CMS Issues Final Rule Requiring States to Develop Medicaid Recovery Audit Contractor Programs

21 September 2011 Publication
Author(s): Maria E. Gonzalez Knavel Anil Shankar Diane Ung Lawrence W. Vernaglia Judith A. Waltz

Legal News Alert: Health Care

On September 16, 2011, the Centers for Medicare and Medicaid Services (CMS) published in the Federal Register a final rule (Final Rule) requiring states to implement a Medicaid Recovery Audit Contractor (RAC) program pursuant to section 6411 of the Patient Protection and Affordable Care Act. The Final Rule is effective January 1, 2012, at which point states will be expected to have a Medicaid RAC program in place.

Under the Final Rule, states are required to contract with one or more eligible Medicaid RACs to review Medicaid claims for any overpayments or underpayments, and to recoup overpayments from providers on behalf of the state. The Medicaid RAC program is modeled after the existing Medicare RAC program, in which CMS contracts with several private entities to review Medicare Part A and B claims. The Final Rule builds upon lessons learned from the Medicare RAC program. In light of the variation among state Medicaid programs, however, the Final Rule grants states some flexibility in establishing RAC programs. Because states have a number of options related to the implementation of the Medicaid RAC program, providers may have an opportunity to participate in the development of the program at the state level.

Awarding of RAC Contracts

The Final Rule provides states with flexibility to contract with entities to operate as Medicaid RACs under procedures defined by state law. Each Medicaid RAC must demonstrate to the state that it has the technical capability to carry out the claims review and recovery activities. In addition, each RAC must hire a minimum of 1.0 FTE Contractor Medical Director who is a licensed Doctor of Medicine or Osteopathy to act as the RAC’s medical director, and must hire certified coders. However, these requirements are subject to potential exceptions upon petition by the state. Unless prohibited by state law, Medicaid RACs must be paid on a contingency basis based on a percentage of the amount of overpayments recovered. The Final Rule caps contingency fees at the highest rate paid under the Medicare RAC program, which is currently 12.5 percent.

Scope of RAC Reviews

Medicaid RACs are permitted to request any Medicaid claims paid under the state’s Medicaid state plan or under a Medicaid demonstration project within the past three years, subject to directions imposed on the RACs by the state. Claims that are older than three years may only be reviewed by a Medicaid RAC with approval from the state.

The Final Rule includes specific authority for states to exclude Medicaid managed care claims from review, at the option of the state, until such time as a permanent Medicare managed care RAC can be developed or a viable state Medicaid model is identified. In response to comments it received on the proposed rule, CMS declined to provide similar authority for states to exclude other categories of claims, such as DSH claims, from the scope of the Medicaid RAC program. While the Final Rule recognizes the general authority of states to direct RAC audit targets, it also expressed an intention that RACs should have the ability to audit the entire Medicaid program.

The Final Rule similarly declines to limit the scope of Medicaid RAC reviews to exclude medical necessity reviews. As a result, Medicaid RACs may review providers' medical necessity determinations, unless further restricted or directed by the state. The Final Rule encourages states to adopt the Medicare RAC program standards with regard to medical necessity reviews, but does not require them to do so.

The Final Rule provides CMS with the authority to grant exceptions to Medicaid RAC program requirements, including allowing a state not to operate such a program at all. However, the final rule cautions that such requests will be approved only rarely and only under exceptional circumstances.

Impact on Providers

Because Medicaid RACs are paid on a contingency basis, they can be expected to aggressively pursue potential overpayments to providers. RAC overpayment determinations should be carefully reviewed by providers, and may be challenged using the appeals process available in the state. If an overpayment determination is reversed at any level of appeal, the Final Rule requires the RAC to return the contingency fee associated with that overpayment.

The Final Rule reserves flexibility for the states to determine the appeals process available for disputes with Medicaid RACs, and notes that most states previously indicated to CMS an intention to use existing state administrative appeals processes. Because the implementation of the Medicaid RAC program is likely to increase the volume of Medicaid appeals, providers may wish to approach their state with proposals to improve the efficiency of those processes.

Another area of state flexibility relates to whether the Medicaid RACs will be required to document good cause to review a provider’s claim. Medicare RACs are required to consistently document whether they have good cause to reopen a Medicare claim, and providers have the ability to challenge whether a RAC audit satisfies this requirement, as defined in Medicare regulations. The Final Rule declines to extend this requirement to the Medicaid RAC program, but encourages states to replicate the Medicare RAC program practices.

The Final Rule contains several provisions intended to alleviate some of the burden RAC audits and collection efforts impose on providers. States are required to set limits on the number and frequency of medical records that a RAC may request, and Medicaid RACs are required to accept electronic medical records from providers on CD or DVD or via facsimile. In addition, Medicaid RACs must operate a toll-free customer service telephone line during normal business hours and each Medicaid RAC must work with the state to develop an education and outreach program for providers that includes notification of audit policies and protocols.  

States must comply with reporting requirements describing the effectiveness of their Medicaid RAC programs as specified by CMS. These required reports suggest that some form of federal and/or public oversight of Medicaid RAC performance may be available. CMS intends to issue sub-regulatory guidance addressing the required reporting and performance metrics for Medicaid RACs in the future.

Medicaid RACs also may identify underpayments to providers, in which case the RAC may report the underpayment to the state, and the Final Rule requires the state to report those underpayments to the provider. The Final Rule requires states to provide fees to Medicaid RACs that appropriately incentivize the detection of underpayments, but grants states flexibility to develop appropriate mechanisms. If the Medicaid RAC identifies a case of suspected fraud or abuse, the Final Rule requires the case to be reported to the state Medicaid Fraud Control Unit for appropriate law enforcement action.


The implementation of the Medicaid RAC program authorized by the Patient Protection and Affordable Care Act promises to transform the landscape of Medicaid provider reimbursement and appeals. The Final Rule projects that nationwide the Medicaid RAC program will result in an aggregate net savings to the federal and state governments of $2.13 billion during FY 2012 through FY 2016.

The Final Rule requires states to award contracts and develop their Medicaid RAC programs over the next few months, and reserves for the states significant flexibility with regard to the scope of the RAC audits and the procedures and protections that will be afforded to providers. Providers should consider contacting their state Medicaid agencies to determine what is being done in response to the Final Rule, and to identify opportunities for public participation and comment.  

Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and our colleagues. If you have any questions about this update or would like to discuss this topic further, please contact your Foley attorney or the following:

Diane Ung
Los Angeles, California

Judith A. Waltz
San Francisco, California

Lawrence W. Vernaglia
Boston, Massachusetts

Maria E. Gonzalez Knavel
Milwaukee, Wisconsin

Heidi A. Sorensen
Washington, D.C.

Anil Shankar
Los Angeles, California

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