What you need to know about new and 'improved' error rate calculations

October 8, 2010

As part of the federal government's strict mandate to reduce waste in all departments and to eliminate fraud and abuse in Medicare and Medicaid, the Department of Health and Human Services and the Centers for Medicare and Medicaid Services (CMS) have significantly revised and improved their calculations of Medicare fee-for-service (FFS) improper payments using "a more rigorous method" in calculating error rate.

Key Points

Until 2010, error rate calculations included not only the "improper payments" recovered by CMS or its designees but also recovered funds from a multitude of other sources.


RAC auditors are prohibited from "extrapolating" the error rate of the larger sampling over claims history for that service except in specific circumstances, unlike in "Probe" or Comprehensive Error Rate Testing (CERT) audits. Once the practice is provided notice of these "improper" billings and requested to repay the amount of overpayment-possibly with penalties and interest-it's up to the practice to challenge the findings of the RAC auditor by engaging an independent auditor to review the claims audited. The practice also will incur fees for a healthcare attorney and miscellaneous costs. For some practices, the cost of defense is staggering. When CMS offers to "settle" for a given amount, many practices do so because the settlement amount usually is far less than the cost of defending themselves. Settlement amounts are included in the error rate calculations.

In addition, once the RAC auditor successfully identifies "improper" payment of a specific service, he or she might identify another service provided by the same practice and review that service. An example might be a surgical procedure identified as having been reported inappropriately and another similar procedure reported the same way. In the same way that an Internal Revenue Service audit may be initiated by a specific flag and then generalized across the entire return, a RAC audit may begin as the result of a single issue (for example, overutilization of a specific modifier) yet cover a broader area within the practice.