RAC Audits

A Recovery Audit Contractor (RAC) audit can result in large overpayment demands and, in some cases, referral to federal investigators. Understanding how RAC audits work — and how to respond — is critical to protecting your practice and your revenue.

What Is a RAC Audit?

Recovery Audit Contractors are private companies contracted by the Centers for Medicare & Medicaid Services (CMS) to identify and recover improper Medicare payments made to healthcare providers. RACs operate on a contingency fee basis — they are paid a percentage of every dollar they recover — which creates a strong financial incentive to find overpayments.

RAC audits cover Medicare Parts A and B, with separate contractors handling Medicare Advantage (Part C) and prescription drug plans (Part D). Medicaid RAC audits are conducted by state-level contractors under federal oversight.

What Do RACs Look For?

RACs review claims for two types of errors. Automated reviews examine claims data without requesting medical records, flagging claims that fail billing rules based on data alone — such as duplicate claims, incorrect coding, or claims for non-covered services. Complex reviews involve actual examination of medical records and are used to determine whether services were medically necessary and appropriately documented.

Common targets include inpatient hospital admissions that RACs argue should have been billed as outpatient or observation stays, evaluation and management coding at higher levels than documentation supports, durable medical equipment (DME) without adequate physician orders, and therapy services exceeding medical necessity thresholds.

The RAC Audit Process

When Does a RAC Audit Become a Fraud Investigation?

Most RAC audits are administrative — they result in overpayment demands, not criminal referrals. However, patterns identified during a RAC audit can trigger escalation. If a RAC finds systemic overbilling, repeated submission of claims for non-covered services, or evidence suggesting intentional misconduct, it may refer the matter to the HHS Office of Inspector General (OIG), a UPIC, or the Department of Justice.

A referral transforms the situation from an administrative billing dispute into a potential federal fraud investigation — with exposure to the False Claims Act, exclusion from federal programs, and criminal prosecution. If you have received a RAC audit with findings suggesting a pattern of improper billing, retaining federal defense counsel is essential.

Defending Against a RAC Audit

Effective RAC audit defense starts with the medical record response. Submitting incomplete or poorly organized records often leads to denials that could have been avoided. Legal counsel experienced in Medicare billing can review records for adequacy before submission, identify which claims are defensible and which are not, and craft appeal arguments grounded in Medicare coverage rules, LCD/NCD policies, and clinical documentation standards.

At the ALJ level and above, the stakes — and the opportunity — increase substantially. Many RAC findings that survive the first two levels are reversed upon proper legal challenge before an Administrative Law Judge.