Recovery Audit Contractors (RACs) have identified $592.5 million is improper payments to Medicare providers during the first three quarters of FY2011, October 2009 thru June2011, according to new figures published by The Centers for Medicare and Medicaid Services (CMS) on their public website in a document entitled “July 2011 FFS Update [PDF, 217 KB].” All the improper payments identified were made during a 36-month look-back period, which is the current limit set by CMS for the RACs.

Recovery Audit Contractors (RACs) have identified $592.5 million is improper payments to Medicare providers during the first three quarters of FY2011, October 2009 thru June2011, according to new figures published by The Centers for Medicare and Medicaid Services (CMS) on their public website in a document entitled “July 2011 FFS Update [PDF, 217 KB].” All the improper payments identified were made during a 36-month look-back period, which is the current limit set by CMS for the RACs.

Significant Growth Achieved

According to the Quarterly Newsletter, a total of $233.4 million in overpayments were collected during the 3^rd quarter of FY2011 alone, as well as $55.9 million in underpayments for the same period.

Chart 1, below, shows the collections for FY2010, plus each quarter of FY2011, and projects an estimate for the last quarter of FY2011, based upon the previous quarters’ trend. [Ed.Note -- The projection is not part of the report by CMS, and is simply an estimate made by The RAC Shadow™.]

It is interesting to note that the percentage of underpayments corrected is indeed growing with time.

Chart 2, below, shows the corrections made during the 3^rd quarter of FY2011 only. Obviously, for whatever reason, Region D, administered by HDI, is far outpacing the other contractors in total payments corrected. Also, notice that about 25% of HDI’s total corrections are underpayments, and make up a significant portion of their total corrections.

Although many industry observers have considered Connolly Healthcare to be the more aggressive of the four RACs, it is obvious that HDI in Region D is the most successful, to date, by more than 2:1, in this past quarter, and almost 2:1 in total corrections, for the FY2011 fiscal year ($242.5 million versus $133.3 million for Connolly). Nevertheless, it is a different ratio that should draw the attention of providers.

Why the Difference in Underpayments versus Overpayments?

The differential in HDI’s overpayment vs. underpayment corrections is almost 3:1, and only CGI in Region B approaches this same ratio. The other RACs correct less than 20% of their totals as underpayments, far below what CGI and HDI are producing. One factor to consider, when trying to explain or understand this difference, is the simple fact that the RACs are actually paid 100% of their contingency fee only for underpayments they discover.

It is a little understood fact that the RACs are actually paid differently for underpayments versus overpayments. According to the RAC Statement of Work (SOW), the RAC is only paid 75% of their contracted contingency fee if a recovery for a Part A claim is made through the offset process by the Medicare fiscal intermediary (FI) or MAC. If the recovery is for a Part B claim, recovered through the offset process by a Carrier, DME MAC or MAC, then the RAC is only paid 50% of their contingency fee.

The RAC has More Incentive to Find Underpayments

A RAC can receive 100% of their contingency fee only for an underpayment, once it is validated by an FI, Carrier, DME MAC or MAC. (Such a process also means that the RAC is possibly paid sooner, instead of waiting for recoupment to occur, certainly a longer process.) Evidently, at least one of the RACs – HDI – has figured out that they can produce 50% more fees (profit) by finding Part A underpayments, and 100% more, or twice the fees (profits), by finding Part B underpayments, as compared to finding overpayments.

If the cost of pursing Part A claims is the same as for Part B claims, then we could surmise that a 50% increase in fees would produce a similar increase in the RAC’s return on investment. So, since the RACs are in business to make a profit, could we expect them to focus on Part A claims, since they “pay” much better than Part B claims – 50% better?

One can argue that it is much more expensive to review a Part A claim versus a Part B claim. A Part A claim will likely require a complex review, done by humans, while a Part B claim might be more likely to need only an automated review, done by a computer, which is much less expensive. That is perhaps a gross oversimplification, but you get the picture.

We don’t need a Harvard MBA to know that 50% better profit is… well… worth pursuing.

The new figures seem to point to the fact that while the RACs have all been reviewing many more claims, at least two of them are actively seeking underpayments, as well as overpayments, which is a welcome relief for providers, since many have long feared that CMS is not very concerned with underpayments.