Medicare Audits 101

If you participate in Medicare, you may have had some of your claims audited. Sometimes, this results in an overpayment request, which requires you to refund payment for a specific claim to Medicare. Our goal at the AAOS is to ensure that all of our members are armed with the information necessary to comply with Medicare policies and avoid overpayment requests or claims denials. This webpage is intended to provide you with a thorough background of current audit programs and how to learn more about successfully complying with Medicare rules.

Medicare Has Increased Audit Programs

In 2010, the President announced three goals for cutting improper Medicare payments by 2012: reducing overall payment errors by $50 billion, cutting the Medicare fee-for-service error rate in half, and recovering $2 billion in improper payments. To that end, Medicare has initiated a number of projects with the intention of reaching those goals. The Agency is very clear in its statements that these are not primarily fraud prevention goals. Improper payments should not be conflated with fraud. All fraudulent claims are improper payments, but not all improper payments are fraudulent claims-most improper payments are due to documentation errors.

Why Are Certain Procedures Targeted by Auditors?

The procedures that are targeted for audits are those that have shown a high error rate in the MAC jurisdiction in which they are performed. At least three MACs have noted high error rates for DRG 470, total joint replacements. Each of them indicates that the improper payments are due to a failure to show medical necessity in the hospital record. This does not mean that the procedures were not medically necessary; generally speaking, the problem is not noting the failure of non-surgical interventions in the hospital records themselves.

Terms You Should Know

MAC: Medicare Administrative Contractor. The US is split into fifteen regions for purposes of Medicare claims administration, though the regions will be consolidated into ten over the next few years. MACs are private companies that serve as contractors performing claims administration for Medicare.

CERT: Comprehensive Error Rate Testing. The CERT audit program is designed to monitor the performance of MACs and to ensure that they are administering claims properly. CERT audits result in annual reports of the rate of improper payments made to hospitals. A high error rate for a particular procedure on the Part A hospital side may lead to increased scrutiny of Part B physician claims.

RAC: Recovery Audit Contractor. A RAC is an independent medical collection agency that works for Medicare to recover overpayments from providers. There are currently four RACs; each of them has an exclusive geographic jurisdiction. RACs are paid 9-12.5% contingency fees for the overpayments they recover. RACs have the ability to analyze claims with payment dates reaching as far back as October 1, 2007 or 3 years prior to any new RAC initiative.

LCD: Local Coverage Determination. Much like private insurers, Medicare has local coverage determinations. MACs define LCDs for different procedures. The LCD tells you what Medicare will cover in its MAC jurisdiction. For example, they define what constitutes medical necessity for a specific procedure, and no procedure will be covered if it is not found to be medically necessary. Failure to follow the requirements of an LCD will result in an overpayment, which could be sought after an audit. If a MAC contains four states, its LCDs will apply to all four states, unless otherwise specified.

CAC: Contractor Advisory Committee. A CAC serves as a formal mechanism for physicians in each state to be informed of and participate in the development of an LCD in an advisory capacity, a mechanism to discuss and improve administrative policies that are within MAC discretion, and a forum for information exchange between MACs and physicians. Every state has a CAC, so the MACs that contain multiple states will have multiple CACs commenting on LCDs. Each CAC is supposed to have an orthopaedic representative.

MAC-Generated Prepayment Audits

MACs have always had the authority to audit claims in order to reduce their CERT error rates. MAC Jurisdiction H, MAC Jurisdiction 9, and MAC Jurisdiction 12 have initiated audits that target specific orthopaedic procedures with high error rates in their jurisdictions. MAC contractors ARE NOT paid on contingency.

Currently, there are 15 MAC jurisdictions. However, between now and 2016, the MAC jurisdictions will be consolidated into ten jurisdictions. Five of the existing jurisdictions will remain the same and ten will be paired off for consolidation, creating five new jurisdictions out of the ten existing. One pair that has already been consolidated is MAC J4 and MAC J7, which formed the newly consolidated MAC JH. Jurisdiction H will serve Arkansas, Colorado, Louisiana, Mississippi, New Mexico, Oklahoma, and Texas.

MAC Jurisdictions
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MAC Contractors
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In the summer of 2011, the contractor for MAC jurisdiction 9 (First Coast Service Options, Inc), which includes Florida, Puerto Rico, and the Virgin Islands, developed a proposed LCD on total joint replacements. The original draft LCD included onerous documentation requirements of multiple 12-week non-surgical interventions prior to authorizing coverage of a total joint replacement. After receiving comments from the AAOS and the American Academy of Hip and Knee Surgeons (AAHKS), the contractor stripped the onerous requirements from the LCD, making it so that only one non-surgical intervention needed to fail in order to meet the requirements of the LCD.

Weeks after the LCD was finalized, the contractor announced a new prepayment audit of 15 specific DRGs. Four of them are orthopaedic codes, including that which covers total joint replacements:

458 -- Spinal fusion except cervical w/spinal curve, malign, or 9+ fusions w/o CC

460 -- Spinal fusion except cervical w/o MCC

470 -- Major joint replacement or reattachment of lower extremity w/o MCC

490 -- Back and neck procedures except spinal fusion w/CC/MCC or disc device/neurostimulator

Under this audit, which only applies in Florida, the MAC initially proposed auditing 100%% of Part A hospital claims related to the 15 DRGs on the list at the beginning of 2012. After hearing complaints from providerst, the MAC reduced the rate of claims that it would audit from 100% to 50% of claims related to DRG 470. The MAC cited improved documentation as a result of the orthopaedic community's educational efforts as one of the reasons for the reduced rate.

Under the audit program, if problems are found with the Part A claims, then payment will be denied, and the MAC may then perform a post-payment audit of the Past B physician services claims related to the problematic Part A claims. The MAC notes that the review of Part B claims are most likely to be due to a failure to support the medical necessity of the procedure. Physicians must pay close attention to LCDs relating to the procedures they perform and ensure that documentation of medical necessity in the hospital record complies with relevant LCDs.

MAC JH and J12

Around the same time of year, the MAC responsible for Jurisdiction 4 (Colorado, New Mexico, Texas, and Wyoming) announced a strikingly similar audit with a smaller number of target DRGs. Two orthopaedic DRGs are included on this list:

460 -- Spinal fusion except cervical w/o MCC

470 -- Major joint replacement or reattachment of lower extremity w/o MCC

The contractor for J4 (now JH) was Trailblazer. Trailblazer never issued a formal LCD on DRG 470 but instead used unnamed criteria (although it is not specified, it appears to be largely based on the InterQual criteria for lower extremity total joint replacement) to determine medical necessity of total joint replacements. The documentation criteria cited in Trailblazer communications are vague suggestions to clearly document prior treatments and their results, such as use of analgesics or physical therapy. Novitas Solutions, Inc is now the MAC for JH.

Novitas (formerly Highmark Medicare Services) has issued troubling guidance documents regarding DRG 470 over the last 18 months. Multiple documents included this statement:

"In addition, the documentation must indicate that there were continued symptoms after a trial of medication (i.e. NSAIDs) or the contraindication of medication due to the patient's inability to tolerate. There must also be documentation of a trail of physical therapy or external joint support greater than or equal to 12 weeks" (emphasis added).

As of July 24, 2012, Novitas quietly updated this informal guidance to the following:

"As with the total knee replacement, the medical record documentation must indicate continued symptoms after a trial of medication (i.e. NSAIDs) or the contraindication of medication due to the patient's inability to tolerate. There must also be documentation of a trial of physical therapy or external joint support greater than or equal to 12 weeks or documentation as to why the patient was not able to tolerate physical therapy" (emphasis added).

Novitas is also the current contractor for MAC J12. Jurisdiction 12 includes Delaware, the District of Columbia, Maryland, New Jersey and Pennsylvania. This means that the above 12-week recommendation for failed physical therapy or external joint support is active in 12 states-several of them quite large. Novitas has also begun to audit DRG 470 claims in MAC J12. The MAC is using the informal guidance as criteria to determine whether medical necessity was properly documented in the hospital record.

In summary, there are known audits of DRG 470 taking place in three MAC jurisdictions-J4 (CO, OK, NM, TX), J9 (FL, PR, VI), and J12 (DC, DE, MD, NJ, PA). However, the audits may soon expand to AR, LA, and MS due to the consolidation of J4 and J7 into Jurisdiction H. Only J9 has adopted a formal LCD to provide guidance to physicians.

AAOS Response to MAC-Generated Audits

The Board of Directors has appointed the Coverage Determinations Project Team, led by David Templeman, MD, to spear-head the AAOS' response to this issue. In addition to the initial collaboration with the AAHKS and the FOS on the FCSO LCD, the AAOS has also responded in a number of other ways to engage CMS and educate members. The AAOS has met with CMS officials and Contractor Medical Directors regarding the audits, including successful advocacy for development of a MLN Matters article to educate all Medicare providers of TKA/THA about proper documentation practices.


The AAOS has developed this webpage on Medicare Audits 101, which includes:

  • An audit reporting tool
  • Access to all AAOS publications regarding the issue,
  • Links to advocacy efforts related to the issue
  • General background information

The Office of Government Relations has published several articles in Advocacy Now and AAOS in the States, AAOS Now, and Headline News Now.

Advocacy Tools

Meeting Presentations

  • The AAOS hosted an Annual Meeting session on Medicare audits that involved CMS officials, MAC medical directors, and legal professionals involved in audit appeals processes.
  • At the most recent National Orthopaedic Leadership Conference, the Board of Specialty Societies included a special presentation on this issue and Dr. Alexe Page included information about the issue in her symposium presentation.
  • The Project Team is planning a 2012 Fall Meeting symposium on the topic, as well as a webinar series.

Medicare Learning Network Article

The Health Care Systems Committee (HCSC) and others, worked with AAOS leadership to develop an article and recommendations for a documentation checklist for consideration by the Centers for Medicare and Medicaid Services (CMS) for publication as a Medicare Learning Network article. While the original article was under consideration, the AAOS developed a new model local coverage determination for DRG 470. AAOS resubmitted information to CMS that included language from the model LCD.

Model Local Coverage Determination on DRG 470

As its first task, the Project Team developed the AAOS' first model coverage policy regarding major lower extremity total joint arthroplasty. This model coverage policy has been submitted to all MAC medical directors nationwide and other relevant CMS officials.

Congressional Pressure on CMS

The AAOS also coordinated a Congressional letter to CMS officials, calling on MAC JH and J12 administrators to cease audits on DRG 470 (major lower extremity total joint replacements) until such time as a formal coverage policy is put into place and orthopaedic surgeons are included in its development process.

In response to a call to action in the affected states, 80 orthopaedic surgeons wrote letters to Congress, urging their representatives to sign the letter. Ultimately, 45 of the 87 Members of Congress representing those states signed the letter, which was sent to Administrator Tavenner on August 7, 2012.

Nationwide Network of Orthopaedic Contractor Advisory Committee Representatives

The AAOS is in the process of developing a nationwide network of orthopaedic Contractor Advisory Committee (CAC) representatives. This network will share information about orthopaedic coverage policies under consideration by MACs across the country and will be armed with information from the AAOS regarding our position on the various policies.

In part due to the efforts of BOC Chair Fred Redfern, MD and the BOC, the AAOS has received information about 41 of the 51 orthopaedic CAC representatives in the U.S. (50 states plus DC).  There are 10 states for which we have no information. 

Of the 41 states for which we have information, 15 of the orthopaedic slots are vacant.  The state orthopaedic societies via their BOCs are working to fill those vacancies.  In order to volunteer to serve on your state's CAC, please contact Ashlen Strong

Meetings with CMS Officials
AAOS staff first met with CMS staff to discuss the audits on December 27, 2011. This meeting was held primarily with the staff responsible for RAC audits. The meeting was instrumental in persuading CMS to delay RAC audits that mirror the MAC audits on DRG 470.

In June 2012, fourteen contractor medical directors (CMDs) met with the group of AAOS Fellows to discuss concerns around the MAC-generated audits. The CMDs indicated that their concern was the high CERT error rate among these procedures in select jurisdictions. It is incumbent upon the MACs to audit claims where there is a high error rate. The orthopaedic surgeons informed the CMDs that AAOS and AAHKS are willing to help MACs educate Fellows about proper coverage and documentation criteria, but that orthopaedic surgeons need to be involved in the process of developing those criteria. In response to the meeting, the Project Team developed a model coverage determination and shared it with all CMDs across the country.

In August 2012, AAOS staff met with CMS officials from theProvider Compliance Group in the Office of Financial Management. This group is responsible for developing coverage policies and working with MACs to implement them. While the officials did not indicate a willingness to call upon the MACs to cease audits until they have developed and published coverage policies to the affected physicians, they did agree to review the AAOS model LCD on DRG 470 and to publish a Medicare Learning Network article. CMS officials agreed to continue the dialogue with the AAOS.

How Can Physicians Properly Document Medical Necessity?

The specific criteria for proper documentation of medical necessity depend on the MAC jurisdiction in which you practice. However, the general consensus among published LCDs and informal notices generated by MACs is that failure of conservative treatment is necessary to show medical necessity. While this information may be present in the physician's office medical record, in most cases it needs to be documented in the hospital records, as well. Please consult your local MAC for specific information. If you are audited and a claim is denied, the process for appealing the audit is the same as for any other claims denial.

RAC Audits

The Recovery Audit Contractor (RAC), program was created through the Medicare Modernization Act of 2003. It was designed to extract waste from the Medicare system by identifying and recovering improper payments paid to healthcare providers. The RAC program has been successful in reclaiming money through retrospective review of fee-for-service claims through a process known as "claw back". RAC auditors ARE PAID ON CONTINGENCY.

The Centers for Medicare and Medicaid Services (CMS) began the program in 2005, as a three-year long demonstration project, which initially focused on Medicare payments in California, New York, and Florida and was later expanded to include Massachusetts and South Carolina. Subsequently, under the Tax Relief and Health Care Act of 2006, the permanent RAC program was implemented in all 50 states and also has been expanded to Medicaid in all 50 states.

The RAC program, which divides the U.S. into four geographic regions, uses contractors to  review, audit, and identify improper Medicare payments in each of those jurisdictions. Contractors are paid on a contingency fee basis, receiving a percentage of the improper payments they collect from providers. While RAC audits focused on site of care and upcoding in the past, they are now increasingly addressing medical necessity. Generally, RAC auditors may review the last three years of provider claims, and they may also conduct medical record reviews.

An adverse opinion from a RAC audit may be appealed. There are five levels of appeal that need to be filed within a specific timeline. These levels of appeal include: Request for Redetermination before the RAC, Request for Reconsideration with a Qualified Independent Contractor, Administrative Law Judge (ALJ) Review, Medicare Appeals Council (MAC) Review, and Judicial Review. The cost and success of the appeal process varies at each level.

Recovery Audit Prepayment Review Demonstration
In November 2011 CMS announced three new demonstrations. One of these three year demonstrations, the Recovery Audit Prepayment Review  Demonstration, was designed to help curb improper Medicare and Medicaid payments CMS had planned to implement the three-year demonstration program on January 1, 2012, but announced in late December that implementation would be delayed indefinitely. The AAOS staff anticipate that the program will be implemented in some form at a later date and staff continue to monitor developments. 

AAOS staff has been proactively engaged in fact-finding and advocacy activities related to this CMS initiative. Shortly after CMS announced this demonstration, AAOS staff met with lead CMS staff to discuss implications for AAOS members and their patients.

As we learned, the demonstration as proposed would allow Medicare recovery auditors to review claims after services are provided but before claims are paid to ensure that the provider complied with all Medicare payment rules. CMS' goal is to prevent improper payments before they are made. These  reviews would focus on seven states with high populations of fraud and error-prone providers (FL, CA, MI, TX, NY, LA, IL) and four states with high claims volumes of short inpatient stays (PA, OH, NC, MO) for a total of 11 states. It is important to note that while this program is being labeled a demonstration, it would be implemented in our most populous states and affect almost 50% of the Medicare population.

At an Open Door teleconference on December 21, prior to the decision to delay implementation of the program, CMS released details of the new demonstration. As planned, the program would authorize recovery auditors to review Part A hospital claims in the 11 approved demonstration states-after provision of service, but before they are paid. Initially, the demonstration would focus on short stay inpatient hospital claims, none of which involve orthopaedic procedures. CMS staff cited several recurring problems with claims for short inpatient hospital stays, including incorrect coding, patients being admitted from the emergency department who should have been placed in outpatient observation, and patients getting surgery on an elective admission rather than on an outpatient basis. CMS acknowledged that RACs would be looking at medical necessity in these prepayment reviews. The demonstration project, however, would not review 100 percent of claims under the selected DRGs, but only a limited number. The appeals process for RAC audits would follow the same procedures as other appeals.

If the program is successful once implemented, CMS stated it may authorize reviews on additional DRGs in the future. CMS also clarified that the demonstration would not replace MAC prepayment review. CMS explained, however, that the MACs would coordinate review areas so providers will not be reviewed by two different contractors for the samecases.

While CMS staff disclosed basic operational details at the Open Door forum, they provided little clarity regarding the documentation CMS would be seeking to justify claims. Some of the examples cited by one of the CMS presenters were criticized during the question and answer period.  Concerned about the potential future implications for orthopaedic surgeons, AAOS staff questioned CMS representatives about the lack of available provider education materials. Following the criticism that CMS received in the lead-up to implementation of this program, the agency decided to delay implementation.

Look for more information about Medicare payment policies and audit programs at upcoming AAOS webinars and in future AAOS publications. In the mean time, please do not hesitate to contact the AAOS Office of Government Relations at 202-546-4430 or