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# The Recovery Audit Contractor (RAC) program

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# The Recovery Audit Contractor (RAC) program

The Recovery Audit Contractor (RAC) program is a federally mandated initiative designed by the Centers for Medicare & Medicaid Services (CMS) to identify and correct improper payments in the Medicare and Medicaid programs. Using private contractors paid on a contingency-fee basis, the program retrospectively audits provider claims within a three-year look-back period to recover overpayments and identify underpayments. RACs primarily target claims with high potential for error, such as the medical necessity of short-stay inpatient admissions and the validation of MS-DRG coding. While effective at recovering funds, the program's design has created significant friction between its goal of fiscal integrity and the operational stability of healthcare providers.

## Pros of the RAC Program

Significant Financial Recoveries: The program has successfully recovered billions of dollars in improper payments, returning these funds to the Medicare Trust Fund. In fiscal year 2021 alone, RACs recovered over $2 billion.

Cost-Effectiveness for Taxpayers: The contingency-fee model ensures the program is highly cost-effective for the government. During its initial demonstration, the program cost CMS only 20 cents for every dollar it collected.

Deterrent Effect and Improved Compliance: The constant possibility of an audit incentivizes providers to improve clinical documentation, coding accuracy, and internal compliance programs, which helps lower the overall payment error rate.

Identification of Underpayments: Although a smaller focus, the program is also mandated to identify underpayments, ensuring providers are correctly reimbursed for their services. In fiscal year 2021, the program repaid $141.9 million to providers.

## Cons of the RAC Program

Heavy Administrative Burden: Providers face significant administrative costs and staff burden to manage audit requests, pull records, and navigate the complex appeals process. Hospitals report spending hundreds of thousands to millions of dollars annually on these tasks alone.

Financial Uncertainty and Strain: The three-year look-back period creates financial instability, as providers can be required to repay large sums for claims paid years earlier. This is especially challenging for small or rural hospitals operating on thin margins.

Perceived Inaccuracy and "Bounty Hunter" Model: The contingency-fee model is criticized for incentivizing RACs to be overly aggressive in denying claims. This criticism is supported by the high rate at which initial RAC denials are overturned on appeal, with some reports showing provider success rates of over 70% at the Administrative Law Judge level.

Unintended Clinical Consequences: The intense focus on short-stay inpatient admissions led many hospitals to defensively shift patients to "observation status," which inadvertently created negative financial consequences for beneficiaries, particularly regarding their eligibility for post-hospital skilled nursing care.

## Conclusion

The RAC program is a powerful and necessary tool for ensuring the integrity of Medicare and Medicaid, successfully protecting taxpayer funds by recovering billions in improper payments. However, its implementation, driven by a contingency-fee model, has placed a substantial and costly burden on healthcare providers, leading to financial uncertainty and influencing clinical practices. The high rate of overturned appeals suggests flaws in the initial audit accuracy, validating provider concerns about the program's fairness. While CMS has introduced reforms to improve transparency and reduce provider burden, a fundamental tension remains between aggressive fiscal oversight and the operational stability of the healthcare system. Future success will depend on continued reforms that better align the program's financial incentives with accuracy and fairness, not just recovery volume.

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