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In November, three of the Recovery Audit Contractors (RACs) reported their earnings to investors and noted that the ongoing confusion surrounding the RAC program was having an impact on their financial projections.

The primary and immediate cause for concern was the Centers for Medicare & Medicaid Services (CMS) decision to extend a moratorium on audits of claims related to setting. CMS originally had scheduled its moratorium to extend from Oct. 1, 2013 to Dec. 31, 2013, during which the RACs were to be unable to audit claims for services delivered on an inpatient basis when outpatient status was more appropriate. In early November, CMS extended that moratorium until March 31, 2014.

Short-stay inpatient claims typically are very lucrative for the RACs. The CEO of PRGX, a subcontractor in three of the four RAC regions, indicated that short-stay, medically necessary claims are “by far the majority of our revenue year-to-date 2013, and also over the lifetime of this program.” As a result of the moratorium and other factors, HMS Holdings, the parent company of HDI, declined to provide earnings guidance on their recent third-quarter call with investors, indicating that “(the) financial impact of the two-midnight rule and a now six-month moratorium on hospital claim audits is difficult to measure precisely, though it will have negative impacts in 2014.” HMS Holdings traditionally has provided earnings guidance during their quarterly conference calls.

Another area of concern for RAC companies is the re-procurement, which is moving forward much more slowly than anticipated. The current RAC contracts are set to expire on Feb. 7, 2014. CMS issued an RFQ on Feb. 28, 2013 for contracts that would extend for the next five years. HMS, which argued that the new scope of work was discriminatory to the incumbent contractors, filed a pre-award protest, which was withdrawn when CMS agreed to take corrective action.

CMS’s corrective action so far includes a contract extension finalized on Aug. 8, 2013. This extension requires the incumbent contractors to perform certain administrative work related to appeals through Dec. 31, 2015. During that time, the incumbent RACs will be able to collect contingency fees on claims in which they prevailed on an appeal. Similarly, CMS can take back contingency fees on claims for which the appellant prevailed.

Unknown at this time is what other corrective action may be required. If the contract extension is sufficient, new RFQs should be released soon. In any event, CMS claims that it will be prepared to award the new contracts in February. If CMS meets that goal, it estimates that it will take six to nine months to implement changes to the program that will be included in the re-procurement. Major changes would include redefinition of the RAC regions and the creation of a single home health/DME RAC.

Finally, the RAC program remains the focus of a good bit of congressional interest. U.S. House of Representatives Small Business Chairman Sam Graves, R-Mo., is the sponsor (with 168 co-sponsors) of a bill to limit certain RAC practices. U.S. Sen. Roy Blunt, R-Mo., is the sponsor of the Senate companion bill. The “do-nothing” Congress does not seem like much of a threat to get much done, but keep in mind that on certain matters, Congress must act. In particular, Congress must act by Dec. 31, 2013 (give or take a few weeks) on certain Medicare and income tax provisions that are extended annually. This legislation could be the vehicle by which Congress addresses complaints from their constituents about the RACs.

The challenges of a re-procurement, a redefinition of the scope of RAC work, issues tied to CMS benefit policy, and legislative interest all add up to a very interesting 2014 for the RACs and their provider clients.

About the Author

Emily Evans is a partner with the Obsidian Research Group.

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