage reflects 48 percent fringe benefits and 
overhead costs.

B. ICRs Regarding State Justifications to Pay Higher Contingency Fees 
(Sec.  455.510)

    Section 455.510(b)(5) requires States to submit justifications to 
CMS to pay Medicaid RACs a contingency fee higher than the highest 
Medicare RAC. The burden associated with this requirement is the time 
and effort put forth by the State to prepare and submit a 
justification. We estimate it will take each State 60 hours to perform 
this task if they submit the justification. The estimated annual burden 
for this requirement is 3,360 hours (56 States x 60 hours) at an 
estimated total cost of $113,366.40 ($33.74/hr labor x 3,360 hours). 
The work will be performed by a mid-level analyst whose salary is the 
average hourly salary as determined by the United States Bureau of 
Labor Statistics as of December 2010, not seasonally adjusted. This 
hourly wage reflects 48 percent fringe benefits and overhead costs.

C. ICRs Regarding Medicaid RAC Provider Appeals (Sec.  455.512)

    Section 455.512 requires States to provide administrative appeal 
procedures for Medicaid providers that seek review of an adverse 
Medicaid RAC determination. The burden associated with this requirement 
is the time and effort put forth by the State to prepare and provide 
administrative appeal procedures. We estimate it will take each State 
60 hours to perform these tasks. The estimated annual burden for this 
requirement is 3,360 hours (56 States x 60 hours) at a cost of $192,696 
($57.35/hr labor x 3,360 hours). The work will be performed by an 
attorney whose salary is the average hourly salary as determined by the 
United States Bureau of Labor Statistics as of December 2010, not 
seasonally

[[Page 57839]]

adjusted. This hourly wage reflects 48 percent fringe benefits and 
overhead costs.

D. ICRs Regarding Federal Share of State Expense for the Medicaid RAC 
Program (Sec.  455.514)

    Section 455.514(b) provides that FFP will be available to States 
for the Federal share of State expenses for the Medicaid RAC program, 
subject to CMS' reporting requirements. The burden associated with a 
State reporting quarterly expenditure estimates is currently approved 
under OMB control number 0938-0067 with an expiration date of August 
31, 2011. CMS recently submitted its request for a 3-year extension of 
the August expiration date. This rule will not significantly affect the 
requirements under OMB  0938-0067. The Form CMS-64 is a 
collection of forms in which States are already required to report 
routine Medicaid recoveries to CMS on a quarterly basis. This task is 
accomplished electronically. The final rule requires States to account 
for, separately, Medicaid RAC overpayment recoveries and the 
corresponding contingency fees associated with the recoveries. We 
estimate that it will take each State 4 hours/quarterly to meet this 
requirement; therefore, the total annual burden associated with this 
requirement is 896 hours(56 States x 4 hours x 4 quarters) at an annual 
total estimated cost of $43,285.76($48.31/hour labor x 896 hours). The 
work will be performed by a computer systems analyst whose salary is 
the average hourly salary as determined by the United States Bureau of 
Labor Statistics as of December 2010, not seasonally adjusted. This 
hourly wage reflects 48 percent fringe benefits and overhead costs.

E. ICRs Regarding Exceptions From Medicaid RAC Programs (Sec.  455.516)

    Section 455.516 requires a State that is seeking an exception from 
any of the requirements of the Medicaid RAC program to submit a written 
justification to CMS. The burden associated with this requirement is 
the time and effort put forth by the State to prepare and submit a 
written justification for the request. We estimate it will take each 
State 20 hours to meet this requirement. During the SPA process, we 
received exception requests from 14 States. Therefore, the total annual 
burden associated with this requirement is 280 hours (14 responses x 20 
hours) at a cost of $9,447.20 ($33.74/hr labor x 280 hours). We 
estimate that the work was performed by a mid-level analyst whose 
salary is the average hourly salary as determined by the United States 
Bureau of Labor Statistics as of December 2010, not seasonally 
adjusted. This hourly wage reflects 48 percent fringe benefits and 
overhead costs.

[[Page 57840]]

[GRAPHIC] [TIFF OMITTED] TR16SE11.000

[[Page 57841]]

    If you comment on these information collection and recordkeeping 
requirements, please do either of the following:
    1. Submit your comments electronically as specified in the 
ADDRESSES section of this final rule; or
    2. Submit your comments to the Office of Information and Regulatory 
Affairs, Office of Management and Budget, Attention: CMS Desk Officer, 
[CMS-6034-F] Fax: (202) 395-6974; or E-mail: OIRA_submission@omb.eopage.gov.

VI. Regulatory Impact Analysis

A. Introduction

    We have examined the impacts of this rule as required by Executive 
Orders 12866 on Regulatory Planning and Review (September 30, 1993) and 
13563 on Improving Regulation and Regulatory Review (January 18, 2011). 
Executive Orders 12866 and 13563 direct agencies to assess all costs 
and benefits of available regulatory alternatives and, if regulation is 
necessary, to select regulatory approaches that maximize net benefits 
(including potential economic, environmental, public health and safety 
effects, distributive impacts, and equity). Executive Order 13563 
emphasizes the importance of quantifying both costs and benefits, of 
reducing costs, of harmonizing rules, and of promoting flexibility. A 
regulatory impact analysis (RIA) must be prepared for major rules with 
economically significant effects ($100 million or more in any one 
year). This final rule has been designated an ``economically 
significant'' rule under section 3(f)(1) of Executive Order 12866. In 
addition, this is a major rule under the Congressional Review Act (5 
U.S.C. 804(2)). Accordingly, the rule has been reviewed by the Office 
of Management and Budget.

B. Statement of Need

    Section 6411(a) of the Affordable Care Act amended and expanded 
section 1902(a)(42) of the Act to require States to establish Medicaid 
RAC programs by December 31, 2010, to contract with 1 or more 
contractors to audit Medicaid claims, and to identify underpayments and 
overpayments and collect overpayments. Section 1902(a)(42)(B) of the 
Act requires all States to establish Medicaid RAC programs, subject to 
the exceptions and requirements as the Secretary may require.
    Medicaid RACs are State programs designed to produce savings in 
State Medicaid expenditures by detecting improper payments to Medicaid 
providers. The majority of State expenditures will be derived from the 
contingency fee payments to Medicaid RACs.
    This final rule will: (1) Implements section 6411 of the Affordable 
Care Act and provides guidance to States related to Federal/State 
funding of State start-up, operation and maintenance costs of Medicaid 
RACs and the payment methodology for State payments to Medicaid RACs; 
(2) requires States to assure that adequate appeal processes are in 
place for providers to dispute adverse determinations made by Medicaid 
RACs; and (3) requires States to coordinate with other contractors and 
entities auditing Medicaid providers, as well as with State and Federal 
law enforcement agencies.

C. Overall Impact

    This final rule applies to States' requirement to contract with 
Medicaid RACs to perform audits of Medicaid providers on a contingency 
fee basis. The majority of anticipated savings, as a result of the 
provisions in this rule, are related to improper payments. However, as 
seen in the Medicare RAC Demonstration period, we expect a limited 
financial impact on most providers, as significant improper payments 
are relatively rare. The CMS Office of the Actuary (OACT) estimated the 
potential impact on Federal Medicaid costs and savings. OACT used the 
historical experience from the Medicare program to estimate potential 
savings to Medicaid. The estimates in the final rule differ from those 
in the proposed rule primarily as a result of the new implementation 
date of January 1, 2012, versus that of April 1, 2011, in the proposed 
rule. These estimates are highly uncertain, and as a result we offer 
estimates for FYs 2012 through 2016 to illustrate the potential effects 
of this program. As a result, OACT's estimates for FYs 2012 through 
2016 are presented in Table 2.

    TABLE 2--Estimated Medicaid Impact Resulting From the Expansion of the Recovery Audit Contractor Program
                                                 [FYs 2012-2016]
----------------------------------------------------------------------------------------------------------------
                                                     Estimated savings ($Millions) FYs 2012-2016
                                   -----------------------------------------------------------------------------
                                        2012         2013         2014         2015         2016      2012-2016
----------------------------------------------------------------------------------------------------------------
Federal share.....................          $60         $190         $280         $330         $360       $1,220
State share.......................           50          140          200          250          270          910
                                   -----------------------------------------------------------------------------
    Total.........................          110          330          480          580          630        2,130
----------------------------------------------------------------------------------------------------------------

D. Detailed Impacts

    The Medicaid RACs are part of a significant initiative to reduce 
waste and improper payments and recoup the improper payments. The 
estimated impact on the Medicaid program, as presented in Table 2, 
reflects an aggregate net savings of $2.13 billion for FYs 2012 through 
2016. This includes an estimated net savings of $1.22 billion to the 
Federal Medicaid program and a net savings of $910 million to the State 
Medicaid program, for the same time period of FYs 2012 through 2016. 
Because the Affordable Care Act requires States to contract with RACs 
on a contingency fee basis, out-of-pocket expenses should be minimized. 
Therefore, the majority of the program costs will be offset by 
overpayment recoveries.
    CMS experience from the Medicare RAC demonstration has shown that 
overpayment recoveries by Medicare RACs represented over 96 percent of 
the improper payments, while underpayments accounted for the remaining 
4 percent of the improper payments. (Medicare RAC Program: An 
Evaluation of the 3-Year Demonstration, January 2008). As a result, we 
continue to believe that States would not need to maintain a reserve of 
recovered overpayments to fund Medicaid RAC costs associated with 
identifying underpayments. We do, however, require States to maintain 
an accounting of amounts recovered and paid. States must report 
overpayments to CMS based on the net amount remaining after all fees 
are paid to the

[[Page 57842]]

Medicaid RAC. As discussed earlier, Medicaid RACs may only receive 
payments through the contingency fee arrangement made in accordance 
with these requirements and the limitations relating to the maximum 
contingency fee amount, unless a State receives an exception from CMS. 
No additional FFP is available for any other State payment made to the 
RACs. The treatment of the fees and expenditures are linked to specific 
statutory language implementing the Medicaid RAC requirements and not 
extended to Medicaid overpayment recoveries in other contexts.
    Regarding appeal costs, a State's appeal costs would be an 
allowable administrative cost under the State's Cost Allocation Plan. A 
provider's appeal costs are administrative costs that are not allowable 
under Medicaid. With regard to the impact upon providers, as discussed 
earlier in the preamble, we closely examined many of the lessons 
learned from the Medicare RAC demonstration, in parallel with the 
current provisions of the permanent Medicare RAC program and 
incorporated those best practices into this final rule. As a result, we 
believe this will limit the burden and associated financial impact on 
providers. Furthermore, we finalize a number of measures that address 
providers' concerns of overzealous RAC auditors. For example, at Sec.  
455.506(c), we finalize that States must coordinate the recovery audit 
efforts of their RACs with other auditing entities. At Sec.  
455.506(e), we require States to set limits on the number and frequency 
of medical records to be reviewed by the RACs, subject to requests for 
exceptions from RACs. At Sec.  455.508 (a), (b) and (c), we prescribe 
mandatory staffing requirements for RACs. At Sec.  455.508(d), we 
require States and their RACs to develop an education and outreach 
program which includes notification to providers of audit policies and 
protocols. At Sec.  455.508(e), we require RACs to provide several 
mandatory customer service measures. At Sec.  455.508(f), we prescribe 
a maximum look back period of 3 years from the date of the claim. At 
Sec.  455.508(g), we prohibit RACs from auditing claims that have 
already been audited or that are currently being audited by another 
entity. At Sec.  455.510(b)(3), we finalize that if a provider appeals 
a RAC overpayment determination and that determination is reversed, at 
any level, the RAC must return the contingency fees associated with 
that payment. At Sec.  455.510(c)(2) and (c)(3), we require States to 
adequately incentivize RACs to detect underpayments and notify 
underpayments that are identified by RACs, respectively. Lastly, we 
finalize at Sec.  455.512, the requirement for States to provide an 
adequate appeals process for providers.

E. Alternatives Considered

    In the proposed rule, we stated that States would have complete 
flexibility with regard to most, if not all, of the Medicaid program 
elements. We wanted to account for differences in the size of the 
State, Medicaid population, amount of expenditures, and other State-
specific characteristics, for example, allowing smaller States the 
flexibility to vary the requirements that would otherwise overburden 
them financially.
    For example, North Dakota, Wyoming, Rhode Island and Connecticut 
may not have the volume of Medicaid expenditures that a State such as 
California would have. Requiring a Connecticut RAC to hire 1.0 FTE 
Medical Director, we believe, would increase the labor costs to a RAC, 
and subsequently to the State. Initially, we considered allowing States 
to determine the appropriate personnel for RACs to hire. However, we 
received a number of comments regarding the need for 1.0 FTE Medical 
Director to oversee the review of claims in the RAC program due to the 
high overturn rates found in the Medicare RAC Demonstration period and 
numerous provider complaints. Accordingly, we decided to include the 
requirement of a minimum of 1.0 FTE Contractor Medical Director who is 
a Doctor of Medicine or Doctor of Osteopathy in good standing with the 
relevant State licensing authorities and has relevant work and 
educational experience. A State may seek to be excepted, in accordance 
with Sec.  455.516, from requiring its RAC to hire a minimum of 1.0 FTE 
Contractor Medical Director by submitting to CMS a written request for 
CMS review and approval.
    In addition, we considered giving States complete flexibility with 
regard to setting their own claims look-back periods based upon State 
specific laws and regulations regarding their claims look-back periods, 
which varied from three to seven years. As a result of many stakeholder 
comments, we reconsidered and now include a 3-year maximum look back 
period, similar to the Medicare RAC program. States will have the 
option of requesting exceptions to this provision.

F. Accounting Statement

    As required by OMB Circular A-4 available at http://www.whitehouse.gov/omb/circulars_a004_a-4, in Table 3, we have 
prepared an accounting statement table showing the classification of 
the impacts associated with the implementation of section 6411 in this 
final rule.

         Table 3--Accounting Statement: Classification of Estimated Net Savings, From FY 2012 to FY 2016
                                                 [in $Millions]
----------------------------------------------------------------------------------------------------------------
             Category                                                Transfers
----------------------------------------------------------------------------------------------------------------
                                        Year dollar               Units discount rate            Period covered
  Annualized monetized transfers  ------------------------------------------------------------------------------
                                           2010                  7%                 3%           FYs 2012-2016
----------------------------------------------------------------------------------------------------------------
                                   Primary Estimate....            -$233.9            -$239.6
����������������������������������
From.............................                         Federal Government to providers
����������������������������������
                                   Primary Estimate....            -$174.5            -$178.7
����������������������������������
From.............................                          State Governments to providers
----------------------------------------------------------------------------------------------------------------

VII. Regulatory Flexibility Act Analysis

    The Regulatory Flexibility Act (RFA) (15 U.S.C. 604), as modified 
by the Small Business Regulatory Enforcement Fairness Act of 1996 
(SBREFA) (Pub. L. 104-121), requires agencies to determine whether 
proposed or final rules would have a significant economic impact on a 
substantial number of small

[[Page 57843]]

entities and, if so, to prepare a Regulatory Flexibility Analysis and 
to identify in the notice of proposed rulemaking or final rulemaking 
any regulatory options that could mitigate the impact of the proposed 
regulation on small businesses. For purposes of the RFA, small entities 
include businesses that are small as determined by size standards 
issued by the Small Business Administration, nonprofit organizations, 
and small governmental jurisdictions). Individuals and States are not 
included in the definition of a small business entity.
    For purposes of the RFA, we assume that approximately 75 percent of 
Medicaid providers are considered small businesses according to the 
Small Business Administration's size standards (with total revenues of 
$35 million or less in any one year), and 80 percent are nonprofit 
organizations. Medicaid providers are required, as a matter of course, 
to follow the guidelines and procedures as specified in State and 
Federal laws and regulations. The Medicaid providers must retain 
accurate billing records for the requisite period of time. 
Additionally, Medicaid providers must cooperate in audits conducted by 
the State and/or Federal Governments and their agents. Lastly, the 
majority of the economic impacts associated with this final rule are a 
direct result of the recovery of improper payments. Therefore, the 
Secretary has determined that this final rule will not have a 
significant economic impact on a substantial number of small entities.
    In addition, section 1102(b) of the Act requires us to prepare a 
regulatory impact analysis if a rule may have a significant impact on 
the operations of a substantial number of small rural hospitals. This 
analysis must conform to the provisions of section 604 of the RFA. For 
purposes of section 1102(b) of the Act, we define a small rural 
hospital as a hospital that is located outside of a metropolitan 
statistical area and has fewer than 100 beds. For the same reason as 
Stated above, the Secretary has determined that this final rule will 
not have a significant impact on the operations of a substantial number 
of small rural hospitals.

VIII. Unfunded Mandates Reform Act Analysis

    Section 202 of the Unfunded Mandates Reform Act of 1995 (Pub. L. 
104-4) requires that agencies assess anticipated costs and benefits 
before issuing any rule whose mandates require spending in any one year 
of $100 million in 1995 dollars, updated annually for inflation. In 
2011, that threshold is approximately $136 million. This final rule 
applies to the States' requirement to procure Medicaid RACs to perform 
audits of Medicaid providers on a contingency fee basis. State 
expenditures associated with this final rule will initially involve 
directing or allocating personnel resources to procurement activities. 
Per the terms of the contracts, States will not be expending funds over 
$136 million for RACs to perform the contracts. Associated costs that 
may include the operation of RAC programs, collateral State personnel 
costs, and maintenance of records are not expected to exceed the $136 
million threshold. Therefore, this final rule is not anticipated to 
have an effect on State, local, or tribal governments in the aggregate, 
or by the private sector of $136 million or more.

IX. Federalism Analysis

    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a final rule (and subsequent final 
rule) that imposes substantial direct requirement costs on State and 
local governments, preempts State law, or otherwise has Federalism 
implications. We have reviewed this final rule under the threshold 
criteria of Executive Order 13132, Federalism, and have determined that 
it will not have substantial direct effects on the rights, roles, and 
responsibilities of States, local or tribal governments.

List of Subjects in 42 CFR Part 455

    Fraud, Grant programs-health, Health facilities, Health 
professions, Investigations, Medicaid, Reporting and recordkeeping 
requirements.
    For the reasons set forth in the preamble, the Centers for Medicare 
& Medicaid Services proposes to amend 42 CFR chapter IV as set forth 
below:

PART 455--PROGRAM INTEGRITY--MEDICAID

0
1. The authority citation for part 455 continues to read as follows:

    Authority:  Section 1102 of the Social Security Act (42 U.S.C. 
1302), section 1902(a)(42)(B) (42 U.S.C. 1396a (a)(42(B)).

0
2. New subpart F is added to part 455 to read as follows:
Subpart F--Medicaid Recovery Audit Contractors Program
Sec.
455.500 Purpose.
455.502 Establishment of program.
455.504 Definitions.
455.506 Activities to be conducted by Medicaid RACs and States.
455.508 Eligibility requirements for Medicaid RACs.
455.510 Payments to RACs.
455.512 Medicaid RAC provider appeals.
455.514 Federal share of State expense for the Medicaid RAC program.
455.516 Exceptions from Medicaid RAC programs.
455.518 Applicability to the territories.

Subpart F--Medicaid Recovery Audit Contractors Program

Sec.  455.500  Purpose.

    This subpart implements section 1902(a)(42)(B) of the Act that 
establishes the Medicaid Recovery Audit Contractor (RAC) program.

Sec.  455.502  Establishment of program.

    (a) The Medicaid Recovery Audit Contractor program (Medicaid RAC 
program) is established as a measure for States to promote the 
integrity of the Medicaid program.
    (b) States must enter into contracts, consistent with State law and 
in accordance with this section, with one or more eligible Medicaid 
RACs to carry out the activities described in Sec.  455.506 of this 
subpart.
    (c) States must comply with reporting requirements describing the 
effectiveness of their Medicaid RAC programs as specified by CMS.

Sec.  455.504  Definitions.

    As used in this subpart--
    Medicaid RAC program means a recovery audit contractor program 
administered by a State to identify overpayments and underpayments and 
recoup overpayments.
    Medicare RAC program means a recovery audit contractor program 
administered by CMS to identify underpayments and overpayments and 
recoup overpayments, established under the authority of section 1893(h) 
of the Act.

Sec.  455.506  Activities to be conducted by Medicaid RACs and States.

    (a) Medicaid RACs will review claims submitted by providers of 
items and services or other individuals furnishing items and services 
for which payment has been made under section 1902(a) of the Act or 
under any waiver of the State Plan to identify underpayments and 
overpayments and recoup overpayments for the States.
    (1) States may exclude Medicaid managed care claims from review by 
Medicaid RACs.
    (b) States may coordinate with Medicaid RACs regarding the 
recoupment of overpayments.
    (c) States must coordinate the recovery audit efforts of their RACs 
with other auditing entities.
    (d) States must make referrals of suspected fraud and/or abuse, as

[[Page 57844]]

defined in 42 CFR 455.2, to the MFCU or other appropriate law 
enforcement agency.
    (e) States must set limits on the number and frequency of medical 
records to be reviewed by the RACs, subject to requests for exception 
from RACs to States.

Sec.  455.508  Eligibility requirements for Medicaid RACs.

    An entity that wishes to perform the functions of a Medicaid RAC 
must enter into a contract with a State to carry out any of the 
activities described in Sec.  455.506 under the following conditions:
    (a) The entity must demonstrate to a State that it has the 
technical capability to carry out the activities described in Sec.  
455.506 of this subpart. Evaluation of technical capability must 
include the employment of trained medical professionals, as defined by 
the State, who are in good standing with the relevant State licensing 
authorities, where applicable, to review Medicaid claims.
    (b) The entity must hire a minimum of 1.0 FTE Contractor Medical 
Director who is a Doctor of Medicine or Doctor of Osteopathy in good 
standing with the relevant State licensing authorities and has relevant 
work and educational experience. A State may seek to be excepted, in 
accordance with Sec.  455.516, from requiring its RAC to hire a minimum 
of 1.0 FTE Contractor Medical Director by submitting to CMS a written 
request for CMS review and approval.
    (c) The entity must hire certified coders unless the State 
determines that certified coders are not required for the effective 
review of Medicaid claims.
    (d) The entity must work with the State to develop an education and 
outreach program, which includes notification to providers of audit 
policies and protocols.
    (e) The entity must provide minimum customer service measures 
including:
    (1) Providing a toll-free customer service telephone number in all 
correspondence sent to providers and staffing the toll-free number 
during normal business hours from 8:00 a.m. to 4:30 p.m. in the 
applicable time zone.
    (2) Compiling and maintaining provider approved addresses and 
points of contact.
    (3) Mandatory acceptance of provider submissions of electronic 
medical records on CD/DVD or via facsimile at the providers' request.
    (4) Notifying providers of overpayment findings within 60 calendar 
days.
    (f) The entity must not review claims that are older than 3 years 
from the date of the claim, unless it receives approval from the State.
    (g) The entity should not audit claims that have already been 
audited or that are currently being audited by another entity.
    (h) The entity must refer suspected cases of fraud and/or abuse to 
the State in a timely manner, as defined by the State.
    (i) The entity meets other requirements as the State may require.

Sec.  455.510  Payments to RACs.

    (a) General. Fees paid to RACs must be made only from amounts 
recovered.
    (b) Overpayments. States must determine the contingency fee rate to 
be paid to Medicaid RACs for the identification and recovery of 
Medicaid provider overpayments.
    (1) The contingency fees paid to Medicaid RACs must be based on a 
percentage of the overpayment recovered.
    (2) States must determine at what stage in the Medicaid RAC audit 
process, after an overpayment has been recovered, Medicaid RACs will 
receive contingency fee payments.
    (3) If a provider appeals a Medicaid RAC overpayment determination 
and the determination is reversed, at any level, then the Medicaid RAC 
must return the contingency fees associated with that payment within a 
reasonable timeframe, as prescribed by the State.
    (4) Except as provided in paragraph (5) of this section, the 
contingency fee may not exceed that of the highest Medicare RAC, as 
specified by CMS in the Federal Register, unless the State submits, and 
CMS approves, a waiver of the specified maximum rate. If a State does 
not obtain a waiver of the specified maximum rate, any amount exceeding 
the specified maximum rate is not eligible for FFP, either from the 
collected overpayment amounts, or in the form of any other 
administrative or medical assistance claimed expenditure.
    (5) CMS will review and consider, on a case-by-case basis, a 
State's well-justified request that CMS provide FFP in paying a 
Medicaid RAC(s) a contingency fee in excess of the then-highest 
contingency fee paid to a Medicare RAC.
    (c) Underpayments. (1) States must determine the fee paid to a 
Medicaid RAC to identify underpayments.
    (2) States must adequately incentivize the detection of 
underpayments.
    (3) States must notify providers of underpayments that are 
identified by the RACs.

Sec.  455.512  Medicaid RAC provider appeals.

    States must provide appeal rights under State law or administrative 
procedures to Medicaid providers that seek review of an adverse 
Medicaid RAC determination.

Sec.  455.514  Federal share of State expense of the Medicaid RAC 
program.

    (a) Funds expended by States for the operation and maintenance of a 
Medicaid RAC program, not including fees paid to RACs, are considered 
necessary for the proper and efficient administration of the States' 
plan or waivers of the plan.
    (b) FFP is available to States for administrative costs of 
operation and maintenance of Medicaid RACs subject to CMS' reporting 
requirements.

Sec.  455.516  Exceptions from Medicaid RAC programs.

    A State may seek to be excepted from some or all Medicaid RAC 
contracting requirements by submitting to CMS a written justification 
for the request for CMS review and approval through the State Plan 
amendment process.

Sec.  455.518  Applicability to the territories.

    The aforementioned provisions in Sec.  455.500 through Sec.  
455.516 of this subpart are applicable to Guam, Puerto Rico, U.S. 
Virgin Islands, American Samoa, and the Commonwealth of the Northern 
Mariana Islands.

    Authority: (Catalog of Federal Domestic Assistance Program No. 
93.778, Medical Assistance Program)

    Dated: May 6, 2011.
Marilyn Tavenner,
Principal Deputy Administrator and Chief Operating Officer, Centers for 
Medicare & Medicaid Services.

    Approved: August 9, 2011.
Kathleen Sebelius,
Secretary, Health and Human Services.
[FR Doc. 2011-23695 Filed 9-14-11; 8:45 am]
BILLING CODE 4120-01-P
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