Opinion ID: 808282
Heading Depth: 3
Heading Rank: 2

Heading: The Recovery Audit Contractor Program

Text: More than one billion Medicare claims are processed each year. Ctrs. for Medicare & Medicaid Servs., The Medicare Recovery Audit Contractor (RAC) Program: An Evaluation of the 3-Year Demonstration 9 (2008) [hereinafter RAC Evaluation Report]. Thousands are paid improperly, most commonly because they are for services that were not medically necessary or were improperly coded. See id. at 6-7. CMS makes efforts to calculate, reduce, and prevent improper payments. Yet improper payments for Medicare constitute a high percentage, more than ten percent, of all payment errors in federal programs. Id. To supplement CMS’s efforts to protect the fiscal integrity of the Medicare program, Congress enacted the RAC program. Congress told the Secretary to conduct a demonstration project using RACs to “identify[ ] underpayments and overpayments and recoup[ ] overpayments under the medicare program.” Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (“MMA”), Pub. L. No. 108-173, § 306(a), 117 Stat. 2066, 2256 (2003). Congress directed the Secretary to “examine the efficacy of [the use of RACs] with respect to duplicative payments, accuracy of coding, and other payment policies in which inaccurate payments arise.” Id. Contractors are required to follow Federal laws, regulations and manual instructions in their business operations. As noted in the interim final rule in response to a similar comment on the proposed rule ([70 Fed. Reg. at 11,453]), our regulations require that contractors abide by the good cause standard for reopening actions as set forth in § 405.980(b) and § 405.986. CMS conducts audits and evaluations of contractor performance in order to assess compliance with Medicare policies. Thus, the necessary monitoring and enforcement mechanisms are already in place and we do not believe it is necessary to add enforcement provisions to these regulations. 74 Fed. Reg. at 65,312. 11018 PALOMAR MEDICAL CENTER v. SEBELIUS § 306(a)(3). The statute specified the scope and duration of the RAC demonstration project—at least two states having high per capita utilization of Medicare and not longer than three years—and certain qualifications for RACs, and also permitted payment to RACs on a contingent basis. See id. § 306(a)(1), (b), (d). Congress decided to rest on the Secretary’s expertise and did not give the Secretary further direction on the means of implementing the RAC program. The RAC demonstration project began in March 2005 and ended in March 2008. RAC Evaluation Report 11, 14. CMS selected three states, California, New York, and Florida, and three RACs; each RAC had jurisdiction in a single state. Id.10 Under the demonstration project, RACs reviewed paid Medicare claims to identify and correct improper payments. They were bound by Medicare policies, regulations, local and national coverage determinations, and manual instructions. Id. at 11. During the demonstration, CMS gave each RAC Medicare claims data from 2001 through 2007. Id. at 12. CMS did not specify a procedure for analyzing the claims data. Rather, each RAC used its own methodology to identify claims that “clearly” contained errors resulting in improper payments and claims that “likely” contained such errors. Id. In cases of clear improper payments, such as duplicate claims, RACs performed “automated review,” where they notified the provider of any underpayment or overpayment amount. Id. In cases of likely improper payments, RACs performed “complex review,” where they requested medical records from the provider to further review the claim and then made a determination on the accuracy of payment. Id. RAC determinations constituted “initial determinations” that could be appealed to a fiscal intermediary, QIC, ALJ, MAC, and federal district court. 10 In 2007, CMS added three additional states to the demonstration project, one to each RAC’s jurisdiction. RAC Evaluation Report 11. PALOMAR MEDICAL CENTER v. SEBELIUS 11019 Through the demonstration project, RACs successfully corrected more than $1 billion in improper Medicare payments: about $980 million in overpayments collected from providers and about $38 million in underpayments repaid to providers. Id. at 15. The net savings returned to the Medicare Trust Funds, after subtracting underpayments repaid, amounts overturned on appeal, and costs of operating the RAC demonstration, was nearly $694 million. In light of the demonstration project’s success, Congress made the RAC program a permanent part of the Medicare Integrity Program and expanded its coverage to all states. 42 U.S.C. § 1395ddd(h)(1), (3). C. The Facts Underlying Palomar’s Claims and Appeal In June 2005, Palomar provided inpatient rehabilitation facility (“IRF”) services to John Doe, a 79-year-old man who had undergone a right total hip arthroplasty. On July 27, 2005, a fiscal intermediary paid Palomar’s claim of $7,992.92 for the IRF services provided to Doe.11 Under the RAC demonstration project, the RAC for California, PRG-Schultz (“the RAC”), selected Palomar’s claim for complex review. On April 27, 2007, CMS sent Palomar a letter notifying it that the RAC had selected one or more of its claims for review. On the same date, the RAC sent Palomar a letter requesting medical records and documentation to support the medical necessity of Doe’s IRF stay. The letter said that the request was “due to a recent review and discovery of potential overpayment of your Medicare paid claim(s).” Palomar tendered the requested records and documentation, and on July 10, 2007, the RAC notified Palomar of its revised determination of overpayment because Doe’s rehabilitation in 11 The amount in controversy here is not a large figure in itself, but the lawfulness of the procedures used to determine that this was an overpayment has implications for other claims. 11020 PALOMAR MEDICAL CENTER v. SEBELIUS an inpatient hospital facility was “not reasonable and necessary.” See 42 U.S.C. § 1395y(a)(1)(A). The RAC told Palomar that it had to repay the overpayment amount. Decisions at four levels of administrative review affirmed the RAC’s initial determination of overpayment. A redetermination by a fiscal intermediary and a reconsideration by a QIC each held that the rehabilitation services were not medically necessary and excessive because they were given in a hospital instead of a less intensive setting such as a skilled nursing facility. The ALJ next agreed that Palomar’s services were not medically reasonable and necessary, though it gave relief on the ground that there was not good cause for the reopening by the RAC.12 The MAC then reversed the ALJ’s decision, concluding that (1) neither the ALJ nor the MAC had jurisdiction to assess good cause for reopening because the RAC’s decision to reopen was not subject to the administrative appeals process,13 and (2) the services were not medically reasonable and necessary. Palomar appealed the MAC’s decision on the reviewability of the reopening to the district court, but did not challenge the MAC’s decision that the IRF services were not reasonable and necessary. Palomar and the Secretary filed cross motions for summary judgment, and the district court referred the case