Recovery auditing has been used in various industries, including health care, to identify and collect overpayments for about 40 years. Private insurance companies, managed care plans, and employee group health plans contract with recovery auditors to review payments made. Typically, recovery auditing contractors are paid a contingency fee based on a percentage of the overpayments collected. Fees vary depending on such factors as the types of overpayment involved and the degree of difficulty associated with identifying and collecting them. Contractors play an essential role in the Medicare program. Since the program’s inception in 1965, Medicare claims administration contractors, then known as fiscal intermediaries and carriers, have conducted its claims administration activities. In addition, CMS also uses other contractors to conduct Medicare functions, such as to investigate instances of potential fraud and develop cases for referral to law enforcement and to answer beneficiary inquiries through the 1-800-Medicare help line. At present, CMS is in the midst of the largest transition of its claims administration contracts since the program was established. The MMA required CMS to use competitive procedures to select new entities called Medicare Administrative Contractors (MACs) to conduct claims administration activities that had been conducted by fiscal intermediaries and carriers. Through February 2005, CMS contracted with approximately 51 fiscal intermediaries and carriers that processed and paid claims, conducted automated pre-payment and limited post-payment review of claims, handled the first level of provider appeals of denied claims, enrolled providers in Medicare, and audited providers’ cost reports. To address improper billing, these Medicare claims administration contractors also performed trend analysis of provider billing patterns, developed strategies to address improper billing through systems edits or provider education and claims review, helped implement CMS-issued national coverage determinations (NCD), and developed local coverage determinations (LCD). By the end of the transition from fiscal intermediaries and carriers to MACs, CMS will have transferred all of these tasks to 15 MACs that will handle Part A claims and Part B claims with the exception of durable medical equipment (DME) claims, which will be processed by four specialized DME MACs. As of September 2009, CMS made an initial award decision on all the MAC contracts and has implemented 13. Because the transition is not completed, the current Medicare contracting environment includes fiscal intermediaries, carriers, and MACs, any one of which we refer to as Medicare claims administration contractors for this report. Claims Review in Medicare Medicare claims administration contractors review Medicare claims both before and after payment using similar automated and complex processes. CMS’s use of recovery auditing in the RAC demonstration project augmented existing Medicare claims administration contractor pre- and post-payment claims review efforts. While Medicare claims administration contractors have the authority to review claims they initially paid, this is only one of the many functions they perform. Further, because the Medicare claims administration contractors receive more than 1.2 billion claims per year (the equivalent of 4.5 million claims per work day), it is impractical, according to CMS, for these contractors to manually review more than a small fraction of claims—either before or after payment. Recovery audit contractors, in contrast, focus exclusively on post-payment claims review. Medicare claims administration contractors and the RACs generally use the same processes to review claims: Automated reviews use systems edits to check claims for evidence of improper coding or other mistakes. Medicare claims administration contractors may use automated reviews before payment to deny claims, or to flag claims that require additional non-automated review before payment. RACs use automated reviews after payment to analyze paid claims and identify those that were or could have been paid improperly. Complex reviews rely on licensed medical professionals to manually examine a claim and any related documentation, including paper files, to determine whether the service was covered and was reasonable and necessary. Complex reviews conducted by a Medicare claims administration contractor or a RAC involve an examination of the medical records associated with a service, which the provider submits for review. CMS implemented the RAC demonstration project to test whether recovery auditing would effectively identify additional improper payments that could be recouped. In March 2005, CMS selected three RAC contractors to conduct claims reviews in the three states with the highest per-capita Medicare utilization rates—California, Florida, and New York. In July 2007, CMS expanded the demonstration project to three additional states—Arizona, Massachusetts, and South Carolina. The demonstration project ended in March 2008. CMS initially provided the RACs with 4 years of claims data in their jurisdictions, followed by an additional 3 months of claims each quarter for the rest of the demonstration project. CMS gave the demonstration RACs a total of 1.2 billion claims that they could review. To prevent the RACs from auditing those claims that previously underwent complex review by a Medicare claims administration contractor or other contractor, CMS established a data warehouse that contained information on which claims were unavailable for RAC review. During the demonstration project, the RACs were required to use automated and complex review processes using the same Medicare policies and regulations as CMS’s Medicare claims administration contractors to identify improper payments. The RACs used their own software to analyze paid claims and identify those that were or could have been paid improperly. For example, claims indicating duplicate payments could be identified by automated analysis alone. In other cases, the RACs identified claims likely to contain errors and conducted complex reviews. (See fig. 1 for a depiction of the claims review process.) In these cases, the RACs requested that providers submit the associated medical records for review. If the RAC found an improper payment, it notified the provider and the Medicare claims administration contractor responsible for recouping the overpayments or repaying an underpayments. Providers could appeal RAC determinations through the established Medicare appeals process, which included a first-level review conducted by the Medicare claims administration contractors. Two years into the demonstration project, CMS initiated a series of vulnerability calls, conference calls between the RACs and the Medicare claims administration contractors. These calls enabled the RACs to provide information about the vulnerabilities they identified that resulted in improper payments and to highlight situations where corrective action might be needed. Although a CMS official told us it was not required, the Medicare claims administration contractors could consider RAC-identified vulnerabilities when developing their strategies to reduce improper payments. If a Medicare claims administration contractor determined that a RAC-identified vulnerability was widespread in its region, it could choose to take several corrective actions. A Medicare claims administration contractor could: (1) conduct provider outreach and education, (2) develop or revise local coverage determinations to clarify what services were reasonable and necessary in that jurisdiction, and (3) initiate additional service-specific prepayment edits in its local claims processing system. In addition, CMS could initiate a nationwide corrective action, such as implementing a national system edit, reissue instructions for coding a claim, or develop a national coverage determination. CMS also could provide outreach and education on critical issues to providers directly through its Special Open Door Forums teleconferences, and presentations at national meetings. In its June 2008 evaluation report, CMS stated that the demonstration project corrected $1.02 billion in improper payments from the three claim RACs—$980.0 million in overpayments and $37.8 million in underpayments—as of March 27, 2008, and returned $693.6 million to the Medicare Trust Funds. Eighty-five percent of the overpayments collected were for services detailed on inpatient hospital claims. Common types of improper payments were for claims determined to be: coded incorrectly, lacking sufficient documentation, or medically unnecessary. However, the RACs collected the majority of these improper payments in the last quarter of the demonstration project, and many provider appeals had not been decided or even filed by the end of the demonstration project. The final outcome of the appeals process, which can take more than two years, could decrease the savings attributed to the demonstration project. CMS’s report also discussed several changes the agency made prior to the start of the RAC national program. (See app. I.) In 2008, following the mandate to create a national program, CMS made initial awards of contingency-fee contracts to four RACs, each with responsibility for reviewing claims in one of four geographic regions. CMS launched the RAC national program in two stages with outreach activities beginning in 24 states on March 1, 2009, and the remaining states starting in August 2009 or later. (See fig. 2.) RAC claim reviews in the national program involve the same processes of automated and complex review of claims as during the demonstration project, and the Medicare claims administration contractors are responsible for recoupments, claims adjustments, and provider outreach and education. The four regional RACs also are required to conduct outreach to providers about the purpose of the RAC program, assist CMS with the development of an improper payment prevention plan, and support the agency regarding any overpayments appealed by providers. The RACs are expected to conduct outreach to providers in each state in coordination with CMS and include the appropriate Medicare claims administration contractor in each state in its region. In addition, RACs are required to compare the claims proposed for review with the claims in the data warehouse to ensure that a Medicare claims administration contractor or other contractor had not previously audited the claims or that RAC activities would not interfere with potential fraud investigations. From March 2009 through June 2009, the RACs’ activities included accessing claims data from CMS and convening meetings with the providers in the states in their regions to explain the RAC program. In June 2009, CMS announced a gradual implementation of claims review activities. CMS permitted RACs to begin automated reviews as of June 2009. RACs will be permitted to conduct complex reviews to assess medical necessity of DME claims in fiscal year 2010 and complex review of other claims for medical necessity in calendar year 2010. (See fig. 3 for a timeline for the RAC program.)