Healthcare: RACs Unlikely to Report Fraud

Recovery audit contractors or "RACs" are private companies that Medicare hires to identify improper payments. When a RAC identifies an improper payment to a physician or medical facility, the RAC receives a "bounty" of between 9% and 12% of the monies recovered for the government. In a three year pilot program in six states, the RACs were able to recover in excess of $1 billion for Medicare. Most of the recoveries came from hospitals.

The types of payments comprising the term "improper payments" includes honest billing errors, payments resulting from poor documentation, and other such ministerial issues. Such payments are to be understood as distinct from fraud. The RACs are required to notify criminal investigators in instances where there is suspected fraud. However, there is no incentive for the RACs to actually make such referrals. To the contrary, there is actually a disincentive to make fraud reports because Medicare requires RACs to discontinue reviewing billing records of those suspected of fraud. Thus, the RACs would forgo the possibility of the percentage reward by alleging that a payment resulted from fraud rather than a more benign explanation. In fact, during the three year pilot program RACs only referred two cases of suspected fraud.

Medicare plans to formally train the RAC auditors on detecting fraud and the process for the referral of suspected cases of fraudulent billing. The hope is that by highlighting the need to identify and report suspected instances of fraud Medicare will persuade the RACs to be more aggressive in fraud detection and reporting. It remains to be seen whether the active encouragement of Medicare can overcome the economic incentive for the RACs to treat fraud as less severe types of payment problems.

For an article about RACs and fraud detection, please see BNET, "Medicare's Bounty Hunters Turn Their Sights to Fraud," February 22, 2010, http://industry.bnet.com/healthcare/10001791/medicare-encourages-private-bounty-hunters-to-investigate-fraud/.