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CMS Program Identifies $371.5 Million in Improper Medicare Payments in Three States

The Centers for Medicare & Medicaid Services (CMS) recently announced that $371.5 million in improper Medicare payments has been collected from or repaid to health care providers and suppliers as part of a demonstration program using recovery audit contractors (RACs) in California, Florida and New York in 2007.  Nearly $440 million has been collected since the program began in 2005.

"We need to ensure accurate payments for services to Medicare beneficiaries and by taking this important step, people with Medicare can be assured they are being charged correctly for their share of their health care services,” Acting CMS Administrator Kerry Weems said.  "The RAC demonstration program has proven to be successful in returning overpayments to the Trust Fund and identifying ways to prevent future improper payments.  We will use the lessons we learned from the demonstration program to help us implement the national RAC program next year.”

The RAC demonstration program, created by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA), is designed to find and correct improper Medicare payments paid to health care providers participating in fee-for-service Medicare.  Medicare processes more than 1.2 billion Medicare claims annually, submitted by more than one million health care providers, including hospitals, skilled nursing facilities, physicians and medical equipment suppliers.  Errors in claims submitted by these health care providers for services provided to Medicare beneficiaries can account for billions of dollars in improper payments each year.

Approximately 96 percent of the improper payments identified by the RACs in 2007 were overpayments collected from health care providers; the remaining 4 percent were underpayments repaid to health care providers.  The demonstration program began in California, Florida and New York in 2005 and expanded into Massachusetts, South Carolina, and Arizona in 2007.  The first three states are those states with the largest number of Medicare claims.

The types of inadvertent errors leading to improper payments, found by the RACs, include the following examples:

  • A health care provider bills Medicare for conducting three colonoscopies on the same patient on the same day;
  • Payments are made for services that are coded incorrectly – for example Medicare is billed for a certain procedure but the medical record shows that a different procedure was actually provided;
  • A health care provider is paid twice because the provider submitted duplicate claims; or
  • A claim is paid using an outdated fee schedule.

In these examples, the RAC would issue a repayment request for the amount that was paid for the extra service or the incorrect coding.  If the beneficiary paid wrong copayment amounts, the health care provider would need to reimburse the patient for those copayments.

The RAC demonstration is a key tool CMS uses to assure payments to health care providers are accurate and proper and that the number of errors in Medicare claims continues to decline.  Medicare calculates the error rate – the amount of incorrect claims that are submitted by health care providers – as part of the Comprehensive Error Rate Testing (CERT) program.  Since CMS began the program, the error rate dropped from 14.2 percent in 1996 to 3.9 percent in 2007.  This decline in improper payments reflects CMS' efforts to target erroneous claims processing, inaccurate billing and errors by health care providers.

Implementation of the RAC program has been guided by reports from the Department of Health and Human Services Office of Inspector General and the Government Accountability Office.  Based on the recommendations included in these reports and experience gained from their work conducting audits of Medicaid and the private sector health care claims, in 2007, the RACs in the three-state pilot returned a total of $247 million to the Medicare Trust Funds after taking into account the dollars repaid to health care providers, the money overturned on appeal and the costs of operating the RAC demonstration program.

The overpayments collected during FY 2007, ending Sept. 30, 2007, were $124.6 million in Florida ($9.8 million in 2006); $120.1 million in California ($29.2 million in 2006); and $112.5 million in New York ($25.6 million in 2006), a total of $357.2 million ($64.6 million in 2006).

The underpayments refunded to health care providers during FY 2007 were $4.1 million in Florida, $8.4 million in California and $1.8 million in New York, a total of $14.3 million.  This information and more is included in the 2007 RAC Status Document, issued today by CMS.

Similar to what was found through the CERT program, most of the improper payments that the RACs identified occurred when health care providers submitted claims that did not comply with Medicare's coverage or coding rules.  More than 85 percent of the overpayments collected by RACs and almost all underpayments refunded by the RACs were from claims submitted by inpatient hospitals.

The RAC demonstration was authorized in the MMA by Congress and was required to be a permanent part of Medicare in the Tax Relief and Healthcare Act of 2006.CMS will enter into new contracts as the national program is implemented before January 1, 2010.

For more information on the RAC program and to view the FY 2007 Status Document, visit:

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