About three-quarters of all Medicare beneficiaries receive their care on a fee-for-service basis, with providers submitting claims for payment for each service provided. CMS contracts with claims administration contractors—primarily MACs—to process claims from over 1 million hospitals, physicians, and other health care providers. In fiscal year 2011, MACs and other claims administration contractors processed about 1.2 billion claims. Medicare claims administration contractors have had a role in determining coverage since 1965, when the Medicare program was enacted. At that time, Congress arranged for many Medicare functions to be contracted out to private insurers to allow the program to be implemented rapidly by organizations already processing claims for hospitals and physicians. Medicare law defines the categories of services covered by the program and provides the Secretary of the Department of Health and Human Services (HHS) with the authority to specify which services within these categories are covered and under what conditions.delegates this responsibility to CMS, which, in turn, carries out some of these responsibilities through MACs. Consistent with Medicare law, CMS sets national coverage, payment, and coding policies regarding when and how services will be covered by Medicare, as well as coding and billing The Secretary requirements for claims. CMS develops or implements the following types of national policies: NCDs, which CMS typically develops for services that have the potential to affect a large number of beneficiaries and that have the greatest effect on the Medicare program. For example, this can include new technologies introduced into health care practice, such as use of Positron Emission Tomography scans for diagnostic purposes. Development of NCDs is a lengthy process, which requires review of clinical evidence and allows for public comment. According to CMS, the agency has the resources to develop approximately 12 NCDs per year. As of February 2012, there were 328 NCDs. National payment policies that specify how payment will be made for covered services in certain situations—such as how physicians who collaborate on providing the same service to a beneficiary will be paid. National Correct Coding Initiative (NCCI) coding policies, which aim to reduce inappropriate payments through the use of automated edits that deny improperly coded claims. NCCI edits include code-pair edits, which deny payment for services that should not be billed together. NCCI edits also include Medically Unlikely Edits (MUE), which deny payment for services where the quantity billed is at a level not likely to be provided under normal medical practice, such as daily doses of drugs higher than the maximum amounts in the prescribing information or services that are anatomically impossible, such as more than one appendectomy on the same beneficiary. CMS allows exceptions to MUEs and some code-pair edits when providers believe the services provided are clinically appropriate. In such cases, special codes called modifiers are included on the claim to indicate why the services were clinically appropriate. MACs may develop local coverage policies as long as these policies are consistent with national policy. MACs develop the following types of local coverage policies: LCDs, which specify the circumstances under which services will be covered in a MAC’s jurisdiction. According to CMS, allowing MACs to develop LCDs allows for timely local reaction to changes in the practice of medicine. MACs also use LCDs to place limits on services that may be overused or abused in their jurisdictions. Before implementing or revising an LCD, a MAC must review clinical evidence and incorporate the information reviewed into the proposed LCD, provide notice of proposed changes on its website, and, in some cases, seek public input from potentially affected individuals or organizations, such as physicians whose billing could be affected by the policy. There are currently thousands of LCDs. Limits on quantities of services that will be covered in a MAC’s jurisdiction. A quantity limit may be included within an LCD or developed separately as a Clinically Unlikely Edit (CUE). CMS and its contractors have developed and implemented various types of prepayment edits based on national and local coverage policies. (See table 1.) MACs are responsible for processing and paying claims, generally in specific geographic jurisdictions, in compliance with coverage and payment policies. Health care providers generally submit claims to the MAC responsible for the geographic area where the services were delivered or the beneficiary resides.standardized coding system, known as the Healthcare Common Procedure Coding System (HCPCS), to identify the medical services, Providers submit claims using a equipment, and other goods provided.patient diagnoses, using a different coding system called the International Classification of Diseases (ICD). Medicare fee-for-service claims processing includes several basic steps that involve three types of systems: MAC front-end systems, shared systems, and the Common Working File (CWF). . Claims are submitted to MACs, whose front- end computer systems perform automated checks to determine whether claims meet certain requirements, such as that the data are complete. Shared systems. Claims that meet the initial requirements in the front- end systems are sent to one of three shared systems—depending on the type of claim—where they are subjected to prepayment edits based on coverage and payment policy criteria. Claims that do not meet these criteria are either automatically denied or flagged for review by trained staff. These systems also verify that providers are enrolled in Medicare. Claims that are not denied by automated edits or suspended for manual review by manual edits in the shared systems are then sent to the CWF, the central CMS system that authorizes payment. . The CWF verifies beneficiary eligibility, coordinates Part A and Part B benefits, and determines the extent of Medicare’s responsibility for payment, based on such factors as whether beneficiaries’ deductibles have been met or utilization limits have been reached. From there, claims are returned to the relevant shared system for final processing and then payments are sent to providers. The process of determining whether claims are consistent with Medicare coverage, payment, and medical coding policies—which includes the application of edits based on these policies, as well as manual review of flagged claims—is known as the medical review process. Of the two categories of prepayment edits used by MACs in this process— automated and manual—automated are less resource intensive. CMS policy requires that automated edits be used whenever possible. However, many improper claims can be identified only through more costly manual review, because staff may have to review associated medical records and claims history or exercise clinical judgment to determine whether a service is reasonable and necessary and therefore should be approved for payment. CMS officials indicated that there are about 17,000 prepayment edits related to medical coverage issues in PIMR. However, some edits—in particular, those that require manual review—may not be in use at any given time for various reasons, such as the staff costs associated with manual review, or because changes in provider behavior make the edit unnecessary. In addition, edits can vary in complexity and the policy issues covered, since some automated edits address only a portion of one coverage policy, while other automated edits address multiple policies. There are limitations to the use of prepayment edits and associated manual review as medical review strategies because some claims can be identified as improper only after a payment is made.recovery audit contractors (RAC) to find and correct overpayments and underpayments after claims have been processed. Although some of the improper payments identified by RACs could have been prevented by prepayment edits, others can be identified only after payment through review of medical records. CMS requires RACs to provide information, based on their analyses, about vulnerabilities, including those that could be addressed through prepayment edits. CMS’s oversight of MACs is governed by the terms of the MACs’ contracts, which in turn reflect provisions of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA). The MMA includes a requirement for CMS to use competitive procedures to select contractors to process claims; to develop performance standards for these contractors, including standards for customer satisfaction; and to provide incentives for these contractors to provide high-quality service. CMS established the MAC contracts as cost-plus-award-fee contracts, a type of cost-reimbursement contract designed to provide sufficient motivation to encourage excellence in contract performance.Specifically, a MAC may earn an incentive, known as an award fee, based on performance, in addition to reimbursement for allowable costs and a base fee for the contract, which is fixed at the inception of the contract. Under the terms of these contracts, CMS sets requirements for MACs with respect to prepayment edits and other aspects of the medical review process. In general, CMS requires MACs to target medical review to areas that pose the greatest financial risk to the Medicare program and where their efforts are likely to produce the best return on investment, and also to implement automated prepayment edits whenever appropriate. CMS also requires MACs to assess the effectiveness of their edits and to submit their medical review strategies to CMS for review and approval. However, MACs have considerable discretion in developing local coverage policies and in deciding how to implement edits to address both local and national coverage policies. CMS assesses MACs’ performance in part through its Quality Assurance Surveillance Plan (QASP) review and its Award Fee Plan review. For the QASP review, which is generally conducted annually, CMS evaluates each MAC’s performance against a MAC-specific subset of performance standards in accordance with the statement of work and other requirements specified in related CMS policy documents. The Award Fee Plan identifies the criteria upon which the MAC will be evaluated and provides an explanation of when the MAC can potentially earn an incentive based on its performance. On an annual basis, CMS creates an award fee plan for each MAC that contains metrics that are generally more challenging to achieve than the requirements outlined in the statement of work.