The acronym RAC in medical and healthcare contexts most commonly stands for Recovery Audit Contractor. RACs are third-party organizations hired by the Centers for Medicare & Medicaid Services (CMS) to oversee the financial integrity of government health programs in the United States. The primary goal of these contractors is to identify and correct improper payments—including those resulting from errors, fraud, and abuse—made to healthcare providers under Medicare and Medicaid. This government oversight program was established to recover funds lost, ensuring taxpayer money is used appropriately.
Understanding Recovery Audit Contractors
Recovery Audit Contractors are independent companies contracted by CMS to perform post-payment reviews of claims submitted by providers. Their mandate is to identify both overpayments and underpayments, though they historically recover significantly more overpayments. The program originated from a demonstration project initiated by the Medicare Modernization Act of 2003 and was made permanent and expanded nationwide by the Tax Relief and Health Care Act of 2006.
The existence of RACs is tied to the significant volume of improper payments within Medicare’s fee-for-service program. RACs operate under a contingency fee model, meaning they receive a percentage of the improper payments they successfully identify and recover. This financial structure incentivizes them to actively pursue these payments. RACs review claims across all Medicare provider types, including hospitals, physician practices, and equipment suppliers. They are geographically organized into regions, and contractors use sophisticated proprietary software to analyze billing patterns and flag claims that deviate from established policies, signaling potential improper payments.
How the RAC Audit System Works
The RAC process identifies improper payments through two main categories: automated reviews and complex reviews.
Automated Reviews
Automated reviews rely entirely on data analysis and algorithms to identify clear-cut errors. These reviews are the less burdensome of the two. They typically target claims where the error is obvious based on existing law, regulation, or published guidance, such as billing for a service that is never covered or is medically unbelievable. If an automated review identifies an overpayment, the RAC sends a demand letter to the provider without requesting medical records.
Complex Reviews
Complex reviews require in-depth, human analysis and involve requesting supporting medical records. These reviews address subjective issues, such as determining medical necessity, the appropriateness of the care setting (e.g., inpatient vs. outpatient observation), or ensuring documentation supports the billed service. For a complex review, the RAC first sends an Additional Documentation Request (ADR) to the healthcare provider.
Licensed medical professionals working for the RAC review the documentation to determine if services were medically necessary and correctly coded. The provider typically has 45 days to comply with the record request. The RAC must complete its review within 60 days of receipt and then issues a determination letter outlining any findings of overpayment or underpayment. This determination is communicated to the Medicare Administrative Contractor (MAC) for adjustment and recoupment.
Consequences for Hospitals and Patients
RAC audit findings have significant financial and administrative implications for healthcare providers. When an overpayment is confirmed, the provider must return the funds. Since audits can target claims up to three years old, these recoupments can cause sudden and significant cash flow disruption. For financially vulnerable institutions, these recoveries, which have historically totaled billions of dollars annually, can pose a serious threat to financial stability.
Hospitals also face a substantial administrative burden managing the audit process. Staff time and resources are diverted from patient care to gather documentation, respond to requests, and manage the lengthy appeals process. The cost of managing these audits, including hiring consultants or adding staff, can range from hundreds of thousands to millions of dollars annually.
Providers have the right to appeal an adverse RAC determination through a multi-level process, beginning with a redetermination request submitted to the MAC. Appealing the initial determination within 30 days typically delays the recoupment of funds, preventing an automatic deduction from future payments. Although the appeals process is long and complex, providers have historically seen a high rate of success at the third level of appeal, heard by an Administrative Law Judge.
Patients are indirectly affected if a hospital’s changes in billing practices, driven by audit risk, lead to increased out-of-pocket costs or confusion regarding their financial responsibility. The intense administrative focus on audit compliance may also divert resources that could otherwise be allocated to improving patient services.
Other Uses of the Acronym RAC
While Recovery Audit Contractor is the dominant definition in healthcare finance and administration, the acronym RAC is also used in other, more specialized medical contexts. These alternative meanings are typically dependent on the clinical or administrative setting.
- Reversible Airway Constriction: Used in respiratory medicine, this describes the temporary narrowing of the airways, often seen in conditions like asthma.
- Resident Assessment Coordinator: This administrative role is typically found in long-term care or nursing home facilities. The coordinator manages the resident assessment process, particularly the Minimum Data Set (MDS) required for Medicare and Medicaid reimbursement.
- Rhythmic Auditory Cueing: A therapeutic technique used in the field of neurology for gait training in patients with movement disorders.