Medicare recovery audit contractors (RACs) are costing hospitals significant sums in terms of expenditures related to managing audits, denials and appeals. Some hospitals report spending hundreds of thousands of dollars, even millions, addressing RAC audits. The hospitals say the money would be better spent on improving the healthcare provided to patients.

The American Hospital Association (AHA) conducted a RAC survey September 2014, which was answered by 402 hospitals; 311 hospitals completed all questions in the survey. As a result, the AHA is calling for a reform of the RAC payment structure. One problem: RACs are paid a commission—between 9.0% and 12.5%—on each claim they deny. Hospitals say the contingency fees should be eliminated so that RACs are no longer incentivized to deny claims.

The AHA cites evidence to support its conclusion, including the fact that “more than 70% of appealed hospital Medicare Part A denials are fully overturned at the third level of appeal, when the case is heard not by a contractor, but by an administrative law judge.” Additionally, it can take years to settle claims that are disputed.

Legislation to improve the situation is pending; if passed, the law would “replace the RAC contingency fee structure with a flat fee to reduce the financial incentive for overzealous auditing practices; rationalize payments to RACs by lowering payments for poor RAC performance; fix CMS’s rebilling rules to allow hospitals to rebill claims when appropriate; and require RACs to base their inpatient claims decisions on only the information the physician had when treating the patient.”

In the meantime, hospitals are continuing to add new staff and hire consultants to process their appeals and manage the RAC audits. The burden is especially great on smaller hospitals. A seven-page report published by the AHA includes case studies and an overview of the various processes used during RAC audits. You can access the report at: http://www.aha.org/content/15/hospsurveyreport.pdf