Federal Register, Volume 76 Issue 180 (Friday, September 16, 2011)

[Federal Register Volume 76, Number 180 (Friday, September 16, 2011)]
[Rules and Regulations]
[Pages 57808-57844]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-23695]

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Vol. 76

Friday,

No. 180

September 16, 2011

Part II

Department of Health and Human Services

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Centers for Medicare & Medicaid Services

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42 CFR Part 455

Medicaid Program; Recovery Audit Contractors; Final Rules

Federal Register / Vol. 76 , No. 180 / Friday, September 16, 2011 /
Rules and Regulations

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 455

[CMS-6034-F]
RIN 0938-AQ19

Medicaid Program; Recovery Audit Contractors

AGENCY: Centers for Medicare & Medicaid Services (CMS), HHS.

ACTION: Final rule.

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SUMMARY: This final rule implements section 6411 of the Patient
Protection and Affordable Care Act (the Affordable Care Act), and
provides guidance to States related to Federal/State funding of State
start-up, operation and maintenance costs of Medicaid Recovery Audit
Contractors (Medicaid RACs) and the payment methodology for State
payments to Medicaid RACs. This rule also directs States to assure that
adequate appeal processes are in place for providers to dispute adverse
determinations made by Medicaid RACs. Lastly, the rule directs States
to coordinate with other contractors and entities auditing Medicaid
providers and with State and Federal law enforcement agencies.

DATES: Effective Date: These regulations are effective on January 1,
2012.

FOR FURTHER INFORMATION CONTACT: Joanne Davis, (410) 786-5127.

SUPPLEMENTARY INFORMATION:

I. Background

A. Current Law

The Medicaid program is a cooperative Federal/State program
designed to allow States to receive matching funds from the Federal
Government to finance medical assistance to eligible low income
beneficiaries. Medicaid was enacted in 1965 by the passage of the
Social Security Act Amendments of 1965 creating title XIX of the Social
Security Act (the Act).
States may choose to participate in the Medicaid program by
submitting a State Plan for medical assistance that is approved by the
Secretary of the U.S. Department of Health and Human Services. While
States are not required to participate in the Medicaid program, all
States, the District of Columbia, and the territories do participate.
Once a State elects to participate in the program, it is required to
comply with its State Plan, as well as the requirements imposed by the
Act and applicable Federal regulations.
CMS is the primary Federal agency providing oversight of State
Medicaid activities and facilitating program integrity efforts. Our
administration of the Medicaid program requires that we expend billions
of dollars in Federal matching payments to States for Medicaid
expenditures. We also have an obligation to prevent, identify, and
recover improper payments to individuals, contractors, and
organizations.
In November 2009, the President signed Executive Order (E.O.) 13520
in an effort to reduce improper payments by increasing transparency in
government and holding agencies accountable for reducing improper
payments. On March 22, 2010, the Office of Management and Budget (OMB)
issued guidance for agencies regarding the implementation of E.O. 13520
entitled Part III to OMB Circular A-123, Appendix C (Appendix C).
Appendix C outlines the responsibilities of agencies, determines the
programs subject to E.O. 13520, defines supplemental measures and
targets for high priority programs, and establishes reporting
requirements under E.O. 13520 and procedures to identify entities with
outstanding payments.
Section 6411 of the Patient Protection and Affordable Care Act
(Pub. L. 111-148, enacted on March 23, 2010) (the Affordable Care Act)
directs States to establish programs by December 31, 2010 in which they
will contract with 1 or more Recovery Audit Contractors (Medicaid
RACs). The Medicaid RACs will review Medicaid claims submitted by
providers of services for which payment may be made under the State
Plan or a waiver of the State Plan to identify overpayments and
underpayments.
Section 6411(a)(1) of the Affordable Care Act amended section
1902(a)(42) of the Act to provide that ``the State shall establish a
program under which the State contracts (consistent with State law and
in the same manner as the Secretary enters into contracts with recovery
audit contractors under section 1893(h) * * *) with 1 or more recovery
audit contractors for the purpose of identifying underpayments and
overpayments and recouping overpayments * * *'' To offer context for
our approach to the Medicaid RAC program, we provide background
discussion on the Medicare RAC program under section 1893(h) of the
Act.

B. Medicare RACs

Medicare RACs are private entities with which CMS contracts to
identify underpayments and overpayments as well as recoup overpayments,
until recently, limited to Medicare's fee-for-service program.
Initially authorized by the Congress as a 3-year demonstration program
by the Medicare Prescription Drug, Improvement, and Modernization Act
of 2003 (Pub. L. 108-173, enacted on December 8, 2003) (MMA), Medicare
RACs were permanently authorized in the Tax Relief and Health Care Act
of 2006 (Pub. L. 109-432, enacted on December 20, 2006)(TRHCA).
During the Medicare RAC demonstration period, CMS contracted with
RACs to review claims from Medicare participating providers and
suppliers in New York, Florida, California, Arizona, Massachusetts, and
South Carolina. From 2005 through 2008, the Medicare RACs identified
and corrected over $1 billion in improper payments. The majority, or 96
percent, of the improper payments were overpayments, while the
remaining 4 percent were underpayments. As a result of the demonstrated
cost effectiveness of the Medicare RACs, the TRHCA required CMS to
implement a nationwide Medicare RAC program. The TRHCA directed CMS to
expand the Medicare RAC program nationwide by January 1, 2010.
In our evaluation of the Medicare RAC demonstration, providers were
surveyed and they identified to CMS a number of concerns and processes
that needed to be improved. For example, Medicare RACs were reportedly
inconsistent in documenting their ``good cause'' for reviewing a claim.
In addition, providers complained that a lack of physician presence on
Medicare RAC staffs contributed to Medicare claims incorrectly being
denied. As a result, we met with stakeholders, including the provider
community, and made a number of changes to improve the Medicare RAC
program. In the permanent Medicare RAC program, CMS directed Medicare
RACs to consistently document their ``good cause'' for reviewing a
claim. In addition, CMS now requires each Medicare RAC to hire a
minimum of 1.0 Full Time Equivalent (FTE) physician Medical Director to
oversee the medical record review process; assist nurses, therapists,
and certified coders upon request; manage quality assurance procedures;
and maintain relationships with provider associations.
Both the MMA and the TRHCA required CMS to pay Medicare RACs on a
contingency fee basis. Currently, CMS

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pays Medicare RACs a contingency fee rate ranging between 9 and 12.50
percent. These contingency fees were not fixed by CMS, but were
established by the contractors through a bidding process with CMS.
Providers may appeal Medicare RAC determinations through the
established Medicare appeals process. During the demonstration period,
Medicare RACs were required to return contingency fees if the claim
determination was overturned on the first level appeal. However,
Medicare RACs were entitled to retain contingency fees if the
determination was overturned on subsequent levels of appeal. In the
permanent Medicare RAC program, CMS requires Medicare RACs to return
the contingency fee payment if the determination is overturned at any
stage of the appeals process.

C. Existing State Contingency Fee Contracts

There is precedent for State Medicaid contingency fee contracts for
purposes of recovering Medicaid overpayments subject to third party
liability (TPL) requirements. Section 1902(a)(25) of the Act requires
States to take all reasonable measures to determine the legal liability
of third parties to pay for medical assistance furnished to a Medicaid
recipient under the State Plan. Several States have elected to do so
through the use of contingency fee arrangements with TPL contractors.
In addition, several States currently contract with contingency fee
contractors to recover Medicaid overpayments unrelated to TPL. In a
memorandum to CMS Regional Administrators dated November 7, 2002, we
revised our policy prohibiting Federal financial participation (FFP)
for States to pay costs to contingency fee contractors, unrelated to
TPL. The revised policy allowed contingency fee payments if the
following conditions were met: (1) The intent of the contingency fee
contract must be to produce savings or recoveries in the Medicaid
program and (2) the savings upon which the contingency fee payment is
based must be adequately defined and the determination of fee payments
documented to CMS's satisfaction.

II. Provisions of the Proposed Medicaid RAC Rule

In the November 10, 2010 Federal Register (75 FR 69037), we
published a proposed rule that set forth guidance to States related to
Federal/State funding of Medicaid RACs and the payment methodology for
State payments to Medicaid RACs in accordance with the Affordable Care
Act. We proposed adding new regulatory provisions in 42 CFR part 455
subpart F governing Program Integrity--Medicaid.
Section 6411(a) of the Affordable Care Act amended and expanded
section 1902(a)(42) of the Act to require States to establish Medicaid
RAC programs by December 31, 2010, to contract with 1 or more
contractors to audit Medicaid claims and to identify underpayments and
overpayments and collect overpayments. While States were required to
establish their Medicaid RAC programs by December 31, 2010, via the
State Plan amendment (SPA) process, the Medicaid RAC programs were not
required to be implemented by this date. In the November 10, 2010
proposed rule, we stated that, absent an exception, States were
required to fully implement their Medicaid RAC programs by April 1,
2011.
The difference between establishing and implementing Medicaid RAC
programs was clarified for States prior to the publication of the
proposed rule. On October 1, 2010, we issued a State Medicaid Director
(SMD) letter providing preliminary guidance to States on the
implementation of their RAC programs. In the SMD letter, States were
advised that they should attest that they would establish a Medicaid
RAC program by submitting a SPA to CMS no later than December 31, 2010,
or indicate that they would be seeking to be excepted from one or more
of the proposed provisions, or indicate that they would be seeking a
complete exception from establishing a Medicaid RAC program.
Subsequently, on February 1, 2011, we issued an Informational Bulletin
stating that the proposed April 1, 2011 implementation date would be
delayed, in part, to ensure that States would be able to comply with
the provisions of the final rule.
Section 1902(a)(42)(B) of the Act directs all States to establish
Medicaid RAC programs, subject to the exceptions and requirements as
the Secretary may require. This provision enables CMS to vary the
Medicaid RAC program requirements, or except a State from establishing
a Medicaid RAC program in certain circumstances, including where it
would be inconsistent with State law. For example, the Secretary may
exempt a State from the requirement to pay Medicaid RACs on a
contingent basis for collecting overpayments when State law expressly
prohibits contingency fee contracting. However, some other fee
structure could be required under any exception.
Similarly, during the Medicaid RAC SPA process, some States advised
CMS that they were required to enact legislation before amending their
State plans. Because the establishment of a Medicaid RAC program is
accomplished by a SPA, some State legislatures did not have the
opportunity to convene and enact the amendment to their State plans
prior to December 31, 2010. In this case, those States submitted
requests to delay establishing Medicaid RAC programs until after those
State legislatures met. CMS granted these requests.
Also, there were circumstances, unrelated to the examples above,
where States sought exceptions from some or all of the requirements of
the Medicaid RAC program. Accordingly, Sec. 455.516 proposed that
States seeking exceptions from contracting with Medicaid RACs must
submit a written justification for the request to CMS. We anticipate
granting complete Medicaid RAC program exceptions rarely, and only
under the most compelling of circumstances.
Section 6411(a) of the Affordable Care Act amended section
1902(a)(42) of the Act, regarding States Medicaid RAC programs:
Under section 1902(a)(42)(B)(ii)(I) of the Act, payments
must be made to a Medicaid RAC under contract with a State only from
amounts recovered. As discussed in the proposed rule, we interpret this
to mean that payments to Medicaid RACs may not exceed the total amounts
recovered. For example, if a Medicaid RAC's efforts result in the
recovery of a total of $1 million, the fees paid to the RAC for its
work regarding both overpayments and underpayments must not exceed $1
million. The intent of the statute is for States and the Federal
government to reduce improper payments in the Medicaid program in order
to realize savings. Additionally, we interpret this to mean that
payments to contractors were not made based upon amounts merely
identified but not recovered, or amounts that may initially be
recovered but that subsequently must be repaid due to determinations
made in appeals proceedings.
In the proposed rule, we stated that the payment methodology
determinations for States, as well as the timing of payments to
Medicaid RACs for their work, were separate but closely related issues.
We stated that the distinction between amounts recovered and amounts
identified had implications for how States structured and administered
payment agreements with Medicaid RACs, as well as the timing of
Medicaid RACs' receipt of payments. We offered two options illustrating
ways that States could structure payments.

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In option one, for example, State A paid RAC A its fee when RAC A
identified and recovered an overpayment. If provider A appealed and
prevailed at any stage, RAC A would be required to return any portion
of the contingency fee that corresponded to the amount of an
overpayment that was overturned at any level of appeal.
In the second option, State B determined it would pay RAC B its
contingency fee at the point at which the recovery amount is fully
adjudicated; that is, at the conclusion of any and all appeals
available to provider B. At that point, State B would pay RAC B a
contingency fee based on the amount recovered.
Under section 1902(a)(42)(B)(ii)(II)(aa) of the Act,
payments to a Medicaid RAC contractor must be made on a contingent
basis for collecting overpayments from the amounts recovered. In the
proposed rule, we noted that we were aware that the Medicaid RAC
program, by virtue of the differences between the Medicare and Medicaid
programs, would not operate identically to the Medicare RAC program. We
recognized that each State must tailor its Medicaid RAC activities to
the uniqueness of its own State, and indicated that we would not
prescribe a set contingency fee rate for States. Instead, we would
implement certain guidelines based upon section 1902(a)(42)(B) of the
Act and our experience with the Medicare RAC program, but allow States
the discretion to set their fees within those guidelines.
Medicaid RACs will contract with States and territories to identify
and collect overpayments, and will be paid on a contingency fee basis
by the States. In the Medicare RAC program, CMS contracts with Medicare
RACs to identify and recover overpayments from Medicare providers, and
are paid on a contingency fee basis by CMS. In the proposed rule, we
recognized the differences among States and territories when
coordinating the collection of overpayments with RACs. The statute
requires Medicaid RACs to collect overpayments. However, some States
may not be able to delegate the collection of overpayments to
contractors, while other States may have other restrictions.
Currently, there are 4 Medicare regional RACs operating. Those RACs
are paid an average contingency fee rate of 10.86 percent by CMS, with
the highest rate being 12.50 percent. We interpret the statutory
language that States must establish a Medicaid RAC program ``in the
same manner as the Secretary enters into contracts with'' Medicare RACs
to mean that some of the provisions of the Medicare RAC program,
generally, should serve as a model for the proposed Medicaid RAC
program, not that Medicaid RACs should be structured identically to
Medicare RACs. Accordingly, in Sec. 455.510(b)(3) and (b)(4), we
stated that CMS would not provide FFP for any amount of a State's
contingency fee in excess of the then highest Medicare RAC contingency
fee rate unless a State requests an exception from CMS and provides an
acceptable justification.
We proposed that, in the absence of an approved exception, a State
may only pay a RAC from the overpayments collected, and may only
receive FFP on a contingency fee up to the highest Medicare RAC
contingency rate. Any additional payment from the State to the RAC must
be made using State-only funds. FFP is not available for administrative
expenditure claims for the marginal difference between the highest
Medicare fee and the State's contingency fee. For example, unless an
exception applies, if the highest Medicare RAC contingency fee is 12.50
percent and the State pays a Medicaid RAC 14 percent, we will not pay
the Federal match on the 1.50 percent difference. In other words, the
State must use State-only funds to make up the difference between the
State's 14 percent contingency fee and the 12.50 percent contingency
fee ceiling. Currently, the Medicare RAC contracts have an established
period of performance of up to 5 years, beginning in calendar year
2009. Initially, the maximum contingency fee rate for which FFP will be
available for States to pay Medicaid RACs will be the highest Medicare
RAC contingency fee, which is 12.50 percent. We anticipate that fee
will be the maximum rate when States implement their RAC programs.
Subsequently, we will make States aware of any modifications to the
payment methodology for contingency fees and Medicaid RAC maximum
contingency rates for which FFP will be available by publishing in a
Federal Register notice, by December 31, 2013, the maximum Medicare
contingency fee rate, which will apply to FFP availability for any
Medicaid RAC contracts covering the period of performance beginning on
July 1, 2014. The established rate will be in place for 5 years, or
until we publish a new maximum rate in the Federal Register.
The Medicare RAC program is still a relatively new program. In our
early outreach campaign to provide technical support and assistance to
States in the procurement of their RAC contracts, we studied many of
the lessons learned from the Medicare RAC Demonstration, as well as the
current provisions of the permanent Medicare RAC program and sought to
incorporate many lessons learned in this final rule. For example, we
proposed that States require their Medicaid RACs to employ trained
medical professionals to review Medicaid claims, as we now require the
Medicare RACs to do. We indicated that States should also be cognizant
of potential organizational conflicts of interest and should take
affirmative steps to identify and prevent any conflicts of interest.
In the proposed rule, we reported that the Office of Inspector
General of the U.S. Department of Health and Human Services (HHS-OIG)
had found that the Medicare RACs identified over $1 billion in improper
payments, but referred only two cases of potential fraud to CMS. HHS-
OIG opined that Medicare RACs had no incentive to make fraud referrals
because the RACs did not receive contingency fees for those referrals.
In the proposed rule, we cautioned States, in their design of Medicaid
RAC programs, to ensure that the Medicaid RACs report instances of
fraud and/or abuse in addition to the pursuit of overpayments. At Sec.
455.508(b), we proposed that whenever RACs had reasonable grounds to
believe that fraud and/or abuse had occurred, they must report it to
the appropriate law enforcement officials. We solicited comments on
these proposals, as well as other issues that States should consider in
the design of their RAC programs. At Sec. 455.508(c), we proposed that
Medicaid RACs must meet the additional requirements that States may
establish.
Under section 1902(a)(42)(B)(ii)(II)(bb) of the Act,
payment to a Medicaid RAC for identifying underpayments may be made in
any amount as the State may specify. Currently, Medicare RACs are paid
a contingency fee to identify underpayments, similar to the way in
which they are paid to identify and recover overpayments. In the
proposed rule, we stated that a State may elect to use a similar
approach, or elect to establish a set fee or some other fee structure
for the identification of underpayments. Consistent with a State's
obligation to ensure that it pays the correct amount to the right
provider for the appropriate service at the right time for the right
beneficiary, whatever methodology a State chooses must adequately
incentivize the detection of underpayments. At Sec. 455.510(c), we
proposed granting States the flexibility to specify the underpayment
fee for Medicaid RACs. Additionally, we stated

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that CMS would monitor the methodologies and amounts paid by States to
Medicaid RACs to identify underpayments, and may consider future
additional regulation depending on what data reveal over time.
Section 1902(a)(42)(B)(ii)(I) of the Act requires that payments to
a Medicaid RAC only come from amounts recovered. We proposed that
Federal matching payments were not available for RAC contingency fees
paid in excess of the overpayment amounts collected. The proposed rule
stated that the total fees paid to a Medicaid RAC included both the
amounts associated with: (1) Identifying and recovering overpayments;
and (2) identifying underpayments. Due to the requirement in section
1902(a)(42)(B)(ii)(I) of the Act that contingency fees only come from
amounts recovered, total fees must not exceed the amount of
overpayments collected.
In the proposed rule, we cited data from the Medicare RAC
Demonstration that overpayment recoveries by Medicare RACs exceeded
underpayment identification by more than a 9:1 ratio. Therefore, we
concluded that States would not need to maintain a reserve of recovered
overpayments to fund Medicaid RAC costs associated with identifying
underpayments. However, we proposed that States maintain an accounting
of amounts recovered and paid.
We also proposed that States report overpayments to CMS based on
the net amount remaining after all fees are paid to the Medicaid RAC.
In the proposed rule, we linked the treatment of the fees and
expenditures to the specific statutory language implementing the
Medicaid RAC requirements and did not extend it to Medicaid overpayment
recoveries in other contexts.
We stated, for example, RAC X's fee for overpayment identification
is 10 percent of the recovery amount. The fee for identification of
underpayments is 10 percent of the amount identified. If an overpayment
recovery amount was $100, and the total amount of underpayment was $20,
the total fees paid to the Medicaid RAC would be $12 ($10 for the
identification and recovery of the overpayment and $2 for the
identification of the underpayment). The State would report the
recovery (collection) amount of $100 and the $10 RAC fee at the
original match rate for the overpayment and the $2 RAC fee at the match
rate for payment of the underpayment. If the State paid a provider
based on the Medicaid RAC-identified underpayment, and that expenditure
was claimed in accordance with timely filing requirements, we proposed,
the $20 expenditure would be matched at the regular Federal Medical
Assistance Percentage (FMAP), or the appropriate FFP rate.
Currently, Sec. 433.312 directs States to refund the Federal share
of overpayments, regardless of whether the State actually recovers the
overpayments from the provider. In the proposed rule, we noted that
this requirement, and all other requirements relating to overpayments,
would apply to Medicaid RAC-identified overpayments. Therefore, if a
Medicaid RAC identified an overpayment to a provider, the State would
refund the Federal share of the overpayment amount to the Federal
Government, regardless of whether the State collected the overpayment.
Under section 1902(a)(42)(B)(ii)(III) of the Act, States
must have an adequate appeals process for entities to challenge adverse
Medicaid RAC determinations. We proposed at Sec. 455.512 that States
must provide appeal rights available under State law or administrative
procedures to Medicaid providers that seek review of an adverse
Medicaid RAC determination. We proposed two alternatives the State
could use to achieve this. In alternative one, a State may utilize an
existing appeals infrastructure to adjudicate Medicaid RAC appeals. The
State would submit to CMS a proposal describing the appeals process,
which would need to be approved prior to implementing its RAC program.
In alternative two, a State may elect to establish a separate
appeals process for RAC determinations, which must also ensure
providers adequate due process in pursuing an appeal. Accordingly, in
Sec. 455.512 we proposed to give States the flexibility to determine
the appeals process that will be available to providers seeking review
of adverse RAC determinations. However, through the State Plan
amendment (SPA) process, each State has indicated that it already has
in place an administrative appeals infrastructure they will use for a
provider to appeal an adverse Medicaid RAC determination.
Finally, we also noted in the proposed rule that the potential
length of a State's administrative appeals process may have an impact
on the methodology or structure of the payment agreement between a
State and a Medicaid RAC. For example, in a contract between State X
and RAC X, where State X's administrative appeal process can extend for
2 years, RAC X may not receive payment for an extended period of time.
Accordingly, RAC X's contingency fee rate will most likely reflect
operating, maintenance and legal costs over that period. Alternatively,
in State Y, completion of the administrative appeals process takes 9
months. A contract between State Y and RAC Y may reflect a different
contingency fee rate.
Under section 1902(a)(42)(B)(ii)(IV)(aa) of the Act, for
purposes of section 1903(a)(7) of the Act, expenditures made by the
State to carry out the Medicaid RAC program are necessary for the
proper and efficient administration of the State Plan or waiver of the
plan. We interpret this reference to section 1903(a)(7) of the Act to
mean that amounts expended by a State to establish and operate the
Medicaid RAC program (aside from fee payments, the treatment of which
is discussed elsewhere in this preamble) are to be shared by the
Federal Government at the 50 percent administrative rate. Therefore, we
proposed at Sec. 455.514(b), that FFP is available to States for
administrative costs subject to reporting requirements.
We also proposed that States would report to CMS certain elements
describing the effectiveness of their Medicaid RAC programs. These
proposed elements included general program descriptors (for example,
contract periods of performance, contractors' names) and program
metrics (for example, number of audits conducted, recovery amounts,
number of cases referred for potential fraud). These elements will be
provided in sub-regulatory guidance specified by CMS.
Sections 1902(a)(42)(B)(ii)(IV)(bb) and 1903(d) of the Act
apply to amounts recovered (not merely identified) under the Medicaid
RAC program. In the proposed rule, we indicated that a State would be
required to refund the Federal share of the net amount of overpayment
recoveries after deducting the contingency fees paid to a RAC (in
conformance with the restrictions discussed above, including the
maximum allowed RAC contingency fee and the exception process). In
other words, a State would be required to take a RAC's contingency fee
``off the top'' before calculating the Federal share of the overpayment
recovery to be returned to CMS. The amounts recovered would be subject
to a State's quarterly expenditure estimates and the funding of the
State's share.
Additionally, we noted in the proposed rule that the U.S.
territories operate under a separate funding authority that is
statutorily-capped. As a result of the limitations placed on FFP by
section 1108(g) of the Act, territories would need to assess the
feasibility of implementing and funding Medicaid RAC contractors in
their jurisdictions.

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As of the date of this final rule, all of the territories requested and
were granted exceptions from establishing RAC programs. These
exceptions will not be reassessed. Should RAC programs become feasible
due to a change in circumstances, the territories can amend their State
Plans to establish RAC programs.
Under section 1902(a)(42)(B)(ii)(IV)(cc) of the Act,
States and their Medicaid RACs must coordinate their efforts with other
contractors or entities performing audits of entities receiving
payments under the State Plan or waiver in the State, including State
and Federal law enforcement agencies. In the proposed rule, we
emphasized that Medicaid RACs were not intended to, and would not,
replace any State program integrity or audit initiatives or programs.
We proposed under Sec. 455.508(b) that an entity that wanted to enter
into a contract with a State to perform the functions of a Medicaid RAC
must agree to coordinate its audit recovery efforts with other
entities.
In the proposed rule, we stated that although overlapping or
multiple provider audits may be necessary, we hoped to minimize the
likelihood of overlapping audits. Section 1902(a)(42)(B)(ii)(IV)(cc) of
the Act directs States to assure CMS that they will coordinate Medicaid
RAC audit activity with an array of other entities that also conduct
audits of Medicaid providers. Providers are currently subject to audits
by the States' routine program integrity audits, CMS' Medicaid
Integrity Contractors' (MICs) audits, as well as audits conducted by
other State and Federal entities. For example, the MICs perform audits
of providers, on behalf of CMS, in order to identify overpayments.
Payment Error Rate Measurement (PERM) audits are ongoing CMS audits
that measure improper payments in the Medicaid and Children's Health
Insurance Program and error rates for each program. As we stated in the
proposed rule, we anticipate working both internally and with the
States to minimize this administrative burden on Medicaid providers.
In addition to the obligation to coordinate auditing efforts to
reduce the overburdening of Medicaid providers, we also wanted to
ensure coordination between Medicaid RACs and law enforcement
organizations so that suspected cases of fraud and abuse were processed
through the appropriate channels. Law enforcement organizations may
conduct audits or investigations of Medicaid providers in addition to
Federal and State agencies. Those organizations include, but are not
limited to, the HHS-OIG, the U.S. Department of Justice, including the
Federal Bureau of Investigation, State Medicaid Fraud Control Units
(MFCUs), other Federal and State law enforcement agencies, as
appropriate, and CMS. We concluded that States are in the best position
to coordinate audit activities.
We also proposed at Sec. 455.508(b) that a Medicaid RAC must
report fraud or criminal activity to the appropriate law enforcement
officials whenever it has reasonable grounds to believe that such
activity has occurred.

III. Analysis of and Responses to Public Comments

We received 76 timely comments on the November 10, 2010 proposed
rule (75 FR 69037) from State associations, hospitals, medical
associations, providers, managed care organizations, and contingency
fee contractors. We reviewed each commenter's comments and grouped
related comments. After associating like comments, we placed them in
categories based on subject matter. Summaries of the public comments
received and our responses to those comments are set forth below.

A. General

Comment: One commenter requested clarification and asked CMS to
consider addressing the fundamental differences between Medicaid RACs
and Medicare RACs.
Response: Medicaid RACs are State funded, designed, procured,
operated and administered programs authorized by section 6411 of the
Affordable Care Act to identify underpayments and overpayments and to
recover overpayments to Medicaid providers, on a contingency fee basis.
Medicare RACs are regionally operated contractors that are federally
funded, procured, operated and administered programs authorized
permanently by section 302 of the TRHCA to identify underpayments and
overpayments and to recoup overpayments under parts A and B of the
Medicare program. The Congress provided for payments to the Medicare
RACs on a contingency fee basis for correcting overpayments and
identifying underpayments. In constructing this final rule, we took
into consideration these fundamental differences between the Medicaid
and Medicare programs along with feedback from commenters on how these
differences can be addressed as well as how best practices from the
Medicare RAC program can be incorporated.
Comment: One commenter asserted that CMS should seek input from
States concerning reporting metrics and that a cooperative approach to
this requirement should provide CMS with the data needed for oversight
of the program but not be overly burdensome to the States.
Response: We agree with the comment regarding reporting metrics. We
anticipate working with States to develop performance metrics and will
issue sub-regulatory guidance regarding specific reporting criteria
when appropriate.
Comment: One commenter indicated that the Medicaid RAC program
would be further enhanced by developing consistent objective criteria
for States to follow and this information should be publicly available
to establish a baseline for the community.
Response: We agree that the Medicaid RAC program should have
consistent and objective criteria. As a result of comments from
stakeholders, we considered and are finalizing the following
provisions:
State coordination of recovery audit efforts with other
auditing entities (Sec. 455.506(c)).
State reporting of fraud and/or abuse, as defined by Sec.
455.2, to its MFCU or other appropriate law enforcement agency (Sec.
455.506(d)).
State established limit on the number and frequency of
medical records requested by a RAC (Sec. 455.506(e)).
The entity must hire a minimum of 1.0 FTE Contractor
Medical Director who is a Doctor of Medicine or Doctor of Osteopathy in
good standing with the relevant State licensing authorities and has
relevant work and educational experience. A State may seek to be
excepted, in accordance with Sec. 455.516, from requiring its RAC to
hire a minimum of 1.0 FTE Contractor Medical Director by submitting to
CMS a written request for CMS review and approval (Sec. 455.508(b)).
A requirement that RACs hire certified coders unless the
State determines that certified coders are not required for the
effective review of Medicaid claims (Sec. 455.508(c)).
The RAC must work with the State to develop an education
and outreach program component, including notification of audit
policies and audit protocols (Sec. 455.508(d)).
Mandatory RAC customer service measures, including:
Providing a toll-free customer service telephone number in all
correspondence sent to providers and staffing the toll-free number
during normal business hours from 8:00 a.m. to 4:30 p.m. in the
applicable time zone (Sec. 455.508(e)(1)); compiling and maintaining
provider approved addresses and points of contact

[[Page 57813]]

(Sec. 455.508(e)(2)); mandatory acceptance of provider submissions of
electronic medical records on CD/DVD or via facsimile at the providers'
request (Sec. 455.508(e)(3)); and notifying providers of overpayment
findings within 60 calendar days (Sec. 455.508(e)(4)).
A three-year maximum claims look-back period (Sec.
455.508(f)).
Timely referral of suspected cases of fraud and/or abuse
by the Medicaid RAC to the State (Sec. 455.508(h)).
Return of contingency fees within a reasonable timeframe
as prescribed by the State if a Medicaid RAC determination is reversed
at any level of appeal (Sec. 455.510(b)(3)).
Comment: One commenter indicated that parallel Medicare and
Medicaid RAC standards are consistent with CMS' aim of harmonization of
the anti-fraud activities of the Medicare and Medicaid programs under
the Center for Program Integrity (CPI).
Response: We agree with the commenter. Medicaid RAC programs are,
by statute, administered differently than Medicare RAC programs.
However, we have concluded that many aspects of the Medicaid RAC
program can operate in alignment with the Medicare RAC program
including the following: Staffing requirements (Sec. 455.508(a), (b),
and (c)); State and RAC development of an education and outreach
program, including notification of audit policies and protocols (Sec.
455.508(d)); minimum customer service measures including: Providing a
toll-free customer service telephone number in all correspondence sent
to providers and staffing the toll-free number during normal business
hours from 8:00 a.m. to 4:30 p.m. in the applicable time zone (Sec.
455.508(e)(1)); compiling and maintaining provider approved addresses
and points of contact (Sec. 455.508(e)(2)); mandatory acceptance of
provider submissions of electronic medical records on CD/DVD or via
facsimile at the providers' request (Sec. 455.508(e)(3)); notifying
providers of overpayment findings within 60 calendar days (Sec.
455.508(e)(4)); a 3 year maximum claims look-back period (Sec.
455.508(f)); and a State established limit on the number and frequency
of medical records requested by a RAC (Sec. 455.506(e)).
Comment: Several commenters indicated that processes should be
developed to minimize provider burden to the greatest extent possible
in connection with the identification of improper payments.
Additionally, the commenters stated that the final rule should
incorporate increased accountability and transparency provisions which
ultimately became part of the permanent Medicare RAC program.
Response: Again, we have concluded that many aspects of the
Medicaid RAC program can operate in alignment with the Medicare RAC
program, consistent with State law, thereby minimizing provider burden
including the following: Staffing requirements (Sec. 455.508(a)), (b),
and (c)); State and RAC development of an education and outreach
program, including notification of audit policies and protocols (Sec.
455.508(d); minimum customer service measures including: Providing a
toll-free customer service telephone number in all correspondence sent
to providers and staffing the toll-free number during normal business
hours from 8:00 a.m. to 4:30 p.m. in the applicable time zone (Sec.
455.508(e)(1)); compiling and maintaining provider approved addresses
and points of contact (Sec. 455.508(e)(2)); mandatory acceptance of
provider submissions of electronic medical records on CD/DVD or via
facsimile at the providers' request (Sec. 455.508(e)(3)); notifying
providers of overpayment findings within 60 calendar days (Sec.
455.508(e)(4)); a 3 year maximum claims look-back period (Sec.
455.508(f)); and a State established limit on the number and frequency
of medical records requested by a Medicaid RAC (Sec. 455.506(e)).
States are obligated to coordinate auditing efforts to reduce the
overburdening of Medicaid providers.
Comment: One commenter expressed concern with the implementation of
a ``Medicare based audit program'' due to budget deficits in the States
and pressure to look for opportunities to find savings in the already
underfunded Medicaid program.
Response: We understand the commenter's concerns. However, the
Affordable Care Act requires the implementation of a Medicaid RAC
program, with certain exceptions as permitted by the Secretary. Because
the Affordable Care Act requires States to contract with RACs on a
contingency fee basis, out-of-pocket expenses should be minimized.
Therefore, the majority of the program costs will be offset by
overpayment recoveries. Further, Medicaid RACs are part of a
significant initiative to reduce waste and improper payments and recoup
the improper payments. Accordingly, we believe that the Medicaid RAC
program will lead to significant savings for States, as indicated in
Section VI. of this final rule, titled ``Regulatory Impact Analysis.''
Comment: One commenter urged CMS to balance the goal of recovery of
funds improperly paid with the ``respectful treatment of the
overwhelming number of Medicaid providers who continue to provide
healthcare services at substantially less than market rates and who
diligently attempt to abide by all applicable regulations and payment
policies.'' Another commenter suggested that providers would no longer
participate in Medicaid and its clients would no longer have access to
care.
Response: We agree that Medicaid providers deserve to receive
respectful treatment from CMS and we understand the commenters'
concerns regarding the burden of additional audits on providers. In the
proposed rule, we specifically emphasized that States and their RACs
must undertake coordination efforts to reduce the potential
overburdening of Medicaid providers, as well as ensuring that suspected
cases of fraud and abuse are processed through the appropriate
channels. We emphasized that it is the State's obligation to ensure
that RACs do not duplicate or compromise the efforts of other entities
performing audits. In the final rule, we require at Sec. 455.506(c)
that States must coordinate the recovery audit efforts of their RACs
with other auditing entities.
Comment: One commenter stated that the Department of Health and
Human Services (HHS) should better target program integrity dollars to
efforts that have the most opportunity for success.
Response: We believe that the Medicare and Medicaid RAC programs
are an investment in successful program integrity efforts. In FY 2010,
Medicare RACs identified and corrected $92.3 million in combined
overpayments and underpayments. Eighty-two percent of all RAC
corrections were collected overpayments, and 18 percent were identified
underpayments that were refunded to providers. We expect that States
will realize a similar ratio of overpayments to underpayments in
connection with the implementation of the Medicaid RAC program, and
will examine the trends among the States over several years.
Comment: One commenter indicated that HHS should clarify whether it
is considering or recommending to the Congress that it eliminate the
Audit Medicaid Integrity Contractor (MIC) and Review of Provider MIC
effort since it appears to be duplicative of the Medicaid RAC program.
Response: We disagree that the work of MICs, both Audit and Review
of Provider, is duplicative of Medicaid RACs. As stated previously,
Federal MICs are better positioned to address certain Medicaid program

[[Page 57814]]

vulnerabilities than State-administered RACs.
Comment: One commenter recommended that CMS require States to
provide transparency in coding/billing rules and guidelines, share
screening guidelines for medical necessity determinations, and provider
education. According to the commenter, this can ensure provider success
as well as develop a framework for auditing bodies to follow. This
commenter believes that existing State rules and guidelines are often
vague or unwritten. Therefore, audits should not be allowed except
where the State has promulgated clear criteria.
Response: We agree that States should be as transparent as possible
with regard to their Medicaid RAC programs. While we are not requiring
States to provide coding/billing guidelines, we are requiring RACs to
work with the State to develop a provider education and outreach
program, including notification of audit policies and protocols for
auditing bodies and providers to have clearly defined roles and
expectations (Sec. 455.508(d)).
Comment: One commenter indicated that allowing contingency fees to
be based on actual recoveries puts a ``tremendous strain on a company's
cash flow.'' The commenter indicated that a company has to prepare for
a long lead time between providing the service of identifying a
recovery and being paid after a governmental agency has made the effort
to collect the recovery and then process the payment. This commenter
further stated that the company providing the service has no input or
control over the collection process and must rely on the good faith of
the agency to process payments in a timely and efficient manner.
Response: We disagree with this comment because we do not believe
that there is credible evidence to suggest that any State agency would
intentionally withhold compensation from one of its contractors. As
envisioned, a State and a RAC would voluntarily enter into a
contractual agreement with provisions protecting both parties'
interests. Thus, the agency would agree to pay the RAC according to the
contractual agreement. As a general rule, contingency fee contractors
should be aware of the financial risk of working on a contingency fee
basis. In addition, States have an incentive to collect overpayments as
soon as possible. Moreover, the RAC can recoup overpayments directly
from providers if its contract with the State is structured to permit
RAC collection of overpayments.
Comment: One commenter expressed concern that the proposed rule
does not reflect the potential savings associated with the correction
of repeated provider billing errors. Thus, the current rule does not
incentivize a RAC to help a State stop systemic overpayments as that
would eliminate the RAC's contingency fee. This commenter suggested
that HHS consider some method to reward a RAC for identifying and
reporting solutions to a State which would end overpayments that occur
from system error or other administrative problems on an ongoing basis.
Response: While we encourage States to work with their RACs to
identify potential State vulnerabilities or other similar problem
areas, a RAC reward for the activities is outside the scope of the
proposed and final rules. Generally, a Medicaid RAC is required to
review post-payment claims for the purpose of identifying and
collecting overpayments as well as identifying underpayments. Sections
1902(a)(42)(B)(i) and (ii)(I)(aa) of the Act require RACs to be
compensated on a contingency fee basis for the identification and
recovery of overpayments, to the extent it is consistent with State
law. The statute does not require Medicaid RACs to identify State
administrative issues. We encourage States to evaluate identified
overpayments to determine if trends are apparent and whether solutions
can be developed to address noted vulnerabilities.
Comment: Several commenters indicated that the final rule should
require CMS, State Medicaid agencies (SMAs), and RACs to use program
``fixes'' to educate providers as well as implement payment system
changes to avoid billing mistakes before they are made.
Response: We agree and have included, in this final rule, a
requirement for States and their RACs to develop an education and
outreach program at Sec. 455.508(d), including notification to
providers of audit policies and protocols. We believe that States
should implement additional process improvements to their payment
systems to the extent possible. Those improvements should not
substitute for program integrity initiatives or programs to ensure that
proper payments are made to providers.
Comment: One commenter suggested that CMS place oversight of the
State Medicaid RAC programs and Medicare RAC contractors within the CMS
CPI. Based on its core function and experience base, CPI is uniquely
positioned to oversee the Medicare and Medicaid RACs because its duties
are to perform Medicare and Medicaid program integrity activities.
Response: While we appreciate the commenter's suggestion, the
Medicaid RACs will be procured, administered and operated by the States
according to State laws and regulations. Additionally, there will be no
privity of contract between CMS and the Medicaid RACs. We recently
provided support and technical assistance to the States in the form of
sub-regulatory guidance, all-State call forums, webinars, and a video
entitled ``Medicaid RACs: Are You Ready?'' We will continue to provide
technical support and assistance to States after publication of this
final rule. The appropriate CMS component to oversee the Medicare RAC
program is outside the scope of this final rule.
Comment: One commenter indicated that it was fundamentally opposed
to contingency fees in Medicare and Medicaid auditing. According to the
commenter, this type of behavior has the overwhelming tendency to push
auditors ``to take a chance'' and inappropriately deny claims.
Response: We understand the concerns of the commenter. However, the
statute requires Medicaid RACs to be paid on a contingency fee basis
for the identification and recovery of overpayments. Contingency fee
contracting is a type of payment methodology that has been a standard
practice accepted among private healthcare payers for more than 20
years. In the final rule, we clarified that Medicaid RACs will only
review post-payment claims for overpayments and underpayments.
Accordingly, the Medicaid RACs will not deny claims.
Comment: One commenter expressed concern that the proposed rule
does not indicate that CMS is aware of abuses to providers. As support,
the commenter cited anecdotes experienced by providers during the
Medicare RAC Demonstration period. According to the commenter, CMS was
advised of the ``horrific costs incurred by providers in fighting
denials, particularly in California, and the extremely high percentage
of denials overturned * * * but tremendous cost had been incurred and
the damage was done in terms of reputation, reallocation of resources,
etc.''
Response: We disagree with the comment. While we are aware of
issues in California, we are not aware of explicit ``abuses to
providers.'' We have attempted to address the concerns of providers and
incorporate the lessons learned from the Medicare RAC Demonstration
period into the permanent Medicare RAC program, including, but not
limited to, requiring

[[Page 57815]]

the Medicare RAC to document their ``good cause'' for reviewing a claim
and requiring each Medicare RAC to hire a minimum of 1.0 Full Time
Equivalent (FTE) physician Medical Director to oversee the program. In
addition, we have attempted to incorporate those lessons learned in the
Medicare RAC program to the development of the Medicaid RAC program.
Comment: One commenter expressed disappointment that the proposed
rule does not contain best practices from the Medicare RAC
Demonstration and recommends that CMS reconsider its proposed Medicaid
RAC program policies in the final rule.
Response: We agree with the spirit of the comment. As a result of
numerous comments from stakeholders, we are making modifications to the
proposed Medicaid RAC program in this final rule. For example, we are
requiring in this final rule that each Medicaid RAC hire a minimum of
1.0 FTE Contractor Medical Director who is a Doctor of Medicine or
Doctor of Osteopathy. A State may request an exception, in accordance
with Sec. 455.516, from requiring its RAC to hire a minimum of 1.0 FTE
Contractor Medical Director by submitting written justification and
receiving approval from CMS. We finalize this provision at Sec.
455.508(b). We are also requiring Medicaid RACs to hire certified
coders unless the State determines that certified coders are not
required for the effective review of Medicaid claims. We finalize this
provision at Sec. 455.508(c). Additionally, we are requiring State and
RAC development of an education and outreach program for providers,
including notification of audit policies and protocols (Sec.
455.508(d)); minimum customer service measures, including those
measures found in the Medicare RAC program such as: Providing a toll-
free customer service telephone number in all correspondence sent to
providers and staffing the toll-free number during normal business
hours from 8:00 a.m. to 4:30 p.m. in the applicable time zone (Sec.
455.508(e)(1)); compiling and maintaining provider approved addresses
and points of contact (Sec. 455.508(e)(2)); mandatory acceptance of
provider submissions of electronic medical records on CD/DVD or via
facsimile at the providers' request (Sec. 455.508(e)(3)); notifying
providers of overpayment findings within 60 calendar days (Sec.
455.508(e)(4)); a 3 year maximum claims look-back period (Sec.
455.508(f)); and a State-established limit on the number and frequency
of medical records requested by a RAC (Sec. 455.506(e)). States may
request exceptions to Sec. 455.508(f) through the SPA process, and
RACs may request from States, exceptions to Sec. 455.506(e).
Comment: One commenter recommended that States should implement the
RAC program, through the use of ``regional RACs'' to minimize provider
burden and to maximize consistency and efficiency.
Response: We agree that regional Medicaid RACs can be an innovative
strategy for States to share resources. There is nothing in the statute
that would preclude a group of States from joining together to contract
with a Medicaid RAC. There has been some State interest in forming/
procuring a regional RAC. We encourage their efforts. However, we will
not mandate that States adopt this strategy.
Comment: One commenter asserted that requiring close oversight of
the RAC program will be challenging due to budget constraints.
Response: We understand the commenter's concerns. However, the
Medicaid RACs are part of a significant initiative to reduce improper
payments and recoup the overpayments that have occurred.
Comment: One commenter requested that CMS provide ``extremely tight
monitoring'' of Medicaid RAC review, auditing behavior and denial
patterns if CMS interprets section 6411 of the Affordable Care Act to
mandate contingency fees regarding the identification and recoupment of
overpayments.
Response: Section 1902(a)(42)(B)(ii)(II)(aa) of the Act mandates
that RACs be paid on a contingency fee basis for the identification and
recoupment of overpayments. We will oversee State implementation of
Medicaid RAC programs to ensure compliance with the Act and these
regulations, but do not anticipate the need to, as the commenter
suggests, engage in ``extremely tight monitoring'' at this point.
States have attested through their SPAs that they will implement a
Medicaid RAC program consistent with this final rule (unless a State
has been granted an exception).
Comment: Several commenters suggested that ``[t]he audit should
include all of Medicaid, and not be restricted to narrow areas. This
will ensure the maximum benefit of program recoveries and preventive
actions on the broadest scope possible.''
Response: We believe that States should have the ability to direct
the audit targets, but that, so long as consistent with State
direction, the RACs should have the ability to audit the entire
Medicaid program.
Comment: Several commenters questioned CMS' authority to require
States to continue existing program integrity efforts. Most of these
commenters recommended that CMS exempt States that have Medicaid
Integrity Programs or similar audit programs from the requirement to
establish RAC programs. These commenters argued that there is no
statutory authority for CMS to compel States to maintain levels of
funding and activity for a duplicate program, and questioned the
assertion that States have no option to choose to either be audited by
a Federal MIC or establish a Medicaid RAC program. Several commenters
also expressed concern that the continuation of existing program
integrity efforts greatly reduces flexibility and creates duplicative
audits and review processes which may ultimately impact provider
participation and access to care. Finally, one commenter recommended
that CMS remove the requirement to continue existing program integrity
activities completely.
Response: Continuation of existing program integrity activities is
important to ensure a comprehensive State program integrity program
that includes more than a claims auditing program, such as the Medicaid
RAC program. Other critical components of a Medicaid integrity program
include Surveillance and Utilization Review (SUR) unit activities, MMIS
system monitoring, and fraud prevention and detection activities,
including coordination with law enforcement.
We disagree that the Medicaid RAC program is duplicative of the
Federal national audit program, in which Federal MICs conduct audits of
Medicaid providers. In particular, while RACs are an efficient way to
identify payment errors, they are not the most effective approach to
identify or prevent fraudulent practices. Federal MICs can focus on
audit issues that may be less advantageous for a contingency-fee based
contractor. In addition, fraudulent schemes may not lead to overpayment
recoveries, which provide the source of RAC fees. Moreover, Medicaid
RAC programs are poised to address State-specific issues stemming from
the individual characteristics of each State's Medicaid program (for
example, special payment structures under a Medicaid demonstration) and
will focus on the needs and vulnerabilities associated with a
particular State. In contrast, Federal MICs are poised to address
vulnerabilities on a regional and national basis. These regional and
national trends would likely go undetected by an individual Medicaid

[[Page 57816]]

RAC. Accordingly, the national audit program is complementary to a
State Medicaid RAC program.
We are not exempting States that have Medicaid integrity programs
from establishing a Medicaid RAC program. Although there is no specific
requirement in the Affordable Care Act regarding the continuation of
program integrity efforts, the Congress directed CMS to promulgate
regulations to carry out section 6411 of the Affordable Care Act with
full awareness of the various program integrity initiatives for which
it had given previous authority and that are currently in place in
States. Congress did not relax any of those previously authorized
program integrity activities in the Affordable Care Act. We take this
to mean that Congress intended this policy to supplement previously
authorized program integrity activities at both the State and Federal
levels. We also believe that States should play a significant role in
coordinating the audit activities of their respective integrity
programs, RACs, and any other auditing entities under contract with the
State. We are very concerned about provider participation and
beneficiary access to care as well as minimizing the potential for
multiple audits of the same provider. However, States should not
supplant existing State program integrity initiatives with a Medicaid
RAC program because of the fundamentally different and complementary
approaches of the two audit programs.

B. Implementation Date

Comment: Several commenters expressed concern that ``States must
fully implement their Medicaid RAC programs by April 1, 2011.'' While
some commenters recommended specific alternative implementation dates
ranging between July 1, 2011 and January 1, 2012, the majority of the
commenters asserted that April 1, 2011, did not allow States enough
time to complete the procurement process, or allow States that require
legislative authority to obtain approval for contracting with RACs. One
commenter requested clarification as to the meaning of ``fully
implement'' by April 1, 2011. Another commenter suggested voluntary
implementation, on the part of States, from the present date until
January 1, 2012.
Response: Although we proposed an implementation date of April 1,
2011, the date was contingent upon the rule being finalized. We
recognize the need to provide a reasonable period of time between
publication of the final rule and the date for required implementation
of the Medicaid RAC program to ensure States' compliance with the final
rule. Accordingly, absent an exception, States will be required to
implement their RAC programs by January 1, 2012.
Comment: One commenter asked if there will be a penalty if a State
does not implement a RAC program.
Response: When a State elects to participate in the Medicaid
program, it is required to comply with its State Plan, as well as the
requirements imposed by the Act and applicable Federal regulations.
Section 1902(a)(42)(B)(i) of the Act requires States to implement RAC
programs, which is consistent with States' commitment to promote
program integrity. Additionally, States are required by section
1903(a)(7) of the Act to administer funding necessary for the proper
and efficient administration of the State Plan or waiver of the plan.
If the Secretary deems that a Medicaid RAC program is necessary to
ensure the integrity and the efficiency of a State's Medicaid program,
a State's failure to implement the program may violate section
1903(a)(7) of the Act. A potential consequence of a State's failure to
implement a RAC program is the loss of FFP. If a State is unable to
implement a RAC program, then that State should request from CMS an
exception either from a specific Medicaid RAC program requirement(s) or
a complete exception from implementing the RAC program. However, as
stated in the proposed rule, we will grant complete exceptions from the
Medicaid RAC program or exceptions to RAC requirements only rarely and
only under the most compelling of circumstances.
Comment: One commenter recommended that CMS adopt a phase-in
strategy similar to the Medicare program to ensure that the provider
community can actively participate in outreach programs.
Response: We provided early guidance for States with regard to the
creation and implementation of a Medicaid RAC program. States already
have the ability to request delayed implementation of RAC programs
through the Medicaid SPA process. Additionally, we provided support and
technical assistance to the States in the form of sub-regulatory
guidance, all-State call forums, webinars and an informative video
entitled ``Medicaid RACs: Are You Ready?'' We fully anticipate
continuing to provide technical assistance after the publication of the
final rule. Therefore, we are not adopting a global phase-in strategy.

C. Program Requirements

Comment: Numerous commenters inquired about the overall program
approach of the Medicaid RAC program. One commenter indicated that it
interpreted the Affordable Care Act to read that Medicaid RACs should
be established in the same manner as CMS currently contracts with
Medicare RACs, and with the same program requirements. Several
commenters suggested that CMS should standardize program elements of
the Medicare RACs into Medicaid RAC programs. Several commenters
expressed their concerns that a variation in Medicaid RAC program
requirements between bordering States would cause an undue burden on
providers that operate nationally or in multiple States.
Response: Consistent with the flexibility afforded States in the
design and operation of their Medicaid programs, we did not prescribe
every element of the Medicaid RAC program in the proposed rule. We
received many comments encouraging CMS to adopt measures in the
Medicaid RAC program that could operate in alignment with Medicare RAC
requirements. We considered the effect of aligning Medicare provisions
upon individually State-run programs and existing State laws and
regulations and balanced that with the spirit of the statute.
Accordingly, in the final rule, we are requiring certain specific
program elements that are consistent with the program elements
established by the Medicare RAC program. These program elements include
the following:
Requiring the entity to hire a minimum of 1.0 FTE
Contractor Medical Director who is a Doctor of Medicine or Doctor of
Osteopathy in good standing with the relevant State licensing
authorities and has relevant work and educational experience. A State
may seek to be excepted, in accordance with Sec. 455.516, from
requiring its RAC to hire a minimum of 1.0 FTE Contractor Medical
Director by submitting to CMS a written request for CMS review and
approval (Sec. 455.508(b));
Requiring the entity to hire certified coders unless the
State determines that certified coders are not required for the
effective review of Medicaid claims (Sec. 455.508(c));
Requiring the development of an education and outreach
program component, including notification to providers of audit
policies and protocols (Sec. 455.508(d));
Requiring RAC customer service measures including:
Providing a toll-free customer service telephone number in all
correspondence sent to providers

[[Page 57817]]

and staffing the toll-free number during normal business hours from
8:00 a.m. to 4:30 p.m. in the applicable time zone (Sec.
455.508(e)(1)); compiling and maintaining provider approved addresses
and points of contact (Sec. 455.508(e)(2)); mandatory acceptance of
provider submissions of electronic medical records on CD/DVD or via
facsimile at the providers' request (Sec. 455.508(e)(3)); notifying
providers of overpayment findings within 60 calendar days (Sec.
455.508(e)(4));
3-year maximum claims look-back period (Sec. 455.508(f));
State established limit on the number and frequency of
medical records requested by a RAC (Sec. 455.506(e));
State coordination of recovery audit efforts with other
auditing entities (Sec. 455.506(c)); and
Return of contingency fees within a reasonable timeframe
as prescribed by the State, if a Medicaid RAC determination is
overturned at any level of appeal (Sec. 455.510(b)(3)). As noted
below, States will have flexibility as to timing of payment.
In addition, we strongly encourage States to adopt specific program
elements that are part of the permanent Medicare RAC program within the
flexibility States have to design and implement their RAC programs in
the following areas:
Medical necessity reviews;
Extrapolation of audit findings;
External validation of accuracy of RAC findings; and
Types of claims audited.
For contingency fees, States maintain the flexibility of paying
contingency fees either from amounts identified and recovered, but not
fully adjudicated, or after the overpayment was fully adjudicated and
all appeals available to the provider were exhausted. As noted above,
the RAC will be required to return the contingency fee, within a
reasonable timeframe as prescribed by the State that corresponds to the
amount of the overpayment if an adverse determination is overturned at
any level of appeal.
Program elements where we will grant States complete flexibility
regarding the design, procurement, administration and operation of
their RAC programs, largely because of the requirements of State laws,
are as follows:
Underpayment methodology;
State appeals process;
Contingency fee rates (States have complete flexibility in
the contingency fee rates they pay, exclusive of FFP. However, we will
provide FFP only for amounts that do not exceed the then-highest
contingency fee rate paid to Medicare RACs);
State exclusion of claims;
Bundling of procurements; and
Coordination of the collection of RAC overpayments.
With regard to the providers serving beneficiaries in multiple
States that expressed concern about the variation among Medicaid RAC
program elements, we believe that a strong education and outreach
campaign developed by the States and RACs and required as a part of
every Medicaid RAC program will help alleviate the concerns that were
expressed.
As we described in more detail, in sections II. and III.G. of this
final rule, we are granting States the flexibility to design their
appeals processes, but States are required by section
1902(a)(42)(B)(ii)(III) of the Act to have an adequate process for
entities to appeal adverse RAC determinations.
Comment: One commenter suggested that Medicaid RAC program goals be
created based on the error rate established by the Payment Error Rate
Measurement (PERM) program.
Response: PERM addresses specific error measures in the Medicaid
program. Under section 1902(a)(42)(B)(i) of the Act, the Medicaid RACs
shall identify underpayments and overpayments and shall recoup
overpayments. Thus, there is no authority under Federal law for
Medicaid RAC programs to apply any measure except to ensure that States
make no improper payments to providers.
Comment: One commenter inquired whether existing patient
identifiers can be used so that files can be readily retrieved by the
provider.
Response: We do not intend for States to deviate from processes
that are already in place to readily identify claims. We encourage
States to work with their contractors to include the necessary fields
to effectively identify overpayments and/or underpayments.
Comment: Several commenters stated that during the Medicare RAC
Demonstration, many providers experienced inappropriate and arbitrary
RAC denials. These commenters indicated that the RAC neither informed
providers of the types of issues they were auditing, nor did they
provide a rationale for adverse determinations. Additionally,
commenters reported RACs audited claims using the wrong payment codes
and audited claims from several years ago. According to commenters,
this led to provider appeals, 64 percent of which were decided in the
favor of the provider.
Response: As stated previously, we are applying numerous lessons
learned from the Medicare RAC demonstration. We are requiring in this
final rule that each Medicaid RAC must hire a minimum of 1.0 FTE
Contractor Medical Director who is a Doctor of Medicine or Doctor of
Osteopathy in good standing with the relevant State licensing
authorities and has relevant work and educational experience. A State
may seek to be excepted, in accordance with Sec. 455.516, from
requiring its RAC to hire a minimum of 1.0 FTE Contractor Medical
Director by submitting to CMS a written request for CMS review and
approval. We finalize this provision at Sec. 455.508(b). We are also
requiring Medicaid RACs in this final rule to hire certified coders
unless the State determines that certified coders are not required for
the effective review of Medicaid claims. We finalize this provision at
Sec. 455.508(c). Finally, we are requiring that there be a 3 year
maximum claims look-back period. We finalize this provision at Sec.
455.508(f).
Comment: One commenter inquired whether Medicaid RACs are required
to comply with the reopening regulation located at Sec. 405.980
similar to Medicare RACs, which requires a RAC to have good cause
before it reopens a claim.
Response: Section 405.980 applies to administrative appeals under
the Medicare program. States have different administrative appeal
processes from the Medicare program. Accordingly, we did not require
States to comply with the reopening regulation as set forth in the
Medicare RAC program. As stated previously, States will retain the
flexibility to design, procure, operate, and administer their RAC
programs in accordance with State laws, regulations, and policies.
Comment: One commenter suggested that patients not receive a letter
regarding a Medicaid RAC audit until the appeal process has ended and a
determination is final, similar to the Medicare program.
Response: The Medicaid RAC program is designed to review claims
submitted by providers of items and services or other individuals
furnishing items and services for which payment has been made under
section 1902(a) of the Act. Accordingly, States have the flexibility to
decide the issue of patient notification of final claims resolution.
Comment: Several commenters stated that the best way to reduce
common billing and coding mistakes is through targeted education and
outreach, rather than onerous audits performed by outside contractors
with incentives to deny claims. These commenters asserted that
education and outreach

[[Page 57818]]

efforts are insufficient across the Medicare and Medicaid programs.
Response: We agree that targeted education and outreach is one way
of reducing common billing and coding mistakes. Accordingly, we have
finalized at Sec. 455.508(d), that States and their RACs are required
to develop a education and outreach program as part of their Medicaid
RAC programs. This includes, at a minimum, notification of audit
policies and protocols.
Comment: Several commenters recommended the exclusion of medical
necessity reviews from the Medicaid RAC program.
Response: We disagree with the commenters. Providers are required
to furnish medically necessary services in State Medicaid plans and
medical necessity reviews by Medicaid RACs are permitted to the extent
they are consistent with State laws and regulations.
Comment: Several commenters suggested that if medical necessity
reviews are permitted in Medicaid RAC programs, then CMS should issue
key oversight provisions in the final rule to mitigate incentives for
aggressive and/or inaccurate medical necessity review denials.
Response: We disagree that we should issue oversight provisions
regarding medical necessity reviews in the Medicaid RAC program.
Providers are required to furnish medically necessary services in
accordance with State Medicaid plans, and thus medical necessity
reviews by Medicaid RACs are permitted to the extent the reviews are
consistent with State laws and regulations. In those cases, we
encourage States to adopt measures reflected in the Medicare RAC
program sub-regulatory guidance. We intend to continue providing
technical assistance to States that will inform them of best practices
from the Medicare RAC program. Accordingly, we decline to issue
oversight provisions in the final rule regarding medical necessity
reviews.
Comment: Several commenters recommended that if medical necessity
reviews are permitted in the Medicaid RAC program and an improper
payment is identified, providers should be allowed to re-bill for the
lower appropriate claim amount.
Response: If a Medicaid RAC identifies an improper payment as a
result of a medical necessity review, or any RAC review, the issue of
whether a provider is permitted to re-bill a corrected claim is
governed by State law, regulation, and policy which set time limits on
the submission of providers' claims.
Comment: One commenter recommended increased physician involvement
in medical necessity reviews.
Response: In the Medicare RAC program, no physician involvement is
required in medical necessity reviews. We require that registered
nurses (RNs) must be utilized, and that the Medicare RAC generally,
employ a Medical Director. Similarly, we have finalized at Sec.
455.508(b), that each RAC must hire a minimum of 1.0 FTE Contractor
Medical Director who is a Doctor of Medicine or Doctor of Osteopathy in
good standing with the relevant State licensing authorities and has
relevant work and educational experience. A State may seek to be
excepted, in accordance with Sec. 455.516, from requiring its RAC to
hire a minimum of 1.0 FTE Contractor Medical Director by submitting to
CMS a written request for CMS review and approval. In addition, States
that elect to permit medical necessity reviews in their Medicaid RAC
programs should develop criteria consistent with their own State laws
and regulations.
Comment: One commenter recommended that CMS establish reporting
mechanisms to monitor contractor accuracy when reviewing claims for
medical necessity in the Medicaid RAC program.
Response: If States elect to include medical necessity reviews in
their Medicaid RAC program, we encourage the States to monitor the
reviews for accuracy. We have finalized Sec. 455.502(c) and Sec.
455.514(b) which require State reporting. Additionally, we will issue
sub-regulatory guidance, generally, on reporting and performance
metrics for Medicaid RACs.
Comment: One commenter recommended that CMS should establish
appropriate guidelines for Medicaid RAC medical necessity reviews, and
require the RACs to have qualified personnel with both the clinical and
regulatory experience to review medical necessity review claims.
Response: We disagree that CMS should establish guidelines for
medical necessity reviews conducted by Medicaid RACs. States must
follow the guidance that is provided in State Medicaid plans, State
law, regulation, and policy. In the final rule at Sec. 455.508(b),
however, we are requiring that each RAC must hire a minimum of 1.0 FTE
Contractor Medical Director who is a Doctor of Medicine or Doctor of
Osteopathy in good standing with the relevant State licensing
authorities and has relevant work and educational experience. A State
may seek to be excepted, in accordance with Sec. 455.516, from
requiring its RAC to hire a minimum of 1.0 FTE Contractor Medical
Director by submitting to CMS a written request for CMS review and
approval.
Comment: Several commenters suggested that Medicaid RACs should
conduct sample medical necessity audits to support the data identifying
the pattern of errors that will be targeted through the audits.
Response: As previously stated, if States elect to include medical
necessity reviews in their Medicaid RAC programs, we encourage the
States to monitor the reviews for accuracy.
Comment: Several commenters recommended that final validation of
medical necessity review denials should be signed off by a physician.
Response: In the Medicare RAC program, a physician's approval is
not required in the validation of a medical necessity review denial.
States have the flexibility to determine the parameters for medical
necessity reviews. Therefore, we are not requiring final validation of
medical necessity review by a physician.
Comment: Several commenters recommended that the RACs be required
to submit a rationale for each medical necessity review to the SMA for
review and approval.
Response: Similar to the Medicare RAC program in which the agency
formed a ``New Issue Review Board'' which approves audit issues prior
to widespread review, we encourage the formation of State review teams
for Medicaid RACs that can approve new audit issues prior to review. We
will provide technical assistance to States who decide to include
medical necessity reviews in their Medicaid RAC programs.
Comment: One commenter recommended that the SMA be required to
share training materials with providers that are used by Medicaid RACs
to conduct a medical necessity review.
Response: Although we will not require States to share Medicaid RAC
training materials with providers, we encourage States and SMAs,
consistent with their laws, regulations, and policies, to make every
effort to ensure transparency in the Medicaid RAC program.
Additionally, we have finalized Sec. 455.508(d), which requires an
education and outreach component in every Medicaid RAC program
including, at a minimum, notification to providers of audit policies
and protocols.
Comment: One commenter recommended that CMS exclude medical
necessity reviews in States where prior authorization programs

[[Page 57819]]

require medical necessity reviews prior to payment approval.
Response: To the extent that medical necessity reviews are
consistent with Medicaid State Plans, State laws or regulations,
medical necessity reviews are permitted. Accordingly, we did not adopt
the commenter's recommendation.
Comment: One commenter suggested that CMS and SMAs use RAC audit
findings to educate providers and implement payment system fixes to
avoid billing mistakes before they are made.
Response: We agree with the comment. If Medicaid RACs identify
program vulnerabilities as a result of their findings, we encourage
RACs to share this information with States so that they can implement
corrective action, such as pre-payment edits or other similar system
fixes. States can also use RAC findings to develop provider education
in an attempt to prevent billing errors.
Comment: Several commenters expressed concern that all staff
conducting automated or complex reviews must demonstrate knowledge of
the State's published Medicaid guidelines and coding criteria for the
dates and types of services.
Response: We believe that States should make the relevant Medicaid
coverage guidelines and coding criteria available as part of the
procurement process. This can be done in detail within the request for
proposal or by providing the necessary links where guidelines and
criteria are located for the various program types.
Comment: A commenter requested that the Medicaid RAC Statement of
Work (SOW) exclude Evaluation and Management (E & M) Services from RAC
review.
Response: States that contract with a RAC engage the RAC for the
purpose of reviewing claims submitted by providers for items or
services for which payment has been made under the Medicaid program. We
expect that E & M Services, that is, those services provided by
physicians and non-physician practitioners to evaluate patients and
manage their care, will be included within the scope of Medicaid RAC
review.
Comment: A commenter suggested having an internal State agency
staff member review claims before auditing by the Medicaid RAC.
Response: We do not oppose States setting up processes to ensure
the validity of claims before a determination is made as to whether a
claim is an overpayment or underpayment. Because of the uniqueness of
each State Medicaid program, the States should have the flexibility to
design their Medicaid RAC programs specific to their individual program
needs.
Comment: One commenter strongly recommended hiring professionally
trained and certified coders, who have the appropriate skill sets that
would facilitate improved reviews and reduce duplicative work in
reviewing records correctly.
Response: We agree with the commenter. Accordingly, we have
included Sec. 455.508(c) in this final rule which requires Medicaid
RACs to hire certified coders unless the State determines that
certified coders are not required for the effective review of Medicaid
claims.
Comment: Several commenters suggested that the final rule require
each Medicaid RAC to have a minimum of 1.0 FTE physician Medical
Director who is currently licensed; has relevant work experience in the
health insurance industry; has extensive knowledge of Medicaid coverage
and payment rules; and has appropriate clinical experience practicing
medicine. Other commenters suggested that CMS not require Medicaid RACs
to hire physician Medical Directors, but require that the appropriate
level of medical expertise be staffed by the RAC to review medical
records. The commenters also suggested that the medical personnel not
have a record of adverse disciplinary actions.
Response: We agree with those commenters who suggested that the
Medicaid RACs should each hire a Medical Director who is a Doctor of
Medicine or a Doctor of Osteopathy and has relevant work and
educational experience. Accordingly, we have finalized at Sec.
455.508(b) that each Medicaid RAC must hire a minimum of 1.0 FTE
Contractor Medical Director who is a Doctor of Medicine or Doctor of
Osteopathy in good standing with the relevant State licensing
authorities and has relevant work and educational experience. A State
may seek to be excepted, in accordance with Sec. 455.516, from
requiring its RAC to hire a minimum of 1.0 FTE Contractor Medical
Director by submitting to CMS a written request for CMS review and
approval. We also require Medicaid RACs at Sec. 455.508(a) to employ
personnel who are trained medical professionals, as defined by the
State, in good standing with the relevant State licensing authorities,
where applicable, to review Medicaid claims.
Comment: One commenter requested that CMS consider clarifying the
language in the final rule to include State policies and provider
handbooks, where Medicaid RACs would review post-payment claims for
overpayments and underpayments consistent with State laws and
regulations.
Response: States have a certain amount of flexibility to design
their Medicaid RAC program according to their needs. We believe that
States' current practices regarding the processing of claims, including
the use of policies and provider handbooks, should not differ in the
Medicaid RAC program. Accordingly, each State should provide its RAC
with all available resources to help facilitate claim review.
Comment: One commenter requested that CMS clarify the types of
technical abilities that an entity wishing to perform as a Medicaid RAC
must demonstrate, as referenced in proposed Sec. 455.508 of the
regulation, and incorporate other examples of technical abilities in
addition to, trained medical professionals in the final rule.
Response: We expect that RACs will have the ability to review
claims submitted by providers of items and services for which payment
has been made under section 1902(a) of the Act as required by Sec.
455.506(a). We have finalized Sec. 455.508(a), which requires RACs to
employ trained medical professionals, as defined by the State, to
review Medicaid claims. These trained medical professionals could
include, for example, nurses or physical therapists. States have the
discretion to determine the types of medical professionals they require
based upon their individual Medicaid RAC program needs.
Comment: One commenter requested that CMS recognize that not all
recovery efforts require trained medical professionals; their
experience with claims review includes the significant input of non-
medical trained professionals, including CPAs, coding professionals,
investigators, and accountants who are able to identify inappropriate
payments that arise out of non-clinical issues.
Response: We appreciate the comment and recognize that the review
of claims could involve a variety of disciplines to ensure the
identification of inappropriate payments. However, we have finalized at
Sec. 455.508(a), (b), and (c) that Medicaid RACs must hire trained
medical professionals, as defined by the State, to review Medicaid
claims, each RAC must hire a minimum of 1.0 FTE Contractor Medical
Director who is a Doctor of Medicine or Doctor of Osteopathy in good
standing with the relevant State licensing authorities and has relevant
work and educational experience. A State may seek to be excepted, in
accordance with Sec. 455.516, from requiring its RAC to hire a

[[Page 57820]]

minimum of 1.0 FTE Contractor Medical Director by submitting to CMS a
written request for CMS review and approval. In addition, the Medicaid
RAC must hire certified coders (unless the State determines that
certified coders are not required for the effective review of Medicaid
claims).
Comment: A commenter suggested that CMS use the Medicare definition
of ``good cause'' found in our regulation at Sec. 405.986 as a floor
in its final regulation for the Medicaid RAC program. This commenter
also suggested that providers should have the right to challenge a lack
of good cause to review a claim by the Medicaid RACs. Another commenter
requested that CMS require Medicaid RACs to document good cause for
claim review.
Response: RACs are required to review Medicaid claims. States will
have the flexibility to establish requirements regarding the
documentation of good cause to review a claim. Additionally, States may
consider establishing requirements regarding the documentation of good
cause to review a claim if they do not already have this requirement.
In addition to those program elements specifically required, we
encourage States to replicate the Medicare practices that would be
beneficial to their Medicaid RAC programs, including, without
limitation, documentation of good cause. However, we will not require
States to document good cause because that requirement applies to the
Medicare administrative appeals process. Each State has already assured
CMS via the State Plan amendment process that it has in place an
administrative appeals infrastructure whereby a provider may avail
itself of its due process rights to appeal an adverse Medicaid RAC
determination. States, therefore, must follow their own administrative
appeals processes, which may or may not require documentation of good
cause.
Comment: One commenter requested that CMS institute an issue
approval process similar to the process now provided in the Medicare
RAC program.
Response: In general, issues reviewed by the Medicare RACs are
approved by CMS prior to widespread review. CMS uses a New Issue Review
Board to provide oversight in conjunction with issues that are reviewed
by the Medicare RACs. States may opt to establish an issue review board
similar to the Medicare RAC program in which they consider topics for
audit review. States will have the flexibility to determine the issues
that are relevant to their respective Medicaid programs which will be
subject to Medicaid RAC review.
Comment: One commenter suggested that CMS require Medicaid RACs to
hold ``meet and greet'' forums.
Response: We recognize that each State has different considerations
and must tailor its Medicaid RAC activities to the uniqueness of its
own State. Accordingly, we will not require Medicaid RACs to hold
``meet and greet'' forums. However, we believe that States should
promote transparency in their respective RAC programs. A ``meet and
greet'' forum is an example of one way a State can promote transparency
in its RAC program by allowing providers to interact with the
contractor's personnel.
Comment: Several commenters asked that CMS require the following
customer service measures that will assist providers in ensuring the
timely submission of sufficient documentation to support the services
billed and generally increase the efficiency of the process:
1. Implement timeframes for RAC determinations and notification of
the same.
2. Require RACs to obtain correct provider addresses and points of
contact.
3. Require RACs to give extensions to providers if RAC provider
notices are sent to a wrong address or other extenuating circumstances.
4. Require RACs to maintain websites and post audit issues.
5. Require RACs to maintain provider portals of customer service
information.
6. Require RACs to provide a toll-free phone number in case of
questions.
7. Require RACs to respond to providers in a timely manner.
8. Require RACs to give providers a rationale for denials.
9. Require RACs to send correspondence to providers in clearly
marked envelopes.
10. Implement deadlines for submission of medical records and
clearly indicate those deadlines in an Additional Documentation Request
(ADR) letter and indicate in that letter the suggested documentation
that will assist RACs in adjudicating the claim.
11. Initiate contact with the provider who is the focus of the
audit before issuing an overpayment determination for failure to submit
documentation.
12. Accept provider submission of medical records on CD/DVD or via
facsimile.
Response: After consideration of these numerous comments, we are
requiring at Sec. 455.508(e), that Medicaid RACs provide minimum
customer service measures including: Providing a toll-free customer
service telephone number in all correspondence sent to providers and
staffing the toll-free number during normal business hours from 8:00
a.m. to 4:30 p.m. in the applicable time zone(Sec. 455.508(e)(1));
compiling and maintaining provider approved addresses and points of
contact(Sec. 455.508(e)(2)); mandatory acceptance of provider
submissions of electronic medical records on CD/DVD or via facsimile at
the providers' request (Sec. 455.508(e)(3)); notifying providers of
overpayment findings within 60 calendar days (Sec. 455.508(e)(4)).
States should also rely upon internal processes and procedures for
notification requirements and identify specific timeframes for required
responses between the Medicaid RAC and providers, if possible.
Comment: Several commenters asked that the proposed rule require
each Medicaid RAC to include a toll-free customer service telephone
number in all correspondence sent to providers.
Response: We agree and have finalized at Sec. 455.508(e) the
requirement that Medicaid RACs must provide minimum customer service
measures including: Providing a toll-free customer service telephone
number in all correspondence sent to providers and staffing the toll-
free number during normal business hours from 8:00 a.m. to 4:30 p.m. in
the applicable time zone (Sec. 455.508(e)(1)).
Comment: One commenter asked if the notification of findings of
overpayments or underpayments would include information on how
overpayments may be repaid/offset, time limits for repayment without
interest, and information on timeliness of additional payments and
methods of additional payments.
Response: We have finalized at Sec. 455.508(e)(4), that RACs must
notify providers of overpayment findings within 60 calendar days. Also,
at Sec. 455.510(c)(3), we require States to notify providers of
underpayments that are identified by the RACs. Each State will have the
discretion to determine any additional information that it wants to
include in provider notifications.
Comment: One commenter asked CMS to require States and their RACs
to give advance notice to providers of audit focus areas in preparation
for reviews, as occurs in the Medicare RAC program.
Response: States have a certain degree of flexibility to design
their Medicaid RAC programs to fit their individual needs. We believe
that States should promote transparency in their RAC programs. States
requiring RACs to give advanced notice to providers of audit areas in
preparation of a review is an

[[Page 57821]]

example of how States can facilitate transparency.
Comment: One commenter asked CMS to require States to be
transparent with regard to their coding/billing rules and guidelines as
well as the screening guidelines that are used for making medical
necessity determinations.
Response: We encourage States to make coding/billing rules and
guidelines available to the extent possible to promote transparency.
Comment: Some commenters recommended that CMS develop a Medicaid
RAC national SOW, similar to the Medicare RAC program.
Response: We disagree with the comment. The proposed Medicaid RAC
program will not be one national program, like Medicare; rather it will
be more than 50 State-specific programs. In this context, it would be
nearly impossible to standardize the SOW for the Medicaid RAC program,
as Medicare does. We have previously stated that as a result of
comments, we have reconsidered the proposal to allow States complete
flexibility regarding most aspects of their RAC programs, and have
finalized at Sec. 455.506 and Sec. 455.508 certain requirements for
States and their RACs to better align with Medicare RACs. With regard
to Medicaid RAC program elements where we encourage States to adopt
those measures that were incorporated into the permanent Medicare RAC
program, we will continue to provide technical assistance after the
publication of the final rule.
Comment: Several commenters expressed concern about allowing the
RAC to develop or apply its own coverage, payment, or billing policies.
Response: States establish Medicaid coverage, payment and billing
policies. The contract established with the RAC should address how the
RAC will audit claims based on those established policies. Whether or
not RACs develop or apply their own coverage, payment or billing
policies is a contract issue resolved between States and their RACs.
Comment: Commenters expressed concern that small and solo practice
physicians are already overwhelmed as a result of requests for records
by other audit programs. Other commenters suggested that CMS require
the RACs to assume the cost of copying and mailing, as well as allow
for the electronic submission of records.
Response: We agree with the commenters with regard to limiting the
number of medical records that may be requested by a Medicaid RAC.
Accordingly, we have finalized at Sec. 455.506(e) that States must set
limits on the number and frequency of medical records to be reviewed by
the RACs, subject to requests for exceptions from RACs. With regard to
the costs of copying and mailing, as well as the electronic submission
of records, we require at Sec. 455.508(e)(3) mandatory acceptance of
provider submissions of electronic medical records on CD/DVD or via
facsimile at the provider's request.
Comment: One commenter requested guidance regarding the parameters
associated with potential conflicts of interests that may develop as a
result of the same contractor performing services on behalf of
providers, for example, coding and billing as well as seeking to
perform RAC audits of these same providers in which they acted as
consultants.
Response: We indicated in the proposed rule that States should be
cognizant of the potential for conflicts of interest, and should take
steps to identify and prevent conflicts of interest. These conflicts of
interest may arise among contractors or their subcontractors that
perform audit related services for providers and then seek to perform
audit recovery services on behalf of the State.
Comment: One commenter requested that the Medicaid RAC obtain
approval from CMS to audit new issues and to post CMS-approved issues
on the Medicaid RAC's website prior to the claims review similar to the
current Medicare RAC process.
Response: The Medicaid RAC program differs from the Medicare RAC
program in that it is a State-run program. Accordingly, specific areas
of RAC review should be determined by the State in conjunction with its
RAC. We recognize that there could be issues that are unique to a
particular State in terms of areas that should be the focus of an
audit. Therefore, we believe States are in the best position to make
this determination.
Comment: One commenter requested that CMS clarify whether RAC
contracts must be for a period of 5 years, similar to the term for
Medicare RAC contracts.
Response: As stated earlier, States will have the flexibility to
set periods of performance in their respective Medicaid RAC contracts
that fit their program needs and are consistent with State law.
Comment: One commenter requested that CMS require States to use a
validation contractor to independently examine Medicaid RAC
vulnerability and claim determinations, and to issue annual accuracy
scores.
Response: While we will not require States to engage a validation
contractor, we believe that States should set targets for validation of
the accuracy of RAC determinations and measure those targets
accordingly. In addition, we plan on developing performance metrics in
conjunction with the States to assist with determining the accuracy of
RAC reviews.
Comment: One commenter requested that CMS require Medicaid RACs to
accept electronic documentation submission in response to RAC audits.
Response: As part of the customer service measures, we are
requiring Medicaid RACs at Sec. 455.508(e)(3) to accept electronic
submissions of medical record documentation to facilitate provider
response in connection with RAC audit requests, without compromising
the security and privacy of that data, unless the State requests and
receives an exception from CMS.
Comment: One commenter suggested that CMS include additional
provisions in the final rule that will serve to protect independent
community pharmacies against abusive auditors and audit practices by
requiring RACs to accept the records of a hospital, physician, or other
authorized practitioner that are made available by the pharmacy to
validate pharmacy records and prescriptions for confirming the accuracy
of Medicaid claims filed by the pharmacy.
Response: We disagree that it is necessary to include additional
provisions to protect independent pharmacies against abusive audit
practices. States will have the flexibility to design their Medicaid
RAC programs consistent with their laws, regulations, and policies.
Comment: One commenter requested that CMS include licensed
pharmacists or a company representative in the RAC auditing process.
Response: We decline to require Medicaid RACs to hire licensed
pharmacists or company representatives. However, States have the
flexibility to require Medicaid RACs to hire licensed pharmacists or
company representatives if they so choose. We are finalizing staffing
requirements at Sec. 455.508 (a), (b) and (c).
Comment: One commenter suggested that CMS require Medicaid RACs to
form panels comprised of practicing physicians representing various
specialties, which can advise RACs on medical issues.
Response: We do not oppose States requiring Medicaid RACs to form
panels of practicing physicians who represent various specialties that
can advise them on medical issues. We encourage States to adopt
measures that will promote transparency and improved

[[Page 57822]]

communication among States, Medicaid agencies, Medicaid RACs, and
providers.
Comment: One commenter suggested that CMS require each Medicaid RAC
auditor to be trained on Medicaid payment and coverage policy relating
to all target areas approved by the State, billing and re-billing
protocols, and the Medicaid appeals process. Each RAC auditor should
also be required to demonstrate proficiency in these areas prior to
conducting audits.
Response: We understand the concerns of the commenter regarding the
need to have highly trained personnel. At Sec. 455.508(a), we require
that Medicaid RACs hire trained medical professionals, as defined by
the State, to review Medicaid claims.
Comment: One commenter urged CMS to designate a percentage of
recovered program dollars to improve education, increase pre-payment
claim edits to eliminate payment of duplicate claims and those
obviously submitted in error (for example, age-specific services
provided to a patient outside the designated age range), and to provide
continuous outreach with information on newly discovered and commonly
occurring billing errors in both the Medicare and Medicaid programs.
Response: We agree with the commenter that education and outreach
is a necessary element to Medicaid RAC programs. Accordingly, we
include in this final rule at Sec. 455.508(d), the requirement that
States and RACs develop an education and outreach program, including
notification to providers of audit policies and protocols. We will not
require States to designate a percentage of recovered program dollars
to improve education and increase pre-payment claim edits.
Comment: A commenter recommended that CMS consider relief in the
presence of a disaster, whether widespread or in an individual
location, in the way of an extension of the deadline for receipt of
records or refund, acceptance of reconstructed records or exemption
from review for records that were completely destroyed, and/or delay of
reviews for up to 6 months.
Response: States should already have policies and procedures in
place for handling unanticipated events when they occur, including
provisions for requests of records.
Comment: Several commenters requested CMS to exclude payments made
to disproportionate share hospitals (DSH) or special hospital payments
from the scope of Medicaid RAC review in the final rule.
Response: We do not believe that DSH payments or special hospital
payments should be excluded in the final rule. States have the
flexibility to determine whether those payments should be the focus of
RAC review.
Comment: One commenter suggested that CMS require States to publish
Medicaid and Medicare RAC audit reports for public viewing.
Response: We believe that States should be as transparent as
possible with regard to their Medicaid RAC programs. While we will not
require States to publish Medicaid audit reports, we encourage States
to consider making those reports available for public viewing.

D. Definitions

Comment: One commenter requested that CMS offer a definition of
``overpayment.''
Response: For purposes of the Medicaid RAC program, we believe that
States should define ``overpayment'' consistent with 42 CFR 433.304
which defines ``overpayment'' as ``the amount paid by a Medicaid agency
to a provider which is in excess of the amount that is allowable for
services furnished under section 1902 of the Act and which is required
to be refunded under section 1903 of the Act.''
Comment: One commenter indicated that the proposed rule does not
include a definition of ``underpayment.'' In addition, this commenter
suggested that the definition of underpayment could range from: (a)
Broad and include a service that was never billed by a provider, to (b)
narrow and reflect an error that was made in the reimbursement
calculation.
Response: For purposes of the Medicaid RAC program, we believe that
States should define ``underpayment'' consistent with their State law
and/or plans. In the Medicare RAC program, an ``underpayment'' is
generally defined as an amount paid to a provider or supplier for items
or services furnished to a Medicare beneficiary at a lesser amount due
and payable under the Act, implementing regulations, and policies.

E. Contingency Fees

Comment: One commenter inquired whether RAC determinations include
cost-based adjustments or cost-based settlements. This commenter also
wanted to know whether contingency fees would be paid to a Medicaid RAC
for those determinations.
Response: We understand that certain States use cost reports for
reimbursement of Medicaid claims. Accordingly, States need the
flexibility to structure their RAC programs to permit review of cost-
based services to identify and recover potential overpayments as well
as identify underpayments. Therefore, contingency fees are payable to a
Medicaid RAC for the identification and recovery of overpayments from
cost-based service providers. With regard to whether a RAC
determination can include cost-based settlements, we believe the State
has the authority to make adjustments to a provider's cost report and/
or cost-based settlements based upon a RAC determination.
Comment: One commenter indicated that the proposed rule fails to
require RACs to return their contingency fee if a denial is overturned
at any stage of the appeals process. Another commenter suggested that
allowing States to determine at what stage in the Medicaid RAC process,
post-recovery, that the RACs will receive contingency fees preserves an
unacceptable risk of improper incentives which might otherwise
encourage a Medicaid RAC to prematurely or even improperly identify and
recover funds from a provider. Another commenter suggested that RACs
should be paid upon recovery rather than after adjudication.
Response: With regard to the timing of RAC payments, we are
finalizing the requirement at Sec. 455.510(b)(2) that States must have
the flexibility to determine at what stage of the audit process their
RACs may receive contingency fees for the collection of overpayments
from Medicaid providers. In addition, if the provider appeals the
overpayment determination and the determination is reversed at any
level of the appeals process, we are also requiring Medicaid RACs to
return their contingency fees within a reasonable timeframe as
prescribed by the State, as reflected in this final rule at Sec.
455.510(b)(3). For example, a State should specify in its contract with
the Medicaid RAC the timeframe in which the State expects the RAC to
return the contingency fee, that is, repayment will occur on the next
applicable invoice. As we indicated in the proposed rule, payments to
RACs may not be made based upon amounts merely identified but not
recovered or amounts initially recovered from providers but that are
subsequently repaid due to determinations made in appeals proceedings.
Accordingly, if a State pays a contingency fee to a RAC based upon
amounts recovered prior to the conclusion of the appeals process that
is available to a provider, then the RAC must return the portion of the
contingency fee that corresponds to the amount of the overpayment that
is reversed at any level of appeal. We do not believe that this
improperly

[[Page 57823]]

incentivizes a RAC to identify and recover funds from a provider.
Comment: One commenter suggested that CMS' illustration regarding
the timing of payment to the RAC that would permit payment to the RAC
when it recovers an overpayment but would subsequently require
reimbursement by the RAC if the recovery is overturned on appeal, is
directly contrary to CMS' interpretation of ``payments to contractors
may not be made based upon amounts merely identified but not recovered,
or amounts that may initially be recovered but that subsequently must
be repaid due to determinations made in appeals proceedings.''
Response: We disagree with the comment. The illustration mentioned
by the commenter is consistent with the Act which requires the amount
paid to a RAC to be from the overpayment amount recovered. If a State
pays a RAC prior to the adjudication of the appeals process, then the
RAC must refund the amount paid by the State within a reasonable
timeframe as prescribed by the State, in connection with the
overpayment in the event the overpayment is reversed at any level of
appeal. For example, a State should specify in its contract with the
Medicaid RAC the timeframe in which the State expects the RAC to return
the contingency fee, that is, repayment will occur on the next
applicable invoice.
Comment: One commenter indicated that the cap on contingency fees
creates an unnecessary administrative burden on States with smaller
Medicaid programs which may not be able to attract qualified
contractors at the rate provided for in the proposed rule.
Specifically, the commenter stated that it is administratively
burdensome to pay for the excess with State only funds or request and
receive an exception to the cap. Commenters further indicated that the
market should determine an equitable contingency fee rate on a State by
State basis. Another commenter indicated that limiting contingency
rates will create the unintended consequence of limiting recoveries.
This commenter was concerned that artificial rate caps would preclude
an auditing firm from uncovering complex improper payments because it
will not be able to do so profitably. Alternatively, another commenter
suggested raising the cap to 18 percent but CMS should continue to have
an exception process. Finally, other commenters indicated that strict
limits should be set on the amount of contingency fees.
Response: We believe that the contingency fee rates for identifying
and collecting overpayments should be reasonable and determined by each
State, taking into account factors, for example, the level of effort to
be performed by the RAC and the size of the State's Medicaid
population. We recognize that each State has different considerations
and must tailor its Medicaid RAC activities to the unique factors of
its own State. Nevertheless, based upon our experience with the
Medicare RACs, we believe that the contingency fee paid to a State
Medicaid RAC should not be in excess of the highest fee paid to a
Medicare RAC unless the State can provide sufficient justification. The
Medicaid RAC contingency fee limit may be adjusted periodically to
maintain parity with the Medicare RAC contingency fee cap.
Comment: One commenter requested that CMS use guidance as reflected
in the Medicare RAC SOW to pay contingency fees to identify
underpayments.
Response: We disagree with the commenter. Section
1902(a)(42)(B)(ii)(II) of the Act requires States to pay Medicaid RACs
for the identification of underpayments from amounts recovered and ``in
such amounts as the State may specify.'' Therefore, States have
discretion to pay RACs for the identification of underpayments so long
as the payments are from amounts recovered. In FY 2010, the Medicare
RACs identified and corrected $92.3 million in combined overpayments
and underpayments. Eighty-two percent of all RAC corrections were
collected overpayments, and 18 percent were identified underpayments
that were refunded to providers. We expect that States will realize a
similar ratio of overpayments to underpayments in connection with the
implementation of the Medicaid RAC program. That is, CMS requires at
Sec. 455.510(c)(2) that States must ``adequately'' incentivize the
detection of underpayments identified by the RACs. We will evaluate
individual States' indicators of adequacy, using the Medicare RAC
benchmark, and will examine the trends among the States over several
years.
Comment: One commenter requested clarification regarding whether
the contingency fee percentage may vary according to a specific
Medicaid RAC focus area of review.
Response: We do not object to a State using a tiered structure for
contingency fee payments to its Medicaid RAC, so long as the maximum
fee percentage does not exceed the highest fee we pay to the Medicare
RACs. We will not pay FFP for amounts paid to RACs above the highest
fee paid to Medicare RACs, unless the State requests and is granted an
exception to that maximum rate. Any tiered structure must also ensure
that the Medicaid RACs are incentivized to identify underpayments as
well as overpayments.
Comment: One commenter requested clarification of CMS' expectations
with regard to fees paid for the identification of underpayments when a
State lacks the legal authority to pay fees for the action. This
commenter recommended that CMS consider including alternatives that
achieve the goal to incentivize the identification of underpayments.
Response: If a State is legally prohibited from requiring a RAC to
identify underpayments, then a State may submit to CMS a written
request for an exception related to this requirement.
Comment: One commenter opposed any exception to an increase in the
FFP limit as a result of an exception to pay a Medicaid RAC a
contingency fee that is higher than the Medicare RAC contingency fee.
The commenter maintains that the contingency fee structure is
inappropriate for any RAC program because it ``perversely incentivizes
RACs to engage in bounty hunting, which leads to increased expenses and
administrative burdens for providers.'' In addition, this commenter
stated that allowing the State to obtain exceptions for the maximum FFP
is needless and exacerbates the predatory nature of RAC audits.
Response: The statute requires Medicaid RACs to be paid on a
contingency basis for the identification of overpayments. Thus, States
do not have an option with regard to the method of payment for the
identification of overpayments for their RACs unless State law
prohibits the arrangement. We also recognize that certain States may
need an exception to the contingency fee cap. For example, States with
small Medicaid populations may need to pay a much larger contingency
fee rate to attract RAC contractors to work in their State.
Accordingly, under certain circumstances, a State may request
authorization to pay a RAC a higher contingency fee than the maximum
amount for which FFP is paid. Therefore, we disagree that exceptions to
pay a RAC a higher contingency than the Medicare RAC contingency fee
rate of 12.5 percent are never justified.
Comment: Several commenters suggested that the proposed contingency
fee structure imposes no disincentive on RACs for pursuing situations
where there is little or no solid evidence of an overpayment. The
commenters recommended that payments to RACs should: (1) Be made only
upon conclusion of all provider appeals; and (2) not compensate RACs
for the time

[[Page 57824]]

required for appeals to be exhausted. A few commenters also suggested
that RACs should be required to pay a penalty to compensate providers
for claims ultimately determined to be unfounded or falsely identified.
Response: As previously stated, we have surveyed States that have
RAC-like programs which utilize a contingency fee payment structure and
have not learned of any circumstances in which RACs were improperly
incentivized to recover overpayments from Medicaid providers. In
addition, our evaluation of the Medicare RAC program provides a basis
for contingency payments to RACs for the identification and recovery of
overpayments. Therefore, we will not compel States to require RACs to
pay a penalty to providers for claims ultimately determined to be
unfounded. With regard to the timing of payments to RACs, States need
the flexibility to determine the most appropriate payment methodology
given the uniqueness of its own State. Accordingly, States should
decide when it is most appropriate to pay Medicaid RACs for their work.
Comment: Several commenters suggested that because the law provides
a strong financial incentive for RACs to focus on overpayments and not
the identification of underpayments, CMS should require States to apply
the same contingency fee schedule for overpayments to underpayments.
One commenter stated that the ``small, flat fee'' for underpayments is
unacceptable. This commenter also suggested that CMS should require
States to increase their underpayment fee when RACS are not applying a
balanced approach to identifying underpayments and overpayments.
Response: With regard to underpayments, we have proposed that a
State may choose to pay its RAC a contingency fee for the
identification of underpayments, similar to Medicare RACs, or a State
may opt to establish a set fee or some other structure for the
identification of underpayments. We believe that States should have the
flexibility to determine the best payment structure consistent with
their State Plans. We also included language in the final rule at Sec.
455.10(c)(2) indicating that States must adequately incentivize their
RACs to identify underpayments. In FY 2010, 82 percent of all Medicare
RAC corrections were collected overpayments, and 18 percent were
identified underpayments that were refunded to providers. We expect
that States will realize a similar ratio of overpayments to
underpayments in connection with the implementation of the Medicaid RAC
program. We will evaluate individual States' indicators of adequacy,
using the Medicare RAC benchmark, and will examine the trends among the
States over several years.
Comment: One commenter suggested that CMS clarify that
underpayments discovered through RAC audits are only payable if claims
are filed by the provider within prescribed timeframes.
Response: Generally, RACs are required to review post-payment
claims. If a Medicaid claim is not timely filed by a provider, then it
would seem that the claim is not payable. Accordingly, these claims
should not be subject to RAC review. If a RAC identifies an
underpayment and the time for re-filing a claim has passed in
accordance with State law, we believe the State has the discretion to
determine whether the provider may re-file the claims with the correct
information.
Comment: One State commenter indicated that the proposed rule does
not state that underpayments must be reimbursed. This commenter stated
that providers are responsible for reviewing their remittance advice to
determine if they were paid correctly. Further, any adjustments must be
made within specific timeframes. This commenter stated that requiring
States to reimburse providers for underpayments outside of existing
timeliness rules is not appropriate.
Response: The Act mandates that RACs be compensated for the
identification of underpayments to providers. While the statute is
silent regarding the remittance of underpayments to providers as a
result of RAC identification of the underpayments, we are concerned
about provider participation in the Medicaid program as well as States
making proper payments to providers. Accordingly, we believe that
States should compensate all providers for any identified underpayments
to the extent possible and consistent with State law. States must
notify providers of underpayments that are identified by their Medicaid
RACs. We have included this requirement in this final rule at Sec.
455.510(c)(3).
Comment: One commenter appreciated the flexibility extended to
States regarding the fees paid to RACs for the identification of
underpayments. The commenter, however, disagreed with CMS' approach
with regard to the possibility of additional rulemaking should CMS deem
it necessary as a result of future CMS review of data, indicating that
RACs are not appropriately incentivized to identify underpayments. This
commenter believes any further Federal regulation of underpayment
identification will create an undue burden on the States and requested
that it be removed from consideration.
Response: We appreciate the comment. However, the burden of
potential future rulemaking is outside the scope of this final rule.
Nevertheless, further rulemaking may be necessary to achieve the
statutory mandate for Medicaid RACs to identify underpayments.
Accordingly, we have maintained this language in this final rule.
Comment: Several commenters suggested that CMS should require SMAs
to: (1) Monitor the volume of underpayment audits conducted by the
RACs; (2) increase the underpayment fee if a RAC is not applying a
balanced approach to identifying underpayments and overpayments; and
(3) include information on the general methods used to identify
Medicaid underpayments in the RAC annual report as well as the steps
taken to ensure a balance between underpayment and overpayment review.
Another commenter recommended that the Medicaid RAC be required to
submit annual reports that include information on methods used to
identify underpayments, the number of underpayments identified, and any
steps taken to ensure that underpayments are addressed.
Response: As stated in the proposed rule, we expect to monitor the
methodologies and amounts paid by States to Medicaid RACs to identify
underpayments. We may consider future rulemaking depending on the data
we review regarding RAC incentive to pursue underpayments. At this
time, we are not requiring States to submit annual reports. However, we
plan to issue sub-regulatory guidance on future reporting requirements.
Accordingly, we will consider the commenters' suggestions regarding the
data elements for an annual report. At this time, we will not require
States to increase the fee paid to RACs for the detection of
underpayments.
Comment: One commenter requested clarification as to whether States
can choose to issue payments only to certain providers based upon
underpayments that are identified by the RAC versus identified
underpayments of all providers. This commenter also mistakenly asserted
that Medicaid RACs are only paid for dollars recovered on overpayments
and suggested that RACs also be paid for the identification of
underpayments.
Response: States are required to pay RACs for the identification of
overpayments as well as the identification of underpayments.

[[Page 57825]]

Although the statute is silent regarding actual payments to providers
as a result of RAC identification of underpayments, we believe that
States should compensate all providers for any identified underpayments
consistent with State law.
Comment: One commenter suggested that Medicaid RACs should be
required to identify underpayment determinations and ensure that the
underpayments are remitted to providers in a timely fashion. In
addition, this commenter suggested that the States and/or CMS should
ensure that Medicaid RACs have the system capability to identify
underpayments before they begin auditing claims.
Response: The Act requires States to establish programs to contract
with a Medicaid RAC for the purpose of, in relevant part, identifying
underpayments. Accordingly, the task of identifying underpayments
should be included in the SOW that is part of the contract between a
State and its RAC. Therefore, we will assume that a State has verified
that its RAC has the capability to identify underpayments even before a
RAC has begun auditing claims. With regard to remittance of
underpayments, it is the State that is responsible for the payment, not
the RAC. The RAC is required to identify, not remit, an underpayment.
Although we recognize that the State has discretion with regard to
timing of the remittance of underpayments, we encourage States to remit
identified underpayments to providers within a reasonable timeframe.
Comment: One commenter pointed out that the proposed rule indicates
that ``CMS contracts with Medicare RACs to identify and recover
overpayments from Medicare providers, and to identify and pay
underpayments to Medicare providers.'' (Emphasis added). This commenter
requested that CMS clarify this statement given that he has not found
any other reference to RACs making payments to Medicare providers for
identified underpayments.
Response: We agree with the commenter. Medicare RACs do not pay
underpayments to Medicare providers. The Medicare program pays
underpayments to providers.
Comment: One commenter disagrees with CMS' proposed approach to
publishing the maximum Medicaid RAC contingency fee consistent with the
schedule of publishing the maximum Medicare RAC contingency fee every 5
years. The next update is scheduled for 2013. Specifically, the
commenter stated that because fee structures can change over the life
of a contract, CMS should publish any modifications to the Medicare RAC
payment methodology and contingency rates within 30 days of the
modification as opposed to the existing 5-year schedule. In addition,
another commenter suggested not requiring the States to conform to the
Medicare timetable because Medicaid RACs will be tailored to each
State's needs and States need the ability to set rates and increases
that are not restricted by Medicare requirements.
Response: While we proposed to publish the maximum Medicaid RAC
contingency fee consistent with the highest Medicare RAC fee, a State
is not precluded from increasing the rate paid to its RAC outside of
that schedule if necessary. To the extent that a State needs to
increase the rate paid to its RAC before the expiration of the
scheduled 5-year Medicare RAC contingency fee, the State can submit a
SPA describing that an increase is required to reflect whether the
State is paying the amount above the Medicare rate with State-only
funds, or is requesting matching FFP.
Comment: One commenter suggested removing the contingency fee cap
because it will allow States to pursue individualized RAC programs that
align the fees with the complexity and scale of the workload and allow
smaller States to garner a larger field of bidders from which to
choose. Another commenter indicated that States need the flexibility to
establish contingency fees separately from Medicare due to the
difficulty States will have in reacting to the changes associated with
the implementation of a RAC program in light of various State budgeting
and contracting/procurement constraints. In addition, a commenter
suggested that States need the ability to set rates and increases that
are not restricted by Medicare requirements because the Medicaid RAC
program needs to be tailored to each State's needs. Therefore,
commenters suggested not requiring the States to conform to the higher
Medicare contingency fee rate cap.
Response: Based upon our experience with the Medicare RACs, we
believe that the contingency fee paid to a State Medicaid RAC should
not be in excess of the highest fee paid to a Medicare RAC unless the
State can provide sufficient justification. We recognize that States
with small Medicaid populations may need to pay a much larger
contingency fee rate to attract the RAC contractors to work in their
State. For example, if a State receives a proposal from a prospective
contractor for a contingency fee that is higher than the maximum
contingency fee set by CMS for Medicare RACs but it accurately reflects
the scope of work to be performed in that particular State, then the
State should submit a request for an exception to CMS for
consideration.
Comment: One commenter believes that the Affordable Care Act does
not specifically mandate that a State Medicaid RAC contingency fee be
linked to the Medicare RAC maximum contingency fee. One commenter
stated that the contingency fee cap is not in the best interests of the
Federal Government, the State or the taxpayer, and is not consistent
with the law. Commenters suggested letting the competitive procurement
process define the contingency fee percentage limit for Medicaid, as
was done for the Medicare RAC program at its inception. One commenter
requested that State contingency-based recovery contracts competitively
procured at a higher percentage rate be ``grandfathered'' in at those
higher rates with a State commitment to transition to the lower
percentage limit with the next procurement cycle.
Response: Section 1902(a)(42)(B)(i) of the Act requires States to
``establish a program under which the State contracts (consistent with
State law and in the same manner as the Secretary enters into contracts
with recovery audit contractors under section 1893(h) [of the Act],
subject to such exceptions or requirements as the Secretary may require
. * * *'' Although the Act does not specifically set the State Medicaid
RAC contingency fee, we believe that the contingency fee paid to a
State Medicaid RAC should not be in excess of the highest fee paid to a
Medicare RAC unless the State can provide sufficient justification that
it is consistent with the statute. If a State cannot procure a
contractor at the 12.5 percent rate, then a State can request an
exception from CMS. For those States that may already have a RAC-like
program in place in which the contingency fee is higher than the
Medicare rate, we will work with these States to establish an
acceptable resolution, which may or may not include ``grandfathering''
in the higher rate.
Comment: One commenter requested clarification with regard to the
process associated with State requests for approval to pay a RAC a
contingency fee that is higher than the 12.5 percent cap set by CMS.
This commenter questioned how CMS will assure nationwide consistency on
contingency rate approval decisions if States have to submit their
requests for approval to the appropriate CMS Regional Office(s). Other
commenters wanted clarification regarding the general exception
process.

[[Page 57826]]

Response: Generally, State requests for approval for exceptions
from the requirements of the RAC program, including higher contingency
fees, are made using the SPA process and are determined by the
Secretary, through delegated authority provided to CMS. CMS, through
partnerships between CPI, the Center for Medicaid, CHIP and Survey &
Certification (CMCS), and individual CMS Regional Offices, reviews and
considers requests for exceptions. CMS strives to ensure consistency to
the extent possible with regard to responses to State exception
requests. We will review all relevant facts and circumstances
surrounding requests for an exception. If a State's request for a
higher contingency fee is denied, the decision is appealable to the
Departmental Appeals Board. State commenters with additional questions
regarding the process associated with exceptions to the RAC program,
including questions about the SPA process, should contact their CMS
Regional Office.
Comment: One commenter expressed concern that CMS will be injecting
itself into a State's decision-making process on a Federal mandate by
denying a State's request for using a higher contingency rate and the
associated FFP.
Response: Generally, when a State completes a new State Plan
preprint page or SPA because of changes in its Medicaid program, it
must be approved by CMS in order for the State to receive Federal
matching funds. This holds true for the majority of changes to a
Medicaid program when FFP is at issue, not just with regard to the
Medicaid RAC program. We have the authority to approve a SPA when FFP
is at issue. If we deny a SPA or elements thereof, then the State has
the right to appeal the decision.
Comment: One commenter recommended that States be given the
flexibility to deploy the most appropriate procurement process for
their individual State so long as they are within the legal confines of
State and Federal procurements laws and regulations, including bundling
Medicaid RAC procurements with other services or combining multiple
States with one RAC vendor. Another commenter requested that the
bundling of RAC services with other recovery services--such as a TPL
contractor--should not be permitted because it will limit competition
by excluding the most qualified Medicaid RAC firms. This commenter
suggested that TPL contractors may not have the skill set to
effectively handle complex reviews.
Response: We expect that all States will procure a RAC contractor.
If a State feels that its unique situation may preclude it from meeting
this expectation, a State must submit a request for an exception to
CMS. However, if a State is interested in ``bundling'' its RAC
procurement with other services performed by an existing contractor,
then the State must execute a separate task order outlining the
requirements of the RAC program with the existing contractor. If a
number of States are interested in combining resources and utilize one
contractor for their respective RAC programs, we do not object if there
are no conflicts of interest and the arrangement comports with Federal
and State law.
Comment: One commenter suggested that States should be permitted to
apply for an exception from the RAC program to the extent that a State
is unable to attract and acquire a RAC vendor.
Response: States are required to procure a RAC contractor. To the
extent that a State is having difficulty procuring that contractor,
then that State should contact CMS to discuss a potential resolution,
which may include additional time to procure a qualified contractor. It
is unlikely that we will grant an exception from the entire RAC program
as a result of a State needing additional time to procure a RAC vendor.
Comment: One commenter requested public access to the payment rates
furnished to Medicaid RACs, similar to the public availability of
Medicare RAC payment rates.
Response: We decline to require States to publicly post their
Medicaid RAC payment rates. However, we encourage States to make this
information available to the extent possible to promote transparency.
Comment: One commenter requested that CMS allow States to engage in
contractual agreements with RACs that limit RAC reimbursements to an
amount less than the total amount recovered, but to grant States
flexibility in meeting this requirement. This would include allowing
States to recover from the provider both the amount of the overpayment
and the contingency fee when overpayments have been identified.
Response: Section 1902(a)(42)(B)(i) of the Act mandates that
payments made to RACs ``shall be made to such contractor only from
amounts recovered'' and that the payments ``shall be made on a
contingent basis.'' Allowing States to recover the contingency fee for
the RAC from the provider is inconsistent with the language in the
statute. To the extent that State law prohibits it from complying with
the statute, then the State should submit a request for an exception to
CMS for consideration.
Comment: One commenter indicated that a large number of pharmacy
claims being audited include those claims that are questionable due to
administrative or clerical errors. This commenter suggested that
providers should only be expected to pay the part of the claim that is
determined to be an overpayment, not the ``clean'' portion of the claim
or those resulting portions of the claim that are the result of
technical or administrative errors.
Response: Medicaid RACs are statutorily mandated to audit Medicaid
claims for the purpose of identifying and recouping overpayments as
well as identifying underpayments. We would expect a provider to return
any identified overpayment to the State Medicaid program. To the extent
there are additional errors associated with the claim that do not
relate to the RAC's required purpose, the issue is outside the scope of
the proposed rule.
Comment: One commenter requested clarification about the following
statement in the proposed rule: ``States must ensure that they do not
pay in total RAC fees more than the total amount of overpayments
collected.'' Specifically, the commenter inquired whether this is in
the aggregate across all audits during a particular time period or if
it applies to one particular audit.
Response: States must track the aggregate of claims that are
identified as overpayments to appropriately calculate the contingency
fees owed to the RAC. States must also account for the costs associated
with the identification of underpayments. States must ensure that they
do not pay in total RAC fees more than the total amount of overpayments
collected.

F. Coordination

Comment: Several commenters expressed concern regarding the
duplication of audits. These commenters suggested that CMS should
prohibit Medicaid RACs from conducting audits on claims that are
already under review by a Medicaid Integrity Contractor or other entity
in the final regulation. Commenters also suggested that Medicaid RACs
should be required to use a RAC data warehouse to identify any claims
that are being reviewed by the RAC or other Medicaid audit program. In
addition, the commenters suggested that the final regulation should
exclude from RAC review, claims in which payment has been denied and/or
withdrawn.

[[Page 57827]]

Response: We are concerned about minimizing the potential for
multiple audits of the same provider. We recognize the need to minimize
the burden on providers associated with responding to multiple audit
requests, to the extent possible. States and their RACs are statutorily
mandated to coordinate auditing efforts with those of other entities
conducting audits of providers receiving payments for Medicaid claims.
We have finalized this requirement at Sec. 455.506(c). Under certain
limited instances, overlapping audits may be necessary or otherwise
unavoidable. For example, if a claim has been reviewed by a Medicaid
RAC, and it suspects fraud, then that claim must be referred to law
enforcement for review. However, in an effort to limit duplicate audit
activity, we have included language in this final rule at Sec.
455.508(g) indicating that Medicaid RACs should not audit a claim that
has already been audited or is currently being audited by another
entity, including the Medicare RACs. However, we decline to require
States to create or use a data warehouse at this time. First, we are
not aware of the existence of a data warehouse containing State
Medicaid claims data. We are aware that States that have existing RAC-
like programs have systems in place to achieve coordination. For
example, one SMA reviews a list of claims to ensure that there are no
open audits or referrals, whereas another SMA screens cases and meets
monthly with its MFCU in an effort to achieve coordination. Second, we
are aware that States have limited resources and cannot mandate the
creation of a data warehouse. Ultimately, we believe that States need
the flexibility to determine the best method of achieving coordination
with the resources available to them. With regard to the review of
denied claims, the Act requires Medicaid RACs to review Medicaid claims
for overpayments. Accordingly, we do not see the need to change the
regulation to incorporate denied claims in the final rule. With regard
to claims that have been filed and subsequently withdrawn by the
provider, we believe that the claims, to the extent that no payment has
been made, should not be the subject of RAC review.
Comment: One commenter suggested that CMS should provide
centralized access to claims data or State policies to limit the burden
on States.
Response: There is no centralized repository of Medicaid claims
data. We have and will continue to work with States to provide
technical assistance to help States comply with implementation
requirements and lessen the burden on States.
Comment: One commenter recommended coordination between vendors
when requesting records from hospitals.
Response: We are aware of the potential for overlapping audits of
the same provider by multiple auditing entities and are concerned about
minimizing the potential for multiple audits of the same provider.
States have the flexibility to achieve coordination within a reasonable
timeframe. Coordination among auditing entities in a State is
achievable. We have learned that States that already have RAC-like
programs have systems in place to coordinate the efforts of auditing
entities to minimize provider burden. In addition, we are working to
assist States with coordination of their auditing efforts with those of
other entities.
Comment: In anticipation of the proposed implementation date of
April 1, 2011, one commenter suggested that CMS should allow States
additional time to accomplish certain tasks to ensure effective
implementation of RAC contracts, including coordination of audit
activity. Specifically, this commenter indicated that there must be
time for careful consideration of how duplicate audit activity will be
avoided.
Response: We are aware of the potential for overlapping audits of
the same provider by multiple auditing entities and are concerned about
minimizing the potential for multiple audits of the same provider. In
response to several commenters, we have delayed implementation of this
final rule until January 1, 2012. Therefore, States have an opportunity
to achieve coordination within a reasonable timeframe. Coordination
among auditing entities in a State is achievable. Indeed, we have
learned that States that already have RAC-like programs have systems in
place to coordinate the efforts of auditing entities to minimize
provider burden.
Comment: One commenter inquired whether RACs are required to
coordinate their auditing efforts with other entities that conduct
cost-based audits for settlement.
Response: The statute requires a State and any contractors under
contract with the State to coordinate their recovery audit efforts with
other contractors or entities performing audits of entities receiving
payments under the State Plan or waiver in the State. Accordingly, at
the direction of the State, a RAC is required to coordinate its
auditing efforts with those of other auditing entities, including those
performing cost-based audits of Medicaid claims.
Comment: One commenter suggested that CMS should include a
provision in the final rule requiring CMS and the State to monitor the
coordination efforts of States and their RACs to ensure that the
coordination is taking place.
Response: We have already surveyed the coordination efforts of
States that have a RAC-like program in place. We are very interested in
learning about the different methods of coordination that will be
utilized by the States. Although we decline to put a monitoring
requirement in the final rule, we plan to do this on an informal basis.
In addition, as discussed in our responses to other comments, we expect
the State to play a vital role with regard to coordination of entities
seeking to audit providers who receive payments under the State
Medicaid Plan or waiver in the State. We have included language in this
final rule requiring States to coordinate the recovery audit efforts of
their RACs with other auditing entities at Sec. 455.506(c).
Comment: Several commenters suggested that proposed Sec. 455.508
lack specificity with regard to oversight of RAC eligibility
requirements. These commenters also expressed concern about the
administrative burden associated with having to respond to multiple
requests for the same documentation from different auditors in a given
period of time.
Response: The State, not CMS, determines whether its RAC has the
ability to perform the requirements outlined in Sec. 455.508. CMS is
not involved in the RAC selection process. With regard to the
coordination of audits, we are concerned about minimizing the potential
for multiple audits of the same provider. We recognize the need to
minimize the burden on providers associated with responding to multiple
audit requests, to the extent possible. States and their RACs are
required to coordinate auditing efforts with other entities conducting
audits of Medicaid claims. We finalize this requirement at Sec.
455.506(c). However, we have also included language in this final rule
at Sec. 455.508(g) indicating that Medicaid RACs should not audit
claims that have already been subject to audit or that are currently
being audited by another entity. We recognize that subsequent reviews
of claims by other auditing entities may be necessary or otherwise
unavoidable. Finally, we hope to develop a system to facilitate State
coordination among auditing entities.
Comment: One commenter suggested that once a claim has been
reviewed by an auditing entity, that claim should not be subject to
review by another auditing

[[Page 57828]]

entity. For example, if a claim is selected for review by a Medicaid
RAC contractor and the claim has previously been reviewed by a State's
internal audit department or fraud unit, then the claim should be
exempt from any RAC review. Similarly, if a RAC reviews a claim, then a
State internal audit department should not subsequently review that
claim or include it in a universe of claims that are part of any audit
extrapolation.
Response: Generally, if a claim is already subject to review and an
overpayment is collected as a result of the audit process, then the
claim should not be subsequently reviewed by another auditing entity
for the same purpose. We have included language in the final rule at
Sec. 455.508(g). However, there are circumstances in which claims may
be the subject of multiple reviews, including, but not limited to,
potential fraud. Accordingly, the claims at issue may be subject to
subsequent review.
Comment: One commenter agreed with CMS' approach to allow States
the flexibility to coordinate the collection of overpayments identified
by the RAC rather than the RAC itself collecting the overpayment. The
commenter currently collects the overpayments from providers and
requested CMS approval to continue to collect the overpayments.
Response: We appreciate the commenter's support and inquiry.
Generally, States utilize the SPA process to seek our approval
regarding any change to their Medicaid programs. States interested in
the changes should contact CMS directly with regard to its SPA.
Comment: One commenter recommended that CMS allow States to
contract with RACs to only identify overpayments and underpayments and
not require the collection of any identified overpayments.
Response: RACs are not required to collect identified overpayments.
We specified in the proposed rule at Sec. 455.506(b) that States have
the discretion to coordinate the recoupment of overpayments with their
RACs. We recognized that States may not be able to delegate the
collection of overpayments to contractors and, therefore, granted
States the flexibility of coordinating the collection of overpayments.
We are finalizing Sec. 455.506(b) as proposed.
Comment: One commenter requested guidance from CMS with regard to
the role of Medicare RACs and Medicaid RACs in reviewing claims for
dually eligible beneficiaries, those enrolled in both the Medicare and
Medicaid programs.
Response: Medicaid RACs are not prohibited from reviewing claims
for dually eligible beneficiaries. However, to the extent possible we
want to minimize provider burden and if the claims were already
reviewed by a Medicare RAC, then the Medicaid RAC should not review the
claims. We note that there is little financial incentive for Medicaid
RACs to review claims involving dually eligible beneficiaries since
Medicare is the primary payer on claims for dual eligibles.
Additionally, many States already use TPL contractors to identify
overpayments involving eligibility issues.
Comment: One commenter suggested that States should have the
flexibility to coordinate with other State and Federal agencies
performing audits of providers who receive payment in connection with
services furnished to Medicaid beneficiaries. Other commenters
suggested coordination between auditing companies when requesting
records from hospitals.
Response: States and their RACs are required to coordinate their
auditing efforts with other entities that perform audits of providers
that receive payments under the State Medicaid Plan. We believe that
States have a significant role in coordinating the auditing efforts of
their respective integrity programs, RACs, and any other auditing
entities under contract with the State as well as any Federal agency
seeking to audit a State's Medicaid providers. To the extent a State
plays an active role in coordinating the efforts of the various
entities seeking to review Medicaid claims, we believe that this will
help to minimize the potential for multiple requests for records from
different auditing entities.
Comment: One commenter requested that CMS delay implementation of
the final rule until coordination issues are resolved.
Response: We disagree with the comment. Implementation of the final
rule is not contingent on coordination of auditing entities. As
previously discussed, we are very concerned about minimizing provider
burden associated with responding to multiple audits and are working to
develop a system for States to help facilitate coordination.
Additionally, we note that the new effective date for the rule will be
January 1, 2012, due in part, to the additional time it will take for
States to be prepared for implementation.
Comment: One commenter inquired whether States are required to
exclude Payment Error Rate Measurement (PERM) claims from Medicaid RAC
review.
Response: Section 1902(a)(42)(B)(i) of the Act mandates that States
and their RACs coordinate their ``recovery audit efforts with other
contractors or entities performing audits of entities receiving
payments under the State plan or waiver in the State * * * .'' The Act
requires the State and its RAC to coordinate with the PERM contractor.
PERM uses a random sample of claims to develop the error rates.
Accordingly, if certain claims have already been audited by the PERM
contractor, then the State, to the extent possible, should not subject
the same claims to a subsequent audit by its Medicaid RAC. However, we
recognize that the PERM contractor may in fact include claims in its
sample that were previously audited by the Medicaid RAC since the PERM
is measuring the error rate of payments that do not meet statutory,
regulatory or administrative requirements.
Comment: One commenter who participated in the CMS Webinar
``Contract Template: Statements of Work,'' in which coordination with
other entities such as CMS and OGC was discussed, inquired about the
meaning of ``OGC'' and what the State is supposed to coordinate with
those entities.
Response: ``OGC'' is an acronym for the Office of the General
Counsel, which is the legal advisor to the Department of Health and
Human Services. Coordination with OGC is not necessary, as OGC does not
conduct audits of Medicaid claims. With regard to coordination, States
and their RACs are required to coordinate their auditing efforts with
other entities that perform audits of providers that receive payments
under the State Medicaid plan. We believe that States have a
significant role in coordinating the auditing efforts of their
respective integrity programs, RACs, and any other auditing entities
under contract with the State as well as any Federal agency that is
conducting potential fraud reviews or seeking to review State Medicaid
providers.
Comment: One commenter asked if an Audit Medicaid Integrity
Contractor already requested records from a provider for certain claims
but did not complete the review at CMS direction, whether the claims
should be suppressed from review by a Medicaid RAC.
Response: Generally, if there were no audit findings associated
with the review of certain claims, then the claims may be subject to
additional review unless the State determines that there is no basis
for the audit of the claims.
Comment: One commenter noted that allowing States to contract with
more

[[Page 57829]]

than one RAC poses the risk of duplicate audits of the same provider.
This commenter, therefore, suggested that the proposed rule should be
modified to ensure that when a State contracts with more than one RAC,
the State and its RACs should be required to coordinate their efforts
to prevent duplication of audits.
Response: We agree with the comment and are making this change in
this final rule at Sec. 455.506(c).
Comment: Several commenters recommended that States be allowed to
manage the reporting and referral of potential fraud to law
enforcement. They proposed that RACs would report suspected fraud to
States and the States would then refer it to the appropriate law
enforcement entities such as the ``MFCUs, SMA, Federal OIG and local
law enforcement.'' The States would be able to provide a more
comprehensive referral to law enforcement by providing information on
past interaction with or conduct by the provider in question. They
indicated that State coordination of fraud and/or abuse is consistent
with Federal and State laws and regulations.
Response: We agree that States are in the best position to know of
potentially fraudulent activities by providers in their States.
Accordingly, we have specified in this final rule at Sec. 455.506(d)
that States, not RACs, have the responsibility to make referrals of
suspected fraud to the MFCU or other appropriate law enforcement
agency.
Comment: Several commenters requested that CMS reconsider the scope
of work and/or expertise of the Medicaid RAC to distinguish fraud or
criminal activity from erroneous billing. These commenters believe that
suspicion of fraud and criminal activity should be referred for further
investigation by other MICs with expertise to determine whether or not
a referral to law enforcement is appropriate.
Response: We understand the concerns of commenters. We believe that
States should determine whether there is a sufficient basis for a fraud
referral to their State MFCUs or other appropriate law enforcement
agency. Accordingly, we are making this change in this final rule at
Sec. 455.506(d).
Comment: One commenter indicated that CMS' proposed standard of
``reasonable grounds'' concerning law enforcement referrals in proposed
Sec. 455.508 of the regulation, is subject to variable interpretation
and could result in inappropriate referrals. This commenter stated that
CMS must clearly define the term ``reasonable grounds'' and include
examples of same.
Response: Based upon the comments received, we have changed the
responsibility of making fraud referrals to law enforcement from the
Medicaid RACs to the States. We have reflected this change in this
final rule at Sec. 455.506(d). We believe that this is consistent with
existing Federal regulations that govern State referrals of fraud and
abuse, as defined by Sec. 455.2, to the appropriate law enforcement
agency as well as require the State to adhere to certain fraud referral
standards. In addition, we have removed the language regarding
``reasonable grounds'' from this final rule. We have also included in
this final rule at Sec. 455.508(h) that Medicaid RACs must refer
suspected cases of fraud and/or abuse to the State in a timely manner.
We expect States to provide clear definitions of timely referrals in
its contract with the RAC or other applicable guidance.
Comment: One commenter recommended that CMS adopt the
recommendations in the OIG Medicare RAC Referral Report. That report
outlined a number of recommendations including requiring Medicare RACs
to receive mandatory training on the identification and referral of
fraud.
Response: We disagree with the commenter. In the permanent Medicare
RAC program, we provided RACs with a presentation about fraud in
Medicare, the definition of fraud, and examples of potential Medicare
fraud. The OIG stated in its report that because Medicare RACs do not
receive their contingency fee for cases they refer and are determined
to be fraud, there may be a disincentive for RACs to refer to cases of
potential fraud. Medicaid RACs are a State operated program, whereas
the Medicare RACs are a national program. Accordingly, the
responsibility of making fraud referrals should belong to the State
instead of the Medicaid RAC, as initially proposed. We have finalized
this change at Sec. 455.506(d).
Comment: One commenter requested the removal of the requirement of
immediate referral for suspicion of fraud to law enforcement from the
final rule. The commenter suggested the requirement exceeds the
authority of the statute. The commenter continued that he/she did not
believe that the determination of what may constitute reasonable
grounds for referral is within the purview of Medicaid RACs, or that
RACs should be required to make the referrals.
Response: We agree that the Medicaid RACs should not have the
responsibility to make fraud referrals and that the responsibility
belongs to the State. Accordingly, we have made the change in this
final rule by adding new subparagraph Sec. 455.506(d). In addition, we
have included in this final rule at Sec. 455.508(h) that the Medicaid
RAC must refer suspected cases of fraud and/or abuse to the State in a
timely manner, as defined by the State. We expect States to provide
clear definitions of timely referrals in the contract with its RAC or
other applicable guidance.
Comment: One commenter requested clarification on how States and
Medicaid RACs will be notified of efforts initiated by the OIG or
criminal investigations to facilitate coordination of efforts. The
commenter expressed concern that routine RAC activities such as record
requests may alert providers and subsequently jeopardize
investigations.
Response: We have finalized that States are required to make
referrals of suspected fraud and/or abuse to the MFCU or other
appropriate law enforcement agency at Sec. 455.506(d). We believe the
States play a significant role with regard to coordination generally,
and should share information regarding investigative activities or
other auditing efforts in the States with their RACs to the extent
possible. However, nothing in this final rule requires the Office of
Inspector General or other law enforcement authorities to disclose
investigative information to Medicaid RACs.

G. Appeals Process

Comment: One commenter asked about the error rate associated with
the RACs finding improper payments that ultimately are reversed on
appeal. Another commenter asked about the frequency with which an
organization believes a RAC has made an error but does not want to go
through the appeal process.
Response: We presume that the commenter was inquiring about data
from the Medicare RAC program. In the Medicare RAC program, we have
contracted with a validation contractor that does an accuracy review
for CMS. That contractor reviews a sample of claims each month
(overpayments and no findings) to determine if the Medicare RAC was
making accurate decisions. In the Medicare RAC Demonstration, only 8.2%
of all claims with an improper payment were overturned on appeal. We do
not have specific data with regard to providers that decline to appeal
Medicare RAC determinations or that believe that a RAC determination
was made in error.
Comment: One commenter asked who bears the cost of the appeal if an
adverse Medicaid RAC determination is appealed. Specifically, the
commenter

[[Page 57830]]

inquired as to whether the State would be able to claim FFP for the
cost of the appeal if the appeal reversed the RAC determination. The
commenter also wanted to know if the determination is upheld, whether
the provider could include the costs in its cost report.
Response: The cost of a State's appeal would be an allowable
administrative cost under the State's Cost Allocation Plan. If a State
is establishing a new appeals process for RAC determinations, the State
may have to amend its Cost Allocation Plan to cover the new appeals
process. A provider's appeal costs are administrative costs that are
not allowable under Medicaid.
Comment: One commenter asked how long the appeal process would take
an organization to go through.
Response: We are not mandating a single appeals process that all
States must use for RAC appeals, therefore the length of time for a
provider's appeal in a given State will differ, based on the nature of
the State's appeals process and the issues on appeal. However, under
section 1902(a)(42)(B)(ii)(III) of the Act, all States must have an
appeals process in place for providers to appeal adverse RAC
determinations.
Comment: A few commenters asked whether they must seek CMS approval
if they intend to use their existing appeals process, or if the
requirement to submit to CMS a proposal describing the appeals process
which must be approved prior to implementation of the RAC programs
applied only when the State intended to establish a separate RAC
appeals process or when the State did not currently have an appeals
process in place.
Response: The proposed rule provided States with 2 options for
their appeals process from which States may choose as they deem
appropriate: (1) Either take advantage of an existing appeals process,
or (2) establish a separate appeals process for RAC determinations. The
proposed rule also required States to submit a proposal describing the
appeals process, which we would approve prior to the State implementing
its RAC program. In this final rule, we now clarify that we will only
require a description and prior approval of any new RAC appeals process
that a State will use, not any existing appeals process.
Comment: One commenter encouraged CMS to prohibit any ability for
States to establish a new appeals process. The commenter believed a new
appeals process would be problematic for those providers that have
entities in more than one State, as each would have to comply with more
than one process to submit appeals on a timely basis.
Response: We are not mandating a single appeals process that all
States must use for RAC appeals. Given that each State has provided us
with assurances through the SPA process that it will comply with the
statutory requirement to provide an adequate appeals process for
entities to appeal adverse RAC determinations, it would be unreasonably
burdensome on the States for us to impose a single appeals process for
RAC appeals. We are not prohibiting States from establishing a new
appeals process for RAC appeals. States will have the flexibility to
determine what form of appeals process best suits their respective RAC
programs. We are aware that responding to multiple States' processes
could be a challenge for providers that are enrolled in multiple
States' Medicaid programs. However, the providers would have been
involved with the RACs' overpayment determination processes and should
have received notice of appeals timeframes.
Comment: One commenter noted that the language of the preamble to
the proposed rule refers to ``ensuring providers adequate due process
rights'' while the proposed regulation at Sec. 455.512 only provides
for general appeal rights with no mention of due process. The commenter
recommends strengthening the rule by changing Sec. 455.512 to read
``States shall provide appeal rights that ensure adequate due process
under State law or administrative procedures to Medicaid providers that
seek review of an adverse Medicaid RAC determination.''
Response: We appreciate the commenter's concerns, however we note
that section 1902(a)(42)(B)(ii)(III) of the Act only refers to ``an
adequate process for entities to appeal any adverse determination.'' To
allow the States maximum flexibility and to accommodate differences in
State laws regarding due process, we are not prescribing specific
requirements for an appeals process for adverse RAC determinations.
Instead, consistent with the statutory language, we are requiring
States to provide an adequate appeals process. Therefore, we decline to
revise Sec. 455.512 in accordance with the commenter's request.
Comment: A commenter asked whether the RAC program contractor
activities may include legal defense of an appealed overpayment
determination, or, in other words, whether the State may contractually
obligate the RAC to defend its findings in the administrative appeal.
The commenter also asked whether the State specific requirements must
be articulated in the SPA.
Response: When designing their RAC programs, States have the
discretion to require their RACs by contract to appear in the State's
administrative or judicial appeals hearings to defend the RACs'
overpayment findings. The Medicaid SPA does not require a detailed
description of the State's RAC program. However, in this final rule, we
are finalizing at Sec. 455.502(c) the requirement that the State
report to CMS elements describing the effectiveness of the State's RAC
program, including, but not limited to, general program descriptors
(for example, contract periods of performance, contractors' names) and
metrics (for example, number of audits conducted, recovery amounts,
number of cases referred for potential fraud). CMS will provide sub
regulatory guidance to States related to performance metrics, State
reporting requirements and other milestones contained in the RAC
program.
Comment: A commenter asked CMS to add clarifying language in 42 CFR
part 455 subpart F that the SMA and not the RAC is the final arbiter of
whether an overpayment or underpayment has been discovered.
Response: When an overpayment is discovered it is governed by Sec.
433.316 of the regulation. To the extent that an overpayment discovered
in the course of a RAC audit is not the result of fraud, it would be
subject to Sec. 433.316(c). The issue is not which party is the final
arbiter of the overpayment, but which party has taken the action that
results in the overpayment being discovered. The party that discovered
the overpayment would depend upon the process established in the
State's RAC contract and which action occurs first in time: From whom
communications with providers are initiated, that is SMA or the RAC,
and whether the RAC initiates recoupment proceedings.
Comment: One commenter requested that CMS reconsider its position
that States could share a part of recovery from a civil or criminal
fraud proceeding with a RAC. The commenter was concerned that CMS might
unintentionally create strong incentives (through the prospect for
multiple damages) that RACs would presume potential fraud where
unfounded. The commenter suggested that even without an incentive under
the Medicare RAC demonstration, RACs often inaccurately determined the
existence of overpayments, with 64 percent of contested cases
overturned on appeal, and cited the June 2010, ``CMS Update to the RAC
Demonstration Report.''

[[Page 57831]]

Response: We proposed that nothing would preclude a State from
agreeing to pay a RAC a contingency fee from funds recovered and
returned to the State as the State share of an overpayment (or
restitution) at the close of the civil or criminal proceeding. It would
be within the State's discretion to design a RAC program that paid a
contingency fee to a RAC on this basis, that is, if the RAC contributed
to the recovery and the recovery was fully adjudicated. We are
sensitive to the potential for creating an incentive for contingency
fees for fraud recoveries. However, given that a fully adjudicated
fraud recovery could take several years, we believe the potential pay-
off for the RAC would be outweighed by the delay in the payment. We
recognize that the Medicare RAC Demonstration program experienced a
moderate overturn rate and are hopeful that States will be able to
design programs that take the Medicare RAC experience, including
overturn rate, into consideration to reduce the burden on the providers
and State Medicaid programs.
Comment: One commenter urges CMS to modify the proposed rule to
permit only the second option that CMS proposed for structuring
payments to RACs in which a State pays a RAC only when the recovery
amount is fully adjudicated and all appeals available to the provider
have been concluded. Adoption of the second option, the commenter
argues, is not only consistent with the expressed interpretation of the
statute by CMS, it is also sound policy, as it would incentivize
Medicaid RACs to conduct their audits with greater care to avoid errors
that would generate appeals. The commenter believes the first option in
which a State pays a RAC when the RAC recovers an overpayment and the
State requires reimbursement by the RAC if the recovery is overturned
on appeal is inconsistent with the language of section
1902(a)(42)(B)(ii)(I) of the Act, which requires that payment must be
made only from amounts recovered.
Response: As we stated in the proposed rule, we interpret the
statute to mean that (a) payments may not exceed the total amounts
recovered, and (b) payments may not be made based upon amounts merely
identified but not recovered, or amounts that may initially be
recovered but that subsequently must be repaid due to determinations
made in appeals proceedings. Therefore, under (a), because the payment
is a contingency fee it is relative to the amounts recovered; and under
(b), the identified amounts must be recovered for the contingency fee
to be paid to the RAC, or the contingency fee must be recouped from the
RAC if a recovered overpayment is found at any level of appeal to not
have been overpaid by the provider. While some RACs may find the second
contingency fee option to be a disincentive to committing errors when
performing audits, we think that a delay of as long as two years to be
paid the contingency fee would act as a disincentive to contracting
with the States at all. We are permitting the States the most
flexibility in designing their RAC programs, which includes the timing
of payment to their RACs.
Comment: One commenter noted that the level of provider appeals
related to RAC determinations could, according to the commenter,
``drive substantial program costs.'' The commenter asked for
clarification as to whether the expenses related to the additional
appeals will be subtracted from the Federal share to be refunded.
Response: As stated above, a State's appeal costs would be an
allowable administrative cost under the State's Cost Allocation Plan. A
provider's appeal costs are administrative costs that are not allowable
under Medicaid.
Comment: Several commenters recommended a discussion period between
RACs and the providers prior to the commencement of the right to appeal
to avoid inaccurate determinations of overpayments. During the
discussion period, the providers could provide RACs with information
necessary to make an accurate determination. The commenters noted that
when the discussion period was implemented in the Medicare RAC program,
providers and RACs avoided the time and expense of going through the
appeals process. The commenters suggested that SMAs would participate
when issues arose regarding RACs' interpretation of the State Plan and
other Medicaid payment policies. One commenter recommended a discussion
period of 25 days. Another commenter suggested that CMS and the States
should monitor how Medicaid RACs observe the discussion period so that
it is not treated as a mere formality but, rather, a meaningful
opportunity for the parties to address any errors in the determination.
Response: We appreciate the commenters' suggestions and are
cognizant of the lessons we might learn from the Medicare RAC program,
as well as other audit programs. Providers that submit additional
information to auditors during the discussion or comment period may
avoid subsequent appeals or they may find that the auditor's findings
will stand. Section 1902(a)(42)(B) of the Act establishes a State RAC
program, which we are interpreting to grant States the flexibility to
design programs, consistent with their State laws and that meet the
needs of their States. We will not mandate that States use discussion
periods, either at all or of any specified duration. However, we
encourage States to require a discussion or comment period prior to a
RAC's audit becoming final, as is commonplace in audits. If a State
chooses to implement a discussion or comment period in its RAC program,
we recommend but do not require that the State monitor the RAC's
compliance with that discussion or comment period requirement.
Comment: Several commenters suggested that we should require each
State to prescribe a clear appeals process that is robust and provides
for multiple levels of appeal. Some commenters urged us to prescribe
specific requirements for Medicaid appeals.
Response: We are not mandating a single appeals process that all
States must use for RAC appeals nor dictating the manner of the appeals
processes that the States must implement for RAC appeals. In the event
that, through the SPA process, a State proposed a process that did not
provide entities with an adequate opportunity to appeal adverse RAC
determinations, we would engage in discussions with the State about its
appeals process until the State was able to provide assurances that its
appeals process was compliant with section 1902(A)(42)(B)(ii)(III) of
the Act. Given that each State has provided us with assurances that it
will comply with the statutory requirement to provide an adequate
appeals process for entities to appeal adverse RAC determinations, it
would be unreasonably burdensome on the States for us to impose a
single appeals process for RAC appeals.
Comment: Several commenters objected that our proposed rule failed
to prevent RACs from recouping funds associated with denials under
appeal. The commenters also objected that the proposal failed to
require RACs to return their contingency fee if a denial is overturned
at any stage of the appeals process. The commenters believe that CMS'
silence on these important issues in the proposed rule will result in
overzealous and inappropriate denials on the part of the Medicaid RACs,
and urge that RACs must not be able to recoup funds until the appeals
process is exhausted and must not receive their contingency fee in
cases where the denial is overturned.
Response: We proposed 2 payment options to provide States with the
most flexibility in designing their RAC programs: (1) States may pay
RACs from

[[Page 57832]]

amounts identified and recovered, but not fully adjudicated, but the
RAC would be required to return any contingency fee that corresponded
to the amount of an overpayment overturned on appeal; or, (2) States
could pay the RAC after the overpayment was fully adjudicated, that is
after the exhaustion of all appeals available to the provider. We
disagree that we failed to require RACs to return their contingency fee
if a denial is overturned during the appeals process. In the first
option as we described it in our proposal, the RAC would be required to
return any portion of the contingency fee that corresponded to the
amount of the overpayment overturned at any level of appeal.
The commenters are concerned that the opportunity for a contingency
fee will act as an incentive to the RACs to find overpayments, even if
those are later overturned on appeal and the RACs must return the
contingency fee. We believe that the possibility of a contingency fee
being overturned would be outweighed by the likelihood that the State
would not be able to attract a RAC for its RAC program, were the State
limited to payment of the contingency fee after exhaustion of appeals.
The appeals process can take years and a RAC would go unpaid for all
its cases in the initial years while providers exhausted their appeal
rights.
Comment: Several commenters noted that the proposed rule does not
require the Medicaid RAC to provide any data on the number of claims
appealed and the number of denials overturned during the appeals
process. The commenters recommend that these data be captured on a
timely basis and urge that the data be used to hold RACs accountable
for inappropriate denials. The commenters also urge that information on
appeal turnover rates be shared with the public. Two of the commenters
also suggested that RACs with a turnover rate of 25 percent or greater
per year should be subject to a monetary penalty.
Response: Whether States should require RACs to provide any data on
the number of claims appealed or the number of denials overturned
during the appeals process, or any penalty to be assessed for high
appeal turnover rates is within the discretion of the States when
designing their RAC programs. Whether to release Medicaid RAC appeal
turnover rates is subject to each State's laws and rules. We proposed
that the States provide us with elements describing the effectiveness
of the RAC programs, including general program descriptors (contract
periods of performance, contractors' names, etc.) and program metrics
(number of audits conducted, recovery amounts, number of cases referred
for potential fraud, etc.). We will issue sub-regulatory guidance to
the States regarding the data to be provided.
Comment: One commenter suggested that CMS set minimum appeal rights
that all States must incorporate into their appeals processes. The
commenter suggested that a standardized Medicaid RAC appeals process
include the following minimum elements:
1. A clearly defined appeals process describing the providers'
rights and responsibilities, including the right to submit documentary
evidence and to be heard in person.
2. A minimum discussion period, such as 120 days, to rebut the RAC
response.
3. A multi-tiered appeals process which provides for an independent
review.
4. A process by which recoupment is delayed until the appeals
process is finished or has reached a certain stage.
5. A description of how interest will be applied to overpayment
determinations.
6. Timeframes regarding appeal deadlines, providing supporting
documentation, and issuing review decisions.
7. Detailed decisions describing the basis for upholding the
overpayment determination and informing the provider of further appeal
rights and deadlines.
8. Agreements between the State, the Medicaid RAC, and any other
entities involved in the Medicaid RAC process to ensure the timely and
accurate flow of information.
9. Penalties for noncompliance with time frames that should apply
to both the provider and the entity adjudicating the RAC appeal.
Response: States will have the flexibility to design their RAC
programs, including the content of and signatories to agreements
regarding the States' RAC programs, as well as whether there will be a
discussion or comment period, and what interest will apply to
overpayments. We are finalizing that States have two options to pay
contingency fees to RACs: States may pay RACs from amounts identified
and recovered, but not fully adjudicated, but the RAC would be required
to return any contingency fee that corresponded to the amount of an
overpayment overturned at any level of appeal within a reasonable
timeframe as prescribed by the State; alternatively, the State may pay
the RAC after the overpayment is fully adjudicated, that is after the
exhaustion of all appeals available to the provider. We leave the
States with the flexibility to select the option that works better for
their programs.
Comment: One commenter suggested specific recommendations that if
the current State appeals process is at the Administrative Law Judge
level only, CMS should impose requirements on the States to implement a
tiered appeals process to allow review by an independent, non-
government entity as a first or second level of appeal. In addition,
CMS should require establishment of timeframes both for providers to
submit their appeals, prior to recoupment, and for those entities
reviewing the appeals to conclude their work and report the outcome to
the providers.
Response: We are neither mandating a single appeals process that
all States must use for RAC appeals, nor are we dictating the manner of
the appeals processes that the States must implement for RAC appeals,
including details as timeframes for any part of the appeals process.
Comment: One commenter appreciated our proposed requirement that
State Medicaid RACs must use trained medical professionals, and that
the RAC programs must have an adequate appeals process and coordinate
with other auditors and law enforcement.
Response: We appreciate the comment. We are finalizing the
following requirements: States must require their RACs to employ
trained medical professionals, as defined by the State, to review
Medicaid claims at Sec. 455.508(a); States must provide appeal rights
under State law or administrative procedures to Medicaid providers that
seek review of an adverse Medicaid RAC determination at Sec. 455.512;
and that States must make referrals of suspected fraud and/or abuse to
the MFCU or other appropriate law enforcement agency at Sec.
455.506(d).
Comment: One commenter recommended that we develop a robust and
consistent infrastructure to support the Medicaid RAC appeals process,
including publishing information about the process online, to reduce
confusion and ambiguity experienced by providers.
Response: While we are sensitive to the challenges of multiple
States' audits and appeals for providers serving in multiple States'
Medicaid programs, we have no plans at this time to establish or
implement any online data repository regarding State Medicaid RAC
appeals processes.
Comment: One commenter encouraged States to utilize their existing
appeals processes rather than to

[[Page 57833]]

establish new Medicaid RAC appeals processes that would require a
learning curve. The commenter also encouraged CMS to establish
timeframes for the RACs to respond to providers during the appeals
processes. The commenter believed that the RACs should be held
accountable in their response period to ensure timeliness in addressing
denials.
Response: The States have the flexibility either to take advantage
of an existing appeals process or to establish a separate appeals
process for RAC determinations. It is within the States' discretion
which option they choose. We are not dictating the manner of the
appeals processes, including timeframes for RAC responses during the
appeals process.
Comment: One commenter noted that Medicare RACs demonstrated a lack
of sufficient review of claims, understanding, and due diligence to
take the appropriate amount of time and ensure their information is
accurate before submitting a denial letter to the provider. Therefore,
the commenter suggested that CMS hold RACs accountable and require them
to conduct due diligence, ensuring accurate and timely denial letters
are submitted to providers under audit.
Response: We are applying the lessons we have learned in the
Medicare RAC program; however, the States have a certain degree of
flexibility to design their RAC programs, including the development of
RAC audit protocols and the content of its findings. However, we agree
with the commenter that the RAC should timely notify providers of its
overpayment findings. We have finalized at Sec. 455.508(e)(4) that
RACs must notify providers of its overpayment findings within 60
calendar days.
Comment: One commenter suggested that patients not receive a letter
regarding an audit until the appeals process has ended and the
determination is final. The commenter also recommended that CMS publish
written policies and procedures of all processes to promote consistency
and provider knowledge, as well as proper understanding of these
processes.
Response: In the course of routine Medicaid provider audits,
Medicaid beneficiaries are contacted to verify receipt of services.
Accordingly, we decline to restrict SMAs in the ordinary conduct of
audits. Additionally, Medicaid RACs are individually State operated,
administered and procured programs. Therefore, CMS will not publish
written policies and procedures about State processes.
Comment: A few commenters supported our proposed approach to allow
States to use existing appeals structures.
Response: We appreciate the commenters' support.
Comment: One commenter had several recommendations for the audit
and appeals process regarding notices to providers during the audit;
notifications of findings of overpayments or underpayments; time limits
for repayment; and information on the right to rebut the findings and
the right to appeal. The commenter specifically recommended that the
notice to providers should explain the right to appeal, specific
requirements for appealing, and the effect of an appeal on the timing
of repayment or offset and applicable interest; and that contact
information should be provided for both rebuttal and appeal inquiries.
Response: Each State has a certain degree of flexibility with
regard to the design of its RAC program, including whether to use an
existing appeals process or to establish an alternate appeals process
for RAC determinations. We are not mandating those details as part of
the content of the RAC's findings. However, we believe that the RAC
should timely notify providers of its overpayment findings. We have
finalized at Sec. 455.508(e)(4) that RACs must notify providers of its
overpayment findings within 60 calendar days.
Comment: One commenter requested that CMS require the Medicaid RAC
process mirror the Medicare RAC program to alleviate the stress of
managing audits in multiple States and ensure the process is more
seamless for providers. The commenter also requested that CMS require
an independent decision maker such as an Administrative Law Judge at
some level of the appeal process to protect providers and the Medicaid
program, providing oversight and an unbiased opinion.
Response: We are sensitive to the challenge that audits in multiple
States can present to providers that serve multiple States' Medicaid
programs. Nevertheless, we are neither mandating a single appeals
process that all States must use for RAC appeals, nor are we dictating
the manner of the appeals processes that the States must implement for
RAC appeals, including who will be the decision makers in their appeals
processes. Given that each State has provided us with assurances
through the SPA process that it will comply with the statutory
requirement to provide an adequate appeals process for entities to
appeal adverse RAC determinations, it would be unreasonably burdensome
on the States for us to impose a single appeals process for RAC
appeals.
Comment: One commenter recommended that CMS conduct a thorough
review of State appeals processes and establish some level of
consistency across States, and include provisions that will require
adequate documentation of those processes including establishing time
frames in which documentation should be provided by RACs to providers
who are interested in filing an appeal. The commenter also recommended
that CMS include provisions that would require States to keep appeal
processes independent of RAC activities. The commenter was concerned
that because RAC fees are based on the amount of the overpayment
collected, RACs have an added incentive to avoid potential provider
appeals. The commenter suggested that all appeals processes should be
done by the State and not the RAC or other entities that may have an
interest in the outcome of the appeal.
Response: Each State has a certain degree of flexibility in the
design of its RAC program, and we are not mandating a single appeals
process that all States must use for RAC appeals, nor are we dictating
the manner of the appeals processes, including timeframes for providing
documentation to providers for filing an appeal and how the appeals
process would be structured. We are requiring that the States operate a
RAC program that meets the requirements of the statute, including
providing an adequate appeals process: section 1902(a)(42)(B)(ii)(III)
of the Act requires an adequate appeals process for providers to appeal
any adverse Medicaid RAC determinations. While we appreciate the
commenter's concerns that RAC activities be separate from the appeals
process, we are not mandating the structure of each State's RAC
program.
Comment: One commenter recommended clarification of the rule
describing providers' rights to appeal and that we require peer review
of overpayments.
Response: Each State has a certain degree of flexibility to design
its RAC program, including whether to use an existing appeals process
or to establish an alternate appeals process for RAC determinations and
how the appeals process will function in that State. While we are
requiring that States require their RACs to employ trained medical
professionals, as defined by the State, to review medical claims, it is
within the States' discretion to determine whether to use medical
professionals to review Medicaid RACs'

[[Page 57834]]

findings prior to the recoupment of overpayments.
Comment: One commenter recommended that due to an already
overburdened system, we should require the establishment of a concrete
timeframe for the record requests, the actual audit, and the appeals
process.
Response: We are sensitive to the demands of audits on States' and
providers' time. However, States have the flexibility with regard to
the design of its Medicaid RAC appeals processes. Therefore, we are not
mandating those details as timeframes for records requests, the
duration of the audit, or the appeals process.
Comment: One commenter noted that the State would have a
disincentive to establish a vigorous, unbiased appeals process because
it is required to return the Federal share under Sec. 433.312 even if
the State is unable to recover the overpayment from the provider.
Response: Under section 1903(d)(2)(C) of the Act and Sec. 433.312,
the State will have a year to attempt to recover an overpayment from a
provider, except in cases of fraud where the time period may be longer.
Then, the State must return the Federal share regardless of whether it
does in fact recover the overpayment. However, if a determination is
overturned on appeal, the State can request a refund of the Federal
share through processes outlined in Sec. 433.320. Thus, we disagree
with the commenter that there is a disincentive for States to establish
a vigorous, unbiased appeals process. States are required under section
1902(a)(42)(B)(ii)(III) of the Act to establish an adequate process for
providers to appeal adverse RAC determinations. We are confident that
States will afford providers vigorous and unbiased appeals processes.
Comment: One commenter suggested that CMS review each State's
appeals process to determine its reasonableness. The commenter
recommended that timeframes for filing appeals and making decisions on
the appeals should allow providers to more easily keep track of all the
levels of reconsideration and review as well as timely filing dates for
all the appeal levels. CMS should very closely monitor the different
appeals systems and remain alert to the concerns of providers if
unreasonableness, inconsistency and unnecessary complexity overwhelm
provider efforts to be compliant.
Response: Each State has the flexibility to design its Medicaid RAC
appeals process, including whether to use an existing appeals process
or to establish an alternate appeals process for RAC determinations.
While we are requiring States to submit a description and obtain prior
approval of any new RAC appeals process that a State will use (not any
existing appeals process), we are not dictating the manner of the
appeals process that the States must implement for RAC appeals.

H. Payment--General/Federal Share/Administrative Match

Comment: One commenter asserted that CMS should require States to
implement automatic positive payment adjustments to providers through
the ``X12 835 transaction process.''
Response: This comment is outside of the scope of the proposed
regulation. Therefore, we decline to accept this suggestion.
Comment: One commenter asked for clarification regarding what
activities are eligible for administrative matching.
Response: Section 1903(a) of the Act directs payment of FFP, at
different matching rates, for amounts ``found necessary by the
Secretary for the proper and efficient administration of the State
plan.'' The Secretary is the final arbiter of which activities fall
under this definition. Claims held under this authority must be
directly related to the administration of the Medicaid program.
Comment: A few commenters requested and/or recommended an enhanced
FFP rate for implementing the Medicaid RAC program. Other commenters
recommended an enhanced FFP match of 90 percent, and one commenter
recommended a rate of 75 percent.
Response: Because enhanced Federal match was not specifically
authorized by the Affordable Care Act, activities associated with the
procurement, operation and administration of a Medicaid RAC do not
qualify for enhanced Federal match.
Comment: One commenter requested that CMS clarify whether a State's
statute allows the State to directly receive the overpayment instead of
delegating the collection responsibility to the RAC.
Response: In the proposed rule, we acknowledged the differences
among the States and territories regarding the issue of coordinating
with Medicaid RACs for the collection of overpayments. We stated that
the statute requires Medicaid RACs to collect overpayments, but some
States may not be legally able to delegate the collection of
overpayments to contractors. Accordingly, we finalize at Sec.
455.506(b) that States will have the discretion to coordinate the
collection of overpayments with their Medicaid RACs.
Comment: One commenter suggested that there is a need for a
standard traceable recovery identifier to be used from beginning to end
to allow for reconciliation.
Response: We recommend that States explore efficient and innovative
processes to detect and/or prevent improper payments. However, we do
not require States to implement uniform processing systems for payments
to providers.
Comment: One commenter requested that CMS clarify the budget and
accounting standards that States must comply with when accounting for
transactions with Medicaid RACs.
Response: Estimates of Federal funds on overpayments should be
included in the Form CMS-37 reports, following the requirements for
reporting of collections and overpayments, not collected within one
year, as required by Sec. 433.312. States should already have an
accounting process in place to record overpayments when discovered, as
well as the Federal share received, and for recording collections and
reporting collections on the Form CMS-64 as they occur, and reporting
outstanding overpayments at the end of the one-year period. States
should follow those same accounting standards and procedures to account
for Medicaid RAC overpayments and collections and the required
reporting as indicated above, although they should be identified as RAC
overpayments and collections to facilitate determination and reporting
of RAC fees.
Comment: One commenter requested that CMS clarify when CMS expects
repayment of the Federal share of overpayments. The commenter stated
that CMS should give States up to one year to remit the Federal share
of the funds recovered. Providing States with up to one year to remit
funds will allow States the opportunity to recoup funds from future
payments.
Response: Under section 1903(d)(2) of the Act, States have up to
one year to recover overpayments before an adjustment is made in the
Federal payment to the State to account for that overpayment. The
Federal share of collections should be reported when received, if
collected within the one-year period. At the end of that period, the
Federal share of the uncollected overpayment amount must be refunded to
the Federal government.
Comment: One commenter requested clarification regarding proposed
language provided at sections 1902(a)(42)(B)(ii)(IV)(bb) and 1903(d) of
the Act as it applies to amounts recovered under the Medicaid RAC
program. There, the commenter noted

[[Page 57835]]

that ``[w]e propose that a State must refund the Federal share of the
net amount of overpayment recoveries after deducting a RAC's fee
payments.'' The commenter wanted CMS to assure that there is no
potential conflict with interpretation of language from page 75 FR
69041 of the proposed rule discussing repayment of the Federal portion.
Additionally, the commenter wanted clarification that the Federal share
should be refunded from overpayments or amounts actually recovered.
Response: The reporting will identify the overpayment recoveries
received and the RAC fees paid, which will ensure that the fees do not
exceed the recoveries. Additionally, overpayments for which the one-
year period for collection has expired will be reported to repay the
Federal share.
The reporting on the recoveries (collections) will distinguish
between recoveries reported within the one-year period to collect
(refunded on the current report) and collections for overpayments
previously refunded due to the expiration of the one-year period (not
refunded on the current report as the amount was previously refunded).
The Federal share of overpayment amounts collected within one year from
discovery is to be refunded when collected (recovered); the Federal
share of overpayment amounts not collected at the end of the one-year
period must be refunded at that time.
Comment: One commenter indicated that Sec. 433.312 requires States
to refund the Federal share of overpayments, regardless of whether the
State actually recovers the overpayments from providers. This commenter
sought clarification that there was no conflict with other sections of
the proposed rule which stated that RACs are paid from amounts
``actually recovered from the provider after all appeals and
negotiations are finalized, and not on amounts identified.''
Response: We do not believe that these provisions are in conflict.
One concept involves the return of FFP to the Federal Government,
whereas the other pertains to the timing of payment to a RAC by a
State. In the proposed rule, we indicated that the requirement for
States to refund the Federal share of overpayments applied to
overpayments that are identified by the RAC. Therefore, if a Medicaid
RAC identifies an overpayment, the State is required to refund the
Federal share of the overpayment amount if not collected by the
expiration of the one-year period. The State's obligation to return FFP
is independent of its obligation to compensate a RAC for the work it
performs. That occurs when an overpayment is collected and a
corresponding contingency fee is paid to the RAC.
Comment: One commenter indicated that the initial identification of
overpayment amounts may be subject to change because findings are often
reversed or revised after additional information is obtained, and some
findings are thrown out through the appeals process. If the RAC
contractor is not paid until overpayments are actually recovered, it
makes sense that the Federal portion of those recovered funds would be
repaid to the Federal government after an appeals process is completed.
Response: The refunding of the Federal share is governed by the
overpayment regulation at Sec. 433.312, as discussed above. If the
appeals process changes the overpayment amount after the expiration of
the one-year period for collection and the State reported that
overpayment, the overpayment amount can then be adjusted on the Form
CMS-64.9ORAC for reporting RAC overpayments that have not been
collected at the end of the one-year period.
Comment: One commenter recommended that the final rule should be
updated to reflect how recoveries are handled via a payment plan.
Response: If a State provides a payment plan which recovers the
total overpayment within one year from discovery, the recoveries are
reported as received. If the payment plan exceeds the one-year period,
the recoveries are refunded as collected during the one-year period and
then the balance is refunded on the overpayments schedule. Subsequent
recoveries of that balance would be reported for the purpose of showing
that fees paid do not exceed recoveries, but would not be refunded as
it would have already been refunded through the reporting on the
overpayment schedule.
Comment: One commenter recommended that CMS remove reference to
payment when addressing RAC fees in proposed section
1902(a)(42)(B)(ii)(IV)(bb) of the Act: ``We propose that a State must
refund the Federal share of the net amount of overpayment recoveries
after deducting a RAC's fee payments . * * * In other words, a State
would take the RAC's fee `off the top' before calculating the Federal
share of the overpayment recovery to be returned to CMS.''
Response: We are uncertain what the commenter is suggesting
regarding removing the reference to payment when addressing the RAC
fee. The statute requires that the RAC ``program is carried out in
accordance with such requirements as the Secretary shall specify
including * * * that section 1903(d) [of the Act] shall apply to
amounts recovered under the program.'' In the proposed rule we
indicated that the ``State would take a RAC's fee payment `off the top'
before calculating the Federal share of the overpayment recovery to be
returned to CMS''. We clarify the reporting in this final rule. In
order to adequately identify recoveries and fees paid, States must
report both the overpayment recoveries and associated fees using the
same Federal share (FMAP rate) that is applicable to the overpayments.
Similarly, the fees paid for identifying underpayments will be reported
at the same FMAP rate appropriate to the payment of that underpayment
amount, or the current FMAP rate if the underpayment is not paid.
Comment: One commenter recommended that the reconciliation process
with historical data should be visible to both the RAC and the
provider.
Response: States have certain flexibilities in which to design,
procure, administer, and operate their RAC programs. While we decline
to adopt the commenter's recommendation, we encourage States to adopt
measures that will promote transparency and efficiency in the Medicaid
RAC program.
Comment: One commenter suggested that CMS revise its proposed
methodology for RAC payment to permit State flexibility, allowing
States the option to claim contingency fees for RACs consistent with
current administrative FFP claiming protocols for existing TPL and non-
TPL overpayment recovery contracts. The State believes that requiring
States to run an accounting process for RAC contingency fees that may
differ from existing non-RAC overpayment recovery contingency fee
claiming processes is administratively burdensome and invites
opportunity for error.
Response: In the proposed rule, we considered requiring States to
treat RAC contingency fees at the administrative rate of 50 percent.
However, we determined that the language in the legislation supported
treating the fees at the FMAP rate applicable to the recovery. This
provides a higher benefit for States than treating the fees at the
administrative rate.
Comment: One commenter indicated that the proposed rule does not
specify that providers must request reimbursement for underpayments.
The commenter further indicated that providers must be responsible and

[[Page 57836]]

accountable for their claims and the State should not be required to
make payments without the provider submitting a claim.
Response: As previously stated, we are concerned about provider
participation in the Medicaid program as well as States making proper
payments to providers. We believe that States should compensate
providers for identified underpayments, consistent with State law. We
are requiring States, in this final rule at Sec. 455.510(c)(3), to
inform providers about underpayments that are identified by their
Medicaid RACs.
Comment: One commenter indicated that its Medicaid Management
Information System (MMIS) only retains claims available for adjustment
for two years. Additionally, it asserted that adjudicating claims or
adjustments outside of the regulated time frames creates technical
accounting and recording problems.
Response: We understand the commenter's concerns. However,
consistent with Sec. 433.322, States are required to maintain a
separate record of all overpayment activities for each provider in a
manner that satisfies the retention and access requirements of 45 CFR
part 74, subpart D. However, we are finalizing at Sec. 455.508(f) that
the maximum look-back period for claims review is three years. If a
State's MMIS system only retains adjustable claims data for only two
years, a State may request an exception from CMS through the SPA
process. We believe this flexibility also enables States to address
concerns pertaining to adjudication and adjustments.

I. Exceptions

Comment: Several commenters recommended that CMS clarify its
position on whether Medicaid RACs will review Medicaid managed care
claims. Most, if not all, of these commenters recommended that CMS
provide guidance exempting Medicaid managed care claims from review by
Medicaid RACs, and focus only on fee-for-service claims. However, one
commenter indicated that it interpreted the proposed rule to include
Medicaid managed care claims within the scope of Medicaid RAC review.
The commenter made several recommendations, including restating
previous recommendations for Parts C and D of the Medicare program.
Response: While the proposed rule was silent on the issue of
whether managed care claims would be included in the scope of review by
the Medicaid RACs, we clarify in the final rule that States may exclude
Medicaid managed care claims from review by Medicaid RACs. We are
finalizing at Sec. 455.506(a)(1) that Medicaid RACs will only be
required to review fee-for-service claims until that time as a
permanent Medicare managed care RAC program is fully operational or a
viable State Medicaid model is identified, at which point, we may
engage in future rulemaking with regard to the review of managed care
claims by Medicaid RACs.
Comment: One commenter suggested that CMS include an exemption for
Medicaid payments made from the ``CMMI or other delivery system reform
programs.''
Response: We appreciate the commenter's suggestion regarding the
Center for Medicare and Medicaid Innovation (CMMI) and other delivery
reform programs CMS is implementing. States have the discretion to
exclude review of claims that are submitted in connection with payment
or delivery system reform programs until the time a viable RAC model is
identified.
Comment: One State recommended that CMS' final rule should exempt
Medicaid RAC programs in States with less than 125,000 enrolled
Medicaid beneficiaries. Additionally, other commenters suggested that
States with low PERM error rates will experience limited recoveries
from the RAC program. Therefore, the States should be exempt from
establishing Medicaid RAC programs. Another commenter requested an
exception to proposed Sec. 455.510(b)(3) and Sec. 455.510(b)(4) for
States with low numbers of Medicaid providers and beneficiaries and/or
expenditures. Finally, one commenter expressed its concern about
repetitive audits leading to diminished provider access. The commenter
continued that it will not be able to attract a RAC for less than 12.5
percent, the contingency fee cap.
Response: The Secretary has discretionary authority to grant
exceptions from program requirements and complete exemptions from
establishing a Medicaid RAC program, to a State, upon a State's
submission of justification for its request. States were advised that
they may request exceptions through the SPA process. We emphasize that
complete exceptions will be granted rarely and under exceptional
circumstances. States are timely notified as to whether their requests
will be granted prior to the expiration of the 90 day clock.

J. ICR Comments

Comment: One commenter anticipated that the appeals process will
consume 100-200 hours per case at a minimum, rather than the 60 hours
that we estimated.
Response: We appreciated the comment, but each State's appeals
process will vary, as will individual cases. Therefore, we have
provided estimates in our analysis to capture this variance.
Comment: One commenter asked for details on the elements that must
be reported to CMS, and also for clarification on how and when the
elements must be reported.
Response: Section 455.502(c) of the final rule requires States to
report to CMS certain elements regarding the effectiveness of their RAC
programs. These elements include, but are not limited to, general
program descriptors and program metrics to evaluate the effectiveness
of their Medicaid RAC programs. We are currently developing these
elements, and will share them with States via sub-regulatory guidance.
Comment: One commenter estimated the full reporting requirement to
take each State 10 through 15 hours per month to query, aggregate, and
submit the data to CMS.
Response: We understand the burden associated with this requirement
includes the time and effort put forth by the State to aggregate data
to report on the effectiveness of its RAC program.

K. RIA Comments

Comment: Several commenters disagreed with our assertion in the
proposed rule that most providers will experience limited financial
impact from the Medicaid RAC program. The commenters stated that their
member organizations have expended significant resources responding to
RAC requests and many have hired additional staff to meet the demands
of the Medicare RAC program. They anticipate that their costs will be
exacerbated if the Medicaid RAC rule is not revised to incorporate
policies necessary to avoid aggressive and overzealous RAC denials.
Response: CMS has closely examined many of the lessons learned from
the Medicare RAC demonstration in parallel with the current provisions
of the permanent Medicare RAC program, and incorporated those best
practices into this final rule. As a result, we believe this will limit
the burden and associated financial impact on providers. We also
clarify that Medicaid RACs will conduct audits of Medicaid providers
for overpayments and underpayments, and not deny payments. In addition,
we finalize a number of provisions that address providers' concerns,
including those related to overzealous RAC auditors. For example, at
Sec. 455.506(c), we finalize that States must coordinate

[[Page 57837]]

the recovery audit efforts of their RACs with other auditing entities.
At Sec. 455.506(e), we require States to set limits on the number and
frequency of medical records to be reviewed by the RACs, subject to
requests for exceptions from RACs. At Sec. 455.508 (a), (b) and (c),
we prescribe mandatory staffing requirements for RACs. At Sec.
455.508(d), we require States and their RACs to develop an education
and outreach program which includes notification to providers of audit
policies and protocols. At Sec. 455.508(e), we require RACs to provide
several mandatory customer service measures in their programs. At Sec.
455.508(f), we prescribe a maximum look back period of 3 years from the
date of the claim. At Sec. 455.508(g), we prohibit RACs from auditing
claims that have already been audited or that are currently being
audited by another entity. At Sec. 455.510(b)(3), we finalize that if
a provider appeals a RAC overpayment determination and that
determination is reversed, at any level, the RAC must return the
contingency fees associated with that payment. We expect that these
provisions will encourage RACs to perform their work with diligence and
restraint. At Sec. 455.510(c)(2) and (c)(3), we require States to
adequately incentivize RACs to detect underpayments and notify
providers about underpayments that are identified by RACs,
respectively. Lastly, we finalize at Sec. 455.512, the requirement for
States to provide an adequate appeals process for providers. We are
sensitive to the challenge that responding to audits and appeals in
multiple States can present to providers that participate in multiple
States' Medicaid programs.
Comment: One commenter requested that CMS reconsider its statement
that the proposed rule will have no significant impact on Medicaid
providers and consider the resources and time that providers must
devote to Medicaid RAC requests for medical records, appeals, etc. The
commenter noted that CMS should also consider the exponential impact of
this program when combined with other audit programs. The commenter
urged CMS to take steps in the final rule to minimize these costs.
Response: We are aware of the challenge of responding to multiple
requests for audits for providers that serve in State Medicaid
programs. Under section 1902(a)(42)(B)(ii)(IV)(cc) of the Act, States
must coordinate their audit efforts with other contractors and entities
performing audits or providers, including efforts with law enforcement.
In an effort to minimize provider burden, we have included in this
final rule at Sec. 455.508(g) that Medicaid RACs should not audit
claims that have already been audited or are currently being audited by
another entity as well as a provision at Sec. 455.506(e) requiring the
State to set limits on the number and frequency of medical records to
be reviewed by its RAC (subject to RAC requests for an exception to
this requirement). Lastly, as detailed in the previous response, this
final rule modeled several requirements on RACs based on the lessons
learned from providers' past experience with the Medicare RAC
demonstration. As a result, we believe this will limit the financial
impact on providers.

IV. Provisions of the Final Regulations

After consideration of the comments reviewed and further analysis
of specific issues, we are adopting the provisions of the proposed rule
as final with several revisions. Those provisions of the final rule
that differ from the proposed rule are as follows:
States may exclude Medicaid managed care claims from
review by Medicaid RACs (Sec. 455.506(a)(1)).
States must coordinate the recovery audit efforts of their
Medicaid RACs with other auditing entities (Sec. 455.506(c)).
States must make referrals of suspected fraud and/or abuse
to the MFCU or other appropriate law enforcement agency (Sec.
455.506(d)).
States must set limits on the number and frequency of
medical records to be reviewed by the Medicaid RACs subject to requests
for exceptions made by the RACs (Sec. 455.506(e)).
Each RAC must hire a minimum of 1.0 FTE Contractor Medical
Director who is a Doctor of Medicine or Doctor of Osteopathy in good
standing with the relevant State licensing authorities and has relevant
work and educational experience. A State may seek to be excepted, in
accordance with Sec. 455.516, from requiring its RAC to hire a minimum
of 1.0 FTE Contractor Medical Director by submitting to CMS a written
request for CMS review and approval (Sec. 455.508(b)).
RACs must hire certified coders unless the State
determines that certified coders are not required for the effective
review of Medicaid claims (Sec. 455.508(c)).
RACs must work with the State to develop an education and
outreach program (including notification of audit policies and
protocols) (Sec. 455.508(d)).
RACs must provide minimum customer service measures
including: Providing a toll-free customer service telephone number in
all correspondence sent to providers, and staffing the toll-free number
during normal business hours from 8:00 a.m. to 4:30 p.m. in the
applicable time zone (Sec. 455.508(e)(1)); compiling and maintaining
provider approved addresses and points of contact (Sec.
455.508(e)(2)); mandatory acceptance of provider submissions of
electronic medical records on CD/DVD or via facsimile at the providers'
request (Sec. 455.508(e)(3)); notifying providers of overpayment
findings within 60 calendar days (Sec. 455.508(e)(4)).
RACs must not review claims that are older than 3 years
from the date of the claim, unless it receives approval from the State
(Sec. 455.508(f)).
RACs should not audit claims that have already been
audited or that are currently being audited by another entity (Sec.
455.508(g)).
If a provider appeals a Medicaid RAC overpayment
determination and the determination is reversed, at any level, then the
Medicaid RAC must return its contingency within a reasonable timeframe
as prescribed by the State (Sec. 455.510(b)(3)).
States must adequately incentivize the detection of
underpayments (Sec. 455.510(c)(2)).
States must notify providers of underpayments that are
identified by the Medicaid RACs (Sec. 455.510(c)(3)).
States must provide appeal rights under State law or
administrative procedures to Medicaid providers that seek review of an
adverse Medicaid RAC determination (Sec. 455.512).
In addition to the inclusion of provisions in the final rule that
differ from the proposed rule, we are retaining the following
provisions, described below, as published in the proposed rule.
We have retained proposed ``Subpart F--Medicaid Recovery Audit
Contractors Program'' that will implement section 1902(a)(42)(B) of the
Act, which sets forth provisions relating to States establishing
recovery audit contractor programs in which States will contract with 1
or more Medicaid RACs to audit Medicaid claims and to identify
underpayments and identify and recover overpayments. We are also
retaining the following sections:

A. Purpose (Sec. 455.500)

In Sec. 455.500, we set forth the purpose of the new subpart F.
The regulations will implement section 1902(a)(42)(B) of the Act that
establishes the Medicaid RAC program.

B. Establishment of Program (Sec. 455.502)

In Sec. 455.502(a), we establish the Medicaid RAC program as a
measure for States to promote the integrity of the Medicaid program. At
Sec. 455.502(b), we

[[Page 57838]]

require that States enter into contracts with one or more RACs to carry
out the activities described in Sec. 455.506. At Sec. 455.502(c), we
require that States report on certain elements describing the
effectiveness of their Medicaid RAC program.

C. Definitions (Sec. 455.504)

In Sec. 455.504(a), we define the Medicaid RAC program as a
recovery audit contractor administered by a State to identify
overpayments and underpayments and recoup overpayments. At Sec.
455.504(b), we define the Medicare RAC program as a recovery audit
contractor program administered by CMS to identify overpayments and
underpayments and recoup overpayments.

D. Activities to be Conducted by Medicaid RACs and States (Sec.
455.506)

At Sec. 455.506(b), States will have discretion over the manner in
which they coordinate with Medicaid RACs' for the recoupment of
overpayments.

E. Eligibility Requirements for Medicaid RACs (Sec. 455.508)

At Sec. 455.508(a), we provide that an entity must have the
technical capability to carry out the activities described in Sec.
455.506, including employing trained medical professionals to review
Medicaid claims. At Sec. 455.508(i), we provide that RACs must meet
other requirements as the State may require.

F. Payments to RACs (Sec. 455.510)

At Sec. 455.510(a), fees paid to RACs must be made only from
amounts recovered. At Sec. 455.510(b), we require the State to
determine the contingency fee rate paid to a Medicaid RAC for the
identification and recovery of overpayments. At Sec. 455.510(b)(1), we
require that the contingency fee paid to Medicaid RACs be based on a
percentage of the recovered overpayment amount. At Sec. 455.510(b)(2),
States must determine at what stage of the audit process Medicaid RACs
will receive their contingency fee. At Sec. 455.510(b)(4), except as
provided in paragraph (b)(5), we will not provide FFP for any amount of
contingency fee that exceeds the then highest contingency fee rate paid
to a Medicare RAC. At Sec. 455.510(b)(5), on a case-by-case basis, we
will review and consider substantially justified requests from States
to pay Medicaid RAC(s) a contingency fee higher than the highest
Medicare RAC contingency fee. At Sec. 455.510(c)(1), we require that
States determine the fee paid to Medicaid RACs to identify
underpayments.

G. Federal Share of State Expense for the Medicaid RAC Program (Sec.
455.514)

At Sec. 455.514(a), funds expended by States to carry out the
Medicaid RAC program must be considered necessary for the proper and
efficient administration of the States Plan or waivers of the Plan.
Additionally, in Sec. 455.514(a), the Federal share of State expenses
does not include fees paid. At Sec. 455.514(b), FFP is available to
States for administrative costs of operation and maintenance of
Medicaid RACs, subject to CMS' reporting requirements.

H. Exceptions From Medicaid RAC Programs (Sec. 455.516)

At Sec. 455.516, States that seek to be excepted from any of the
requirements of the Medicaid RAC program must submit to CMS a written
justification for the request and obtain CMS approval.

I. Applicability to the Territories (Sec. 455.518)

At Sec. 455.518, the provisions in Sec. 455.500 through Sec.
455.516 are applicable to Guam, Puerto Rico, U.S. Virgin Islands,
American Samoa and the Commonwealth of the Northern Mariana Islands.

V. Collection of Information Requirements

Under the Paperwork Reduction Act of 1995, we are required to
provide 30-day notice in the Federal Register and solicit public
comment before a collection of information requirement is submitted to
the OMB for review and approval. To fairly evaluate whether an
information collection should be approved by OMB, section 3506(c)(2)(A)
of the Paperwork Reduction Act of 1995 requires that we solicit comment
on the following issues:
The need for the information collection and its usefulness
in carrying out the proper functions of our agency.
The accuracy of our estimate of the information collection
burden.
The quality, utility, and clarity of the information to be
collected.
Recommendations to minimize the information collection
burden on the affected public, including automated collection
techniques.
We solicited public comment on each of these issues for the
following sections of this document that contain information collection
requirements (ICRs):

A. ICRs Regarding State Submission of Certain Elements Describing the
Effectiveness of Their Medicaid RAC Programs (Sec. 455.502)

Section 455.502(c) requires States to submit certain elements
describing the effectiveness of their Medicaid RAC programs. These
elements include, but are not limited to general program descriptors
and program metrics that will evaluate effectiveness. The burden
associated with this requirement will be the time and effort put forth
by the State to aggregate data to report on the effectiveness of its
RAC program. We estimate it will take each State 2 hours to perform
this task. The estimated annual burden for this requirement is 112
hours (56 States x 2 hours) at an estimated cost of $3,778.88 ($33.74/
hr labor x 112 hours). The work will be performed by a mid-level
analyst whose salary is the average hourly salary as determined by the
Bureau of Labor Statistics as of December 2010, not seasonally
adjusted. This hourly wage reflects 48 percent fringe benefits and
overhead costs.

B. ICRs Regarding State Justifications to Pay Higher Contingency Fees
(Sec. 455.510)

Section 455.510(b)(5) requires States to submit justifications to
CMS to pay Medicaid RACs a contingency fee higher than the highest
Medicare RAC. The burden associated with this requirement is the time
and effort put forth by the State to prepare and submit a
justification. We estimate it will take each State 60 hours to perform
this task if they submit the justification. The estimated annual burden
for this requirement is 3,360 hours (56 States x 60 hours) at an
estimated total cost of $113,366.40 ($33.74/hr labor x 3,360 hours).
The work will be performed by a mid-level analyst whose salary is the
average hourly salary as determined by the United States Bureau of
Labor Statistics as of December 2010, not seasonally adjusted. This
hourly wage reflects 48 percent fringe benefits and overhead costs.

C. ICRs Regarding Medicaid RAC Provider Appeals (Sec. 455.512)

Section 455.512 requires States to provide administrative appeal
procedures for Medicaid providers that seek review of an adverse
Medicaid RAC determination. The burden associated with this requirement
is the time and effort put forth by the State to prepare and provide
administrative appeal procedures. We estimate it will take each State
60 hours to perform these tasks. The estimated annual burden for this
requirement is 3,360 hours (56 States x 60 hours) at a cost of $192,696
($57.35/hr labor x 3,360 hours). The work will be performed by an
attorney whose salary is the average hourly salary as determined by the
United States Bureau of Labor Statistics as of December 2010, not
seasonally

[[Page 57839]]

adjusted. This hourly wage reflects 48 percent fringe benefits and
overhead costs.

D. ICRs Regarding Federal Share of State Expense for the Medicaid RAC
Program (Sec. 455.514)

Section 455.514(b) provides that FFP will be available to States
for the Federal share of State expenses for the Medicaid RAC program,
subject to CMS' reporting requirements. The burden associated with a
State reporting quarterly expenditure estimates is currently approved
under OMB control number 0938-0067 with an expiration date of August
31, 2011. CMS recently submitted its request for a 3-year extension of
the August expiration date. This rule will not significantly affect the
requirements under OMB 0938-0067. The Form CMS-64 is a
collection of forms in which States are already required to report
routine Medicaid recoveries to CMS on a quarterly basis. This task is
accomplished electronically. The final rule requires States to account
for, separately, Medicaid RAC overpayment recoveries and the
corresponding contingency fees associated with the recoveries. We
estimate that it will take each State 4 hours/quarterly to meet this
requirement; therefore, the total annual burden associated with this
requirement is 896 hours(56 States x 4 hours x 4 quarters) at an annual
total estimated cost of $43,285.76($48.31/hour labor x 896 hours). The
work will be performed by a computer systems analyst whose salary is
the average hourly salary as determined by the United States Bureau of
Labor Statistics as of December 2010, not seasonally adjusted. This
hourly wage reflects 48 percent fringe benefits and overhead costs.

E. ICRs Regarding Exceptions From Medicaid RAC Programs (Sec. 455.516)

Section 455.516 requires a State that is seeking an exception from
any of the requirements of the Medicaid RAC program to submit a written
justification to CMS. The burden associated with this requirement is
the time and effort put forth by the State to prepare and submit a
written justification for the request. We estimate it will take each
State 20 hours to meet this requirement. During the SPA process, we
received exception requests from 14 States. Therefore, the total annual
burden associated with this requirement is 280 hours (14 responses x 20
hours) at a cost of $9,447.20 ($33.74/hr labor x 280 hours). We
estimate that the work was performed by a mid-level analyst whose
salary is the average hourly salary as determined by the United States
Bureau of Labor Statistics as of December 2010, not seasonally
adjusted. This hourly wage reflects 48 percent fringe benefits and
overhead costs.

[[Page 57840]]

[GRAPHIC] [TIFF OMITTED] TR16SE11.000

[[Page 57841]]

If you comment on these information collection and recordkeeping
requirements, please do either of the following:
1. Submit your comments electronically as specified in the
ADDRESSES section of this final rule; or
2. Submit your comments to the Office of Information and Regulatory
Affairs, Office of Management and Budget, Attention: CMS Desk Officer,
[CMS-6034-F] Fax: (202) 395-6974; or E-mail: [email protected].

VI. Regulatory Impact Analysis

A. Introduction

We have examined the impacts of this rule as required by Executive
Orders 12866 on Regulatory Planning and Review (September 30, 1993) and
13563 on Improving Regulation and Regulatory Review (January 18, 2011).
Executive Orders 12866 and 13563 direct agencies to assess all costs
and benefits of available regulatory alternatives and, if regulation is
necessary, to select regulatory approaches that maximize net benefits
(including potential economic, environmental, public health and safety
effects, distributive impacts, and equity). Executive Order 13563
emphasizes the importance of quantifying both costs and benefits, of
reducing costs, of harmonizing rules, and of promoting flexibility. A
regulatory impact analysis (RIA) must be prepared for major rules with
economically significant effects ($100 million or more in any one
year). This final rule has been designated an ``economically
significant'' rule under section 3(f)(1) of Executive Order 12866. In
addition, this is a major rule under the Congressional Review Act (5
U.S.C. 804(2)). Accordingly, the rule has been reviewed by the Office
of Management and Budget.

B. Statement of Need

Section 6411(a) of the Affordable Care Act amended and expanded
section 1902(a)(42) of the Act to require States to establish Medicaid
RAC programs by December 31, 2010, to contract with 1 or more
contractors to audit Medicaid claims, and to identify underpayments and
overpayments and collect overpayments. Section 1902(a)(42)(B) of the
Act requires all States to establish Medicaid RAC programs, subject to
the exceptions and requirements as the Secretary may require.
Medicaid RACs are State programs designed to produce savings in
State Medicaid expenditures by detecting improper payments to Medicaid
providers. The majority of State expenditures will be derived from the
contingency fee payments to Medicaid RACs.
This final rule will: (1) Implements section 6411 of the Affordable
Care Act and provides guidance to States related to Federal/State
funding of State start-up, operation and maintenance costs of Medicaid
RACs and the payment methodology for State payments to Medicaid RACs;
(2) requires States to assure that adequate appeal processes are in
place for providers to dispute adverse determinations made by Medicaid
RACs; and (3) requires States to coordinate with other contractors and
entities auditing Medicaid providers, as well as with State and Federal
law enforcement agencies.

C. Overall Impact

This final rule applies to States' requirement to contract with
Medicaid RACs to perform audits of Medicaid providers on a contingency
fee basis. The majority of anticipated savings, as a result of the
provisions in this rule, are related to improper payments. However, as
seen in the Medicare RAC Demonstration period, we expect a limited
financial impact on most providers, as significant improper payments
are relatively rare. The CMS Office of the Actuary (OACT) estimated the
potential impact on Federal Medicaid costs and savings. OACT used the
historical experience from the Medicare program to estimate potential
savings to Medicaid. The estimates in the final rule differ from those
in the proposed rule primarily as a result of the new implementation
date of January 1, 2012, versus that of April 1, 2011, in the proposed
rule. These estimates are highly uncertain, and as a result we offer
estimates for FYs 2012 through 2016 to illustrate the potential effects
of this program. As a result, OACT's estimates for FYs 2012 through
2016 are presented in Table 2.

TABLE 2--Estimated Medicaid Impact Resulting From the Expansion of the Recovery Audit Contractor Program
[FYs 2012-2016]
----------------------------------------------------------------------------------------------------------------
Estimated savings ($Millions) FYs 2012-2016
-----------------------------------------------------------------------------
2012 2013 2014 2015 2016 2012-2016
----------------------------------------------------------------------------------------------------------------
Federal share..................... $60 $190 $280 $330 $360 $1,220
State share....................... 50 140 200 250 270 910
-----------------------------------------------------------------------------
Total......................... 110 330 480 580 630 2,130
----------------------------------------------------------------------------------------------------------------

D. Detailed Impacts

The Medicaid RACs are part of a significant initiative to reduce
waste and improper payments and recoup the improper payments. The
estimated impact on the Medicaid program, as presented in Table 2,
reflects an aggregate net savings of $2.13 billion for FYs 2012 through
2016. This includes an estimated net savings of $1.22 billion to the
Federal Medicaid program and a net savings of $910 million to the State
Medicaid program, for the same time period of FYs 2012 through 2016.
Because the Affordable Care Act requires States to contract with RACs
on a contingency fee basis, out-of-pocket expenses should be minimized.
Therefore, the majority of the program costs will be offset by
overpayment recoveries.
CMS experience from the Medicare RAC demonstration has shown that
overpayment recoveries by Medicare RACs represented over 96 percent of
the improper payments, while underpayments accounted for the remaining
4 percent of the improper payments. (Medicare RAC Program: An
Evaluation of the 3-Year Demonstration, January 2008). As a result, we
continue to believe that States would not need to maintain a reserve of
recovered overpayments to fund Medicaid RAC costs associated with
identifying underpayments. We do, however, require States to maintain
an accounting of amounts recovered and paid. States must report
overpayments to CMS based on the net amount remaining after all fees
are paid to the

[[Page 57842]]

Medicaid RAC. As discussed earlier, Medicaid RACs may only receive
payments through the contingency fee arrangement made in accordance
with these requirements and the limitations relating to the maximum
contingency fee amount, unless a State receives an exception from CMS.
No additional FFP is available for any other State payment made to the
RACs. The treatment of the fees and expenditures are linked to specific
statutory language implementing the Medicaid RAC requirements and not
extended to Medicaid overpayment recoveries in other contexts.
Regarding appeal costs, a State's appeal costs would be an
allowable administrative cost under the State's Cost Allocation Plan. A
provider's appeal costs are administrative costs that are not allowable
under Medicaid. With regard to the impact upon providers, as discussed
earlier in the preamble, we closely examined many of the lessons
learned from the Medicare RAC demonstration, in parallel with the
current provisions of the permanent Medicare RAC program and
incorporated those best practices into this final rule. As a result, we
believe this will limit the burden and associated financial impact on
providers. Furthermore, we finalize a number of measures that address
providers' concerns of overzealous RAC auditors. For example, at Sec.
455.506(c), we finalize that States must coordinate the recovery audit
efforts of their RACs with other auditing entities. At Sec.
455.506(e), we require States to set limits on the number and frequency
of medical records to be reviewed by the RACs, subject to requests for
exceptions from RACs. At Sec. 455.508 (a), (b) and (c), we prescribe
mandatory staffing requirements for RACs. At Sec. 455.508(d), we
require States and their RACs to develop an education and outreach
program which includes notification to providers of audit policies and
protocols. At Sec. 455.508(e), we require RACs to provide several
mandatory customer service measures. At Sec. 455.508(f), we prescribe
a maximum look back period of 3 years from the date of the claim. At
Sec. 455.508(g), we prohibit RACs from auditing claims that have
already been audited or that are currently being audited by another
entity. At Sec. 455.510(b)(3), we finalize that if a provider appeals
a RAC overpayment determination and that determination is reversed, at
any level, the RAC must return the contingency fees associated with
that payment. At Sec. 455.510(c)(2) and (c)(3), we require States to
adequately incentivize RACs to detect underpayments and notify
underpayments that are identified by RACs, respectively. Lastly, we
finalize at Sec. 455.512, the requirement for States to provide an
adequate appeals process for providers.

E. Alternatives Considered

In the proposed rule, we stated that States would have complete
flexibility with regard to most, if not all, of the Medicaid program
elements. We wanted to account for differences in the size of the
State, Medicaid population, amount of expenditures, and other State-
specific characteristics, for example, allowing smaller States the
flexibility to vary the requirements that would otherwise overburden
them financially.
For example, North Dakota, Wyoming, Rhode Island and Connecticut
may not have the volume of Medicaid expenditures that a State such as
California would have. Requiring a Connecticut RAC to hire 1.0 FTE
Medical Director, we believe, would increase the labor costs to a RAC,
and subsequently to the State. Initially, we considered allowing States
to determine the appropriate personnel for RACs to hire. However, we
received a number of comments regarding the need for 1.0 FTE Medical
Director to oversee the review of claims in the RAC program due to the
high overturn rates found in the Medicare RAC Demonstration period and
numerous provider complaints. Accordingly, we decided to include the
requirement of a minimum of 1.0 FTE Contractor Medical Director who is
a Doctor of Medicine or Doctor of Osteopathy in good standing with the
relevant State licensing authorities and has relevant work and
educational experience. A State may seek to be excepted, in accordance
with Sec. 455.516, from requiring its RAC to hire a minimum of 1.0 FTE
Contractor Medical Director by submitting to CMS a written request for
CMS review and approval.
In addition, we considered giving States complete flexibility with
regard to setting their own claims look-back periods based upon State
specific laws and regulations regarding their claims look-back periods,
which varied from three to seven years. As a result of many stakeholder
comments, we reconsidered and now include a 3-year maximum look back
period, similar to the Medicare RAC program. States will have the
option of requesting exceptions to this provision.

F. Accounting Statement

As required by OMB Circular A-4 available at http://www.whitehouse.gov/omb/circulars_a004_a-4, in Table 3, we have
prepared an accounting statement table showing the classification of
the impacts associated with the implementation of section 6411 in this
final rule.

Table 3--Accounting Statement: Classification of Estimated Net Savings, From FY 2012 to FY 2016
[in $Millions]
----------------------------------------------------------------------------------------------------------------
Category Transfers
----------------------------------------------------------------------------------------------------------------
Year dollar Units discount rate Period covered
Annualized monetized transfers ------------------------------------------------------------------------------
2010 7% 3% FYs 2012-2016
----------------------------------------------------------------------------------------------------------------
Primary Estimate.... -$233.9 -$239.6
����������������������������������
From............................. Federal Government to providers
����������������������������������
Primary Estimate.... -$174.5 -$178.7
����������������������������������
From............................. State Governments to providers
----------------------------------------------------------------------------------------------------------------

VII. Regulatory Flexibility Act Analysis

The Regulatory Flexibility Act (RFA) (15 U.S.C. 604), as modified
by the Small Business Regulatory Enforcement Fairness Act of 1996
(SBREFA) (Pub. L. 104-121), requires agencies to determine whether
proposed or final rules would have a significant economic impact on a
substantial number of small

[[Page 57843]]

entities and, if so, to prepare a Regulatory Flexibility Analysis and
to identify in the notice of proposed rulemaking or final rulemaking
any regulatory options that could mitigate the impact of the proposed
regulation on small businesses. For purposes of the RFA, small entities
include businesses that are small as determined by size standards
issued by the Small Business Administration, nonprofit organizations,
and small governmental jurisdictions). Individuals and States are not
included in the definition of a small business entity.
For purposes of the RFA, we assume that approximately 75 percent of
Medicaid providers are considered small businesses according to the
Small Business Administration's size standards (with total revenues of
$35 million or less in any one year), and 80 percent are nonprofit
organizations. Medicaid providers are required, as a matter of course,
to follow the guidelines and procedures as specified in State and
Federal laws and regulations. The Medicaid providers must retain
accurate billing records for the requisite period of time.
Additionally, Medicaid providers must cooperate in audits conducted by
the State and/or Federal Governments and their agents. Lastly, the
majority of the economic impacts associated with this final rule are a
direct result of the recovery of improper payments. Therefore, the
Secretary has determined that this final rule will not have a
significant economic impact on a substantial number of small entities.
In addition, section 1102(b) of the Act requires us to prepare a
regulatory impact analysis if a rule may have a significant impact on
the operations of a substantial number of small rural hospitals. This
analysis must conform to the provisions of section 604 of the RFA. For
purposes of section 1102(b) of the Act, we define a small rural
hospital as a hospital that is located outside of a metropolitan
statistical area and has fewer than 100 beds. For the same reason as
Stated above, the Secretary has determined that this final rule will
not have a significant impact on the operations of a substantial number
of small rural hospitals.

VIII. Unfunded Mandates Reform Act Analysis

Section 202 of the Unfunded Mandates Reform Act of 1995 (Pub. L.
104-4) requires that agencies assess anticipated costs and benefits
before issuing any rule whose mandates require spending in any one year
of $100 million in 1995 dollars, updated annually for inflation. In
2011, that threshold is approximately $136 million. This final rule
applies to the States' requirement to procure Medicaid RACs to perform
audits of Medicaid providers on a contingency fee basis. State
expenditures associated with this final rule will initially involve
directing or allocating personnel resources to procurement activities.
Per the terms of the contracts, States will not be expending funds over
$136 million for RACs to perform the contracts. Associated costs that
may include the operation of RAC programs, collateral State personnel
costs, and maintenance of records are not expected to exceed the $136
million threshold. Therefore, this final rule is not anticipated to
have an effect on State, local, or tribal governments in the aggregate,
or by the private sector of $136 million or more.

IX. Federalism Analysis

Executive Order 13132 establishes certain requirements that an
agency must meet when it promulgates a final rule (and subsequent final
rule) that imposes substantial direct requirement costs on State and
local governments, preempts State law, or otherwise has Federalism
implications. We have reviewed this final rule under the threshold
criteria of Executive Order 13132, Federalism, and have determined that
it will not have substantial direct effects on the rights, roles, and
responsibilities of States, local or tribal governments.

List of Subjects in 42 CFR Part 455

Fraud, Grant programs-health, Health facilities, Health
professions, Investigations, Medicaid, Reporting and recordkeeping
requirements.
For the reasons set forth in the preamble, the Centers for Medicare
& Medicaid Services proposes to amend 42 CFR chapter IV as set forth
below:

PART 455--PROGRAM INTEGRITY--MEDICAID

0
1. The authority citation for part 455 continues to read as follows:

Authority: Section 1102 of the Social Security Act (42 U.S.C.
1302), section 1902(a)(42)(B) (42 U.S.C. 1396a (a)(42(B)).

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2. New subpart F is added to part 455 to read as follows:
Subpart F--Medicaid Recovery Audit Contractors Program
Sec.
455.500 Purpose.
455.502 Establishment of program.
455.504 Definitions.
455.506 Activities to be conducted by Medicaid RACs and States.
455.508 Eligibility requirements for Medicaid RACs.
455.510 Payments to RACs.
455.512 Medicaid RAC provider appeals.
455.514 Federal share of State expense for the Medicaid RAC program.
455.516 Exceptions from Medicaid RAC programs.
455.518 Applicability to the territories.

Subpart F--Medicaid Recovery Audit Contractors Program

Sec. 455.500 Purpose.

This subpart implements section 1902(a)(42)(B) of the Act that
establishes the Medicaid Recovery Audit Contractor (RAC) program.

Sec. 455.502 Establishment of program.

(a) The Medicaid Recovery Audit Contractor program (Medicaid RAC
program) is established as a measure for States to promote the
integrity of the Medicaid program.
(b) States must enter into contracts, consistent with State law and
in accordance with this section, with one or more eligible Medicaid
RACs to carry out the activities described in Sec. 455.506 of this
subpart.
(c) States must comply with reporting requirements describing the
effectiveness of their Medicaid RAC programs as specified by CMS.

Sec. 455.504 Definitions.

As used in this subpart--
Medicaid RAC program means a recovery audit contractor program
administered by a State to identify overpayments and underpayments and
recoup overpayments.
Medicare RAC program means a recovery audit contractor program
administered by CMS to identify underpayments and overpayments and
recoup overpayments, established under the authority of section 1893(h)
of the Act.

Sec. 455.506 Activities to be conducted by Medicaid RACs and States.

(a) Medicaid RACs will review claims submitted by providers of
items and services or other individuals furnishing items and services
for which payment has been made under section 1902(a) of the Act or
under any waiver of the State Plan to identify underpayments and
overpayments and recoup overpayments for the States.
(1) States may exclude Medicaid managed care claims from review by
Medicaid RACs.
(b) States may coordinate with Medicaid RACs regarding the
recoupment of overpayments.
(c) States must coordinate the recovery audit efforts of their RACs
with other auditing entities.
(d) States must make referrals of suspected fraud and/or abuse, as

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defined in 42 CFR 455.2, to the MFCU or other appropriate law
enforcement agency.
(e) States must set limits on the number and frequency of medical
records to be reviewed by the RACs, subject to requests for exception
from RACs to States.

Sec. 455.508 Eligibility requirements for Medicaid RACs.

An entity that wishes to perform the functions of a Medicaid RAC
must enter into a contract with a State to carry out any of the
activities described in Sec. 455.506 under the following conditions:
(a) The entity must demonstrate to a State that it has the
technical capability to carry out the activities described in Sec.
455.506 of this subpart. Evaluation of technical capability must
include the employment of trained medical professionals, as defined by
the State, who are in good standing with the relevant State licensing
authorities, where applicable, to review Medicaid claims.
(b) The entity must hire a minimum of 1.0 FTE Contractor Medical
Director who is a Doctor of Medicine or Doctor of Osteopathy in good
standing with the relevant State licensing authorities and has relevant
work and educational experience. A State may seek to be excepted, in
accordance with Sec. 455.516, from requiring its RAC to hire a minimum
of 1.0 FTE Contractor Medical Director by submitting to CMS a written
request for CMS review and approval.
(c) The entity must hire certified coders unless the State
determines that certified coders are not required for the effective
review of Medicaid claims.
(d) The entity must work with the State to develop an education and
outreach program, which includes notification to providers of audit
policies and protocols.
(e) The entity must provide minimum customer service measures
including:
(1) Providing a toll-free customer service telephone number in all
correspondence sent to providers and staffing the toll-free number
during normal business hours from 8:00 a.m. to 4:30 p.m. in the
applicable time zone.
(2) Compiling and maintaining provider approved addresses and
points of contact.
(3) Mandatory acceptance of provider submissions of electronic
medical records on CD/DVD or via facsimile at the providers' request.
(4) Notifying providers of overpayment findings within 60 calendar
days.
(f) The entity must not review claims that are older than 3 years
from the date of the claim, unless it receives approval from the State.
(g) The entity should not audit claims that have already been
audited or that are currently being audited by another entity.
(h) The entity must refer suspected cases of fraud and/or abuse to
the State in a timely manner, as defined by the State.
(i) The entity meets other requirements as the State may require.

Sec. 455.510 Payments to RACs.

(a) General. Fees paid to RACs must be made only from amounts
recovered.
(b) Overpayments. States must determine the contingency fee rate to
be paid to Medicaid RACs for the identification and recovery of
Medicaid provider overpayments.
(1) The contingency fees paid to Medicaid RACs must be based on a
percentage of the overpayment recovered.
(2) States must determine at what stage in the Medicaid RAC audit
process, after an overpayment has been recovered, Medicaid RACs will
receive contingency fee payments.
(3) If a provider appeals a Medicaid RAC overpayment determination
and the determination is reversed, at any level, then the Medicaid RAC
must return the contingency fees associated with that payment within a
reasonable timeframe, as prescribed by the State.
(4) Except as provided in paragraph (5) of this section, the
contingency fee may not exceed that of the highest Medicare RAC, as
specified by CMS in the Federal Register, unless the State submits, and
CMS approves, a waiver of the specified maximum rate. If a State does
not obtain a waiver of the specified maximum rate, any amount exceeding
the specified maximum rate is not eligible for FFP, either from the
collected overpayment amounts, or in the form of any other
administrative or medical assistance claimed expenditure.
(5) CMS will review and consider, on a case-by-case basis, a
State's well-justified request that CMS provide FFP in paying a
Medicaid RAC(s) a contingency fee in excess of the then-highest
contingency fee paid to a Medicare RAC.
(c) Underpayments. (1) States must determine the fee paid to a
Medicaid RAC to identify underpayments.
(2) States must adequately incentivize the detection of
underpayments.
(3) States must notify providers of underpayments that are
identified by the RACs.

Sec. 455.512 Medicaid RAC provider appeals.

States must provide appeal rights under State law or administrative
procedures to Medicaid providers that seek review of an adverse
Medicaid RAC determination.

Sec. 455.514 Federal share of State expense of the Medicaid RAC
program.

(a) Funds expended by States for the operation and maintenance of a
Medicaid RAC program, not including fees paid to RACs, are considered
necessary for the proper and efficient administration of the States'
plan or waivers of the plan.
(b) FFP is available to States for administrative costs of
operation and maintenance of Medicaid RACs subject to CMS' reporting
requirements.

Sec. 455.516 Exceptions from Medicaid RAC programs.

A State may seek to be excepted from some or all Medicaid RAC
contracting requirements by submitting to CMS a written justification
for the request for CMS review and approval through the State Plan
amendment process.

Sec. 455.518 Applicability to the territories.

The aforementioned provisions in Sec. 455.500 through Sec.
455.516 of this subpart are applicable to Guam, Puerto Rico, U.S.
Virgin Islands, American Samoa, and the Commonwealth of the Northern
Mariana Islands.

Authority: (Catalog of Federal Domestic Assistance Program No.
93.778, Medical Assistance Program)

Dated: May 6, 2011.
Marilyn Tavenner,
Principal Deputy Administrator and Chief Operating Officer, Centers for
Medicare & Medicaid Services.

Approved: August 9, 2011.
Kathleen Sebelius,
Secretary, Health and Human Services.
[FR Doc. 2011-23695 Filed 9-14-11; 8:45 am]
BILLING CODE 4120-01-P