More Medicare Auditors Are Targeting Clinical Labs

To identify fraud, Medicare programs use private contractors to audit providers, labs

CEO SUMMARY: For labs and all healthcare providers, the risk of an audit is growing because the number of auditors seeking overpayments is rising. In their efforts to eliminate waste and make the Medicare and state Medicaid programs more efficient, federal officials have introduced several different audit programs in recent years. A consultant who helps clinical labs and pathology groups respond and appeal the assessments of these private auditors provides insight and advice.

MEDICARE AUDITS CONDUCTED by private contractors are proving to be contentious and frequently based on inaccurate interpretations of the law. This situation is creating new compliance threats for the clinical laboratory industry.

“Growing numbers of clinical labs and pathology groups are becoming ensnared by the expanding host of Medicare audit programs, of which the Recovery Audit Contractor (RAC) program is probably best known,” observed Christopher P. Young, CHC, President of Laboratory Management Support Services (LMSS), in Phoenix, Arizona.

“With the number of auditors seeking Medicare overpayments rising, the risk of any clinical lab or pathology group experiencing an audit similarly increases,” added Young, who provides regulatory guidance to lab managers, pathologists, and compliance officers. “It is all because Medicare officials, in their efforts to eliminate waste and make the federal Medicare and state Medicaid programs more efficient, have introduced multiple new contractor audit programs.”

Young listed four separate Medicare audit programs that allow private contractors to audit the records of providers to identify situations where the Medicare program was improperly billed. These include: Recovery Audit Contractor (RAC) program, Comprehensive Error Rate Testing (CERT) program, Zone Program Integrity Contractors (ZPICs) program, and the Medicaid Integrity Contractors (MICs) program.

Extrapolating from Samples

“People tend to focus on the RACs, but any of these contractors can review a sample of laboratory claims and then extrapolate to determine what a lab owes,” he explained. “In such situations, it’s imperative that you review any and all correspondence from these auditors carefully, because these contractors are frequently wrong!

“Many lab directors will recall how, back in 2010, RAC auditors in the Pacific Northwest sent demand letters to many pathology labs because the auditors were interpreting the technical component (TC) grandfather rule incorrectly,” he said. “It took months of dogged determination for these pathology labs to challenge the RAC auditor’s demands and prevail upon appeal to the Medicare pro- gram. (See TDR, August 15, 2011.)

“Similarly, on January 1, 2011, the Centers for Medicare and Medicare Services (CMS) implemented the rule requiring that labs have a physician sign each paper laboratory requisition,” con- tinued Young. “However, this rule was never implemented because it was based on an error in the manuals and later with- drawn. Yet, later in the year, CERT auditors started questioning why labs were not getting requisitions signed by referring physicians.” (See TDR, January 18, 2011.)

Negotiate Favorable Outcome

“Both of these issues were resolved in labs’ favor, but it required considerable effort for labs to appeal, to document, and to negotiate a favorable resolution,” he stated. “One problem with the RAC audit program is that the auditors are paid on a contingency fee basis. The CERT, ZPICs, and MICs auditors are not paid in this manner.”

Young has several recommendations. “First, labs need to prepare in advance for Medicare audits conducted by private contractors by putting programs in place to protect themselves,” he advised. “Every laboratory should have a strategy for how to respond when a demand letter or a request for records arrives from a federal auditor.

“Second, be aware that the request for records may not reveal the specific target of the audit,” commented Young. “If an auditor sends a demand letter to your lab, however, that letter will spell out precisely what you need to do if you review the information carefully.

“Third, it is most important to recognize that any request for records or a demand letter could turn out to be a big problem for the lab,” Young continued. “For this reason, labs should not let any request for records or a demand letter go by without careful examination. And, it would be best to get professional advice in such situations.

“My fourth point is this: even if you think it’s not worth the trouble to appeal it, don’t just make a repayment and hope that it’s over. That could be a grave error,” he added. “Labs need to ask: ‘Would I have some additional liability if I just refund the money?’”

“When a lab simply refunds the amount of money assessed by the auditor, it is essentially agreeing that its actions in how it billed the Medicare program for those specific claims were wrong,” emphasized Young. “That is why your lab should fully understand these issues first. Engaging a consultant or lawyer to assist in this process can avoid much trouble later in the appeal process.

“That leads to my fifth point: You need to be deliberate with your response to the request for records and/or the demand letter—but do not delay!” declared Young. “Your laboratory needs to respond quickly, in an appropriate way. That is because, once you’ve received the request from the private Medicare audi- tor, that auditor expects the lab to answer within a specified number of days.

“And, rest assured, the auditors will not go away unless and until you act to resolve the issue,” he said. “That is why it is essential that your lab has a procedure in place so that every such letter or communication does not get buried somewhere in the lab, but rather is quickly brought to the attention of management.

“I have seen cases where an auditor’s request for records was received in one department of the laboratory,” explained Young. “None of the staff handling that letter understood the importance of bringing it to the attention of management. Enough time went by that, when lab management finally became involved, it had missed the deadlines for a timely response or appeal.

Auditors Make Mistakes

“Point number six is to always keep in mind that—just as we saw with the RAC audits regarding the TC grandfather clause for pathology claims—these auditors often make mistakes,” added Young. “All too often, it turns out that the auditors failed to correctly understand or interpret the regulations. Laboratory billing is a complex process.

“Another source of mistakes made by auditors is that they do not apply current regulations,” he stated. “In these cases, because the laboratory team is much more familiar with the current regulations, it can provide the proper documentation to support its appeal.”

Young believes that the various Medicare audit programs are likely to be an ongoing part of Medicare compliance for all providers. “There is pressure on the Medicare program to become more efficient and to root out sources of fraud,” observed Young. “For that reason, all providers should expect to see these audits continue into the future.”

Young also noted that a lab that appeals its audit findings has a very good percentage chance of winning its appeal. “In June, CMS reported that the RACs determined that Medicare overpaid 903,372 claims last year and that providers appealed only 56,620 of those claims,” he said. “Yet, out of those 56,620 claims, 24,548 (or 43.4%) were decided in the provider’s favor. In other words, if a laboratory believes it has a strong case, then it should appeal.”

Congressional Committee Looking at RAC Auditors

ARE FEDERAL AUDITORS ACTING appropriately when auditing healthcare providers? That’s a question that the members of the U.S. Senate Finance Committee want to answer.

The committee has asked the Government Accountability Office to study the audits being done in the Medicare pro- gram, according to the Clinical Laboratory Management Association (CLMA). In a memo to members, CLMA asked members to provide examples of a variety of poor behavior on the part of private auditors including the following:

  • Letters from auditors who use poor or unclear writing, cite inaccurate information, or have typographical errors;
  • Examples of over-reach, such as when auditors searched through trash or made burdensome requests for information, for example, by asking for hundreds of records;
  • Lack of coordination by the contractor such as when different auditors would ask for the same documentation from various sources; and
  • Failure to follow proper procedures or current rules.


Pathology Group Appealed Its RAC Audit with Success

IT WAS DURING 2010 when InCyte Pathology, Inc., of Spokane, Washington, underwent a RAC audit of certain Medicare claims. Following the successful resolution of these issue, THE DARK REPORT interviewed Tom Rehwald, InCyte’s Chief Financial Officer (CFO). (See TDR, August 15, 2011.)

Rehwald offered four lessons learned in working with the private RAC auditor to resolve the issues identified in this case. His advice included these points:

  • Hire a lawyer or someone knowledgeable to challenge the RAC audit findings.
  • Know the issues in question.
  • Recognize that you may know more than the RAC auditor knows.
  • Listen closely and be respectful.


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