The U.S. Court of Appeals for the Federal Circuit issued a decision in early March in a case filed by one of the Medicare Recovery Audit Contractors (RAC) after the Centers for Medicare and Medicaid Services (CMS) changed the timing for the payment of contingency fees on collections. The decision means the auditing program will be put on hold until CMS determines how to contract with its RACs.

The RAC program is responsible for identifying fraud and waste in the Medicare system by detecting improper Medicare payments. Since 2008, when the program started, RACs have been paid immediately after Medicare overpayments are collected from providers – generally within 41 days.

In 2014, CMS proposed a different payment method: paying on collections only after a provider's challenge passed the second of a five-level appeal process. RACs balked at this because providers often appeal the overpayment decisions, causing contingency fees to be delayed anywhere from four months to more than a year.

CMS also required the RACs to create a reserve fund, to be used to repay CMS any contingency fees related to denials overturned on appeal. The original RAC contracts did not include a provision to handle such scenarios after RAC contacts expired.

RAC contractor CGI filed a lawsuit in federal court protesting against the new payment terms, arguing that CMS violated federal procurement law by delaying payments to the RACs beyond fair and usual practices. The CGI lawsuit asked the court to compel CMS to procure new contracts through a time-consuming request-for-proposal process instead of more straightforward commercial bidding.

The federal appeals court agreed with CGI's protest, and now CMS must decide how it wants to contract with RACs. The agency can either rebid the contracts through the general commercial process with the original contingency fee structure from 2008, or it can rebid the contracts through the longer noncommercial process with the new payment terms. This will cause a significant delay for the new contracts and it is likely that they won’t be finalized until early 2016.

Physicians and hospitals got a reprieve last year from the RAC auditing program, while CMS reevaluated its contracts and implements improvements for physicians. Audits were to begin again in the fall of 2015.

The Medicare program has already felt the effects of the scaled-back RAC program, only recouping $48.3 million of overpayments from providers – approximately $768 million less than what RACs collected in the same period the year before.