Contractors can now conduct “medical necessity” audits at your medical laboratory


Clinical laboratories and anatomic pathology groups will have new legal responsibilities to perform as of December 31, 2010. That’s when the Medicare Recovery Audit Contractor (RAC) program expands to include Medicare Part C, Part D, and all 50 state Medicaid programs. The expanded RAC program gives independent auditors the power to conduct “medical necessity” audits at your hospital, health system, clinical laboratory, or pathology group.

Many healthcare executives are critical of how the Medicare RAC program will be implemented. Four private companies have been selected by the federal government to conduct RAC Audits. Each RAC auditor will be paid on a contingency basis. RAC contractors are thus motivated to identify improper payments. RAC auditors can analyze claims with payment dates going back to October 1, 2007. The possible consequences are severe because every RAC audit has the potential to reveal Medicare fraud or abuse issues. Thus, a RAC audit can bring added legal exposure to your medical laboratory or pathology group.

CMS Announces Expansion of RAC Program

On Oct 1, 2010, the Centers for Medicare and Medicaid Services (CMS) sent letters to participating state Medicaid directors informing them of the impending expansion of the RAC program to include all of Medicare and Medicaid by December 31, 2010. According to CMS, the letter “provides initial guidance on section 6411 of the Affordable Care Act, Expansion of the Recovery Audit Contractor (RAC) Program, which amends section 1902(a)(42) of the Social Security Act (the Act) requiring States to establish programs to contract with RACs to audit payments to Medicaid providers by December 31, 2010.”

The expanded RAC program gives independent auditors the power to conduct “medical necessity” audits at your hospital, health system, clinical laboratory, or pathology group.

The expanded RAC program gives independent auditors the power to conduct “medical necessity” audits at your hospital, health system, clinical laboratory, or pathology group.

Until now, the RAC program only allowed audits of Medicare fee-for-service (FFS) billing, but the expanded RAC program will include all billing for Medicare Parts C, Part D, and the 50 individual state Medicaid programs.

Common provider claims that would be subject to recovery following a RAC audit include services that are:

  • “medically unnecessary;
  • performed in a medically unnecessary setting; or,
  • improperly coded.”

What constitutes “medically unnecessary care” or “medically unnecessary care settings” is to be determined on a case-by-case basis.

Medical Community Voices Strong Concerns About RAC Program

The announced expansion raised concerns among the medical community. In a recent Modern Healthcare article, American Hospital Association (AHA) spokesman Matt Fenwick noted that the 58 areas where healthcare providers were “vulnerable” to improperly receiving Medicare payments—identified during the RAC program pilot—have not yet been corrected. Thus, expanding the program to include Medicare parts C and D, as well as all of Medicaid, could exacerbate the problem.

Testifying before a sub-committee of the Senate Homeland Security and Governmental Affairs Committee, Deborah Taylor, Director and CFO of CMS’s Office of Financial Management said, “This change requires all states to establish individual Medicaid RAC programs under their State plan or waiver. Both expansions will take the RAC program beyond Medicare FFS for the first time. Although RACs proved effective and relevant to FFS Medicare, it remains to be seen how this effort will translate into other programs.”

The Dark Report conducted a live audio conference on October, 19th titled “How to Stay Legal in 2011: New Legal Issues and Regulatory Changes Affecting Clinical Laboratories and Pathology Groups.” Among other things, it covered the latest information on the Medicare Recovery Audit Contractor program, or “RAC.” Find out why Medicare now gives recovery audit contractors the power to conduct “medical necessity” audits at your hospital, health system or lab. RAC auditors can analyze claims with payment dates going back to October 1, 2007. Our experts will alert you to key points that can help you avoid an audit-and its resulting problems. Dark Daily readers can read a description of the conference and order a digital audio copy by clicking here, or by going to http://darkdaily.com/audio-conferences.

Since the RAC program was launched, healthcare providers have been wary about the design of the program and the fact that the private companies’ performing the audit will be paid some percentage of the money recovered as a result of the RAC audit. Pathologists and clinical laboratory managers should consider the consequences of hosting a visit by RAC auditors. It would be timely for medical laboratory compliance officers to become familiar with the specific requirements their laboratories would need to meet should RAC auditors show up and begin a RAC audit.

Related Information:

Deborah Taylor testimony before a subcommittee of the Senate Homeland Security and Governmental Affairs Committee (PDF)

CMS issues letter to state Medicaid directors on RAC expansion

CMS laying groundwork for Medicaid RACs

Federal Register / Vol. 75, No. 175 / Friday, September 10, 2010 / Notices

Recovery Audit Contractors (RACs) for Medicaid Letter

How to Stay Legal in 2011: New Legal Issues and Regulatory Changes Affecting Clinical Laboratories and Pathology Groups (Audio Conference)

THE DARK REPORT: CMS Coverage