Many aspects of the Medicare Recovery Audit Contractor program came under intense scrutiny during a Senate Finance Committee hearing Tuesday, including how auditors are compensated, the speed and clarity of the appeals process, and observation stays.

Sen. Mike Enzi (R-WY) said he was surprised that RACs are paid upon identifying errors, and suggested that this “contingency” system could lead to improper incentives for auditors to identify Medicare overpayments. Long-term care providers, including those testifying at the hearing, have agreed the incentives are a problem.

But witness Robert Rolf, vice president of audit company CGI Federal Inc., assured Enzi that auditors are paid equally for identifying underpayments to providers as well as overpayments. Responding to a question from Sen. Charles Grassley (R-IA) about the best way to compensate auditors, Rolf said the “contingency audit approach allows for the greatest flexibility in scaling to the size of the problem.” 

Paying auditors from a set administrative budget will mean auditors put in the same work whether they’re looking at a “$1 million issue or a $29 billion issue,” according to Rolf. 

Yet Jennifer J. Carmody, director of reimbursement at the Billings Clinic, disagreed with Rolf. She said that the contingency payment system does not motivate RACs to educate providers, as the auditors can make money by repeatedly identifying the same issue. The Billings Clinic includes a 285-bed hospital and 90-bed skilled nursing and assisted living facility.

Carmody also suggested eliminating the observation stay rule, which allows Medicare beneficiaries to be hospitalized without inpatient status. Long-term care advocates have pressed hard to eliminate hospital observation stays, which can prevent Medicare payment for subsequent skilled nursing care. The American Medical Association said last week Medicare should cover nursing visits without prior hospitalizations.

The hearing ended with sharp words from Ranking Member, Sen. Orrin Hatch (R-UT), and more conciliatory ones from Sen. Tom Carper (D-DE). Hatch called the RAC payment system “perverse.” He complimented Rolf’s “articulate” testimony but said he “empathized” with the providers who are under “continual pressure” from RAC audits. Carper noted a balance must be struck between reducing provider burdens and ensuring robust oversight, commenting “we’re all in this together.”

Click here to access a video of the hearing and the witnesses’ written testimony.