Reprinted from the Nov. 10, 2008, issue of REPORT ON MEDICARE COMPLIANCE.

On Nov. 1, PRG-Schultz USA, Inc., and Viant, Inc., which lost the bidding wars for lucrative RAC contracts, separately asked GAO to recommend that CMS conduct a do-over of the RAC selection process. GAO has 100 days to decide if the vendors make a persuasive case that CMS erred when it didn't choose them as RACs, explains Michael Golden, managing associate general counsel at GAO. During this time, CMS must impose a "stop-work order" on the four winning RAC contractors until GAO's decision comes down.

But RACs delayed will not be RACs denied, hospital officials agree. Congress mandated the expansion of the RACs nationwide after a three-year pilot program, and CMS views them as an effective method for identifying payment errors, so there's no question the RACs will be back. "You can't stop worrying about the RACs. The government is convinced this is a good way to [recover] money, and especially during this economy, they're not going to shy away from it," contends Boston attorney Larry Vernaglia, who is with Foley & Lardner LLP.

Either the protests will fail, and the RACs will get to work in a few months, or the contracting process will be reopened, and the national RAC program will take longer to get off the ground -- but the latter scenario is less likely.

The suspension came down about one month after CMS formally announced the national RAC rollout by naming the four vendors that won the contracts -- and just four days after CMS posted a schedule of site visits to numerous states to prepare hospitals there for the RAC launch. CMS pledged to meet with hospitals (and bring RAC representatives) before the first medical-record requests hit the streets. In a sense, the posting of the site-visit schedule was a concrete sign that the audits would begin. And then, bam -- the RACs were stopped in their tracks by the protest.

"The fact that RACs are being held up because contractors are fighting over the contracts doesn't give us any hope there will be more reasonableness on the part of the RACs. But at least we will have more time to organize our approach and our response to RAC medical-records requests and to review different kinds of software being developed to track and oversee the RAC response process," says Nickie Braxton, compliance officer for Hartford Hospital and Healthcare Corp. in Connecticut.

Ironically, the RAC suspension was set in motion the moment when CMS announced the four contractors, says Washington, D.C., attorney David Ralston, who is with Foley & Lardner. CMS would also have sent a letter to the losers saying they didn't get a RAC contract. That notification triggers their right to a "debriefing" by CMS so that the vendors can get a sense of why they lost the RAC bids, he explains. This gives the vendors enough information to decide whether to file a protest with GAO. If and when they do, the case will be assigned to a GAO attorney for review. GAO reviews are intended to ensure integrity in the contracting system, he says.

Only one in five protests wins the support of GAO, Golden and Ralston say.

Thirty days after the protest is filed with GAO, CMS submits all procurement records to GAO and the vendors' lawyers under a protective order. That may give the attorneys for a losing vendor more ammunition for the protest, Ralston says. Vendors might argue that CMS unfairly evaluated their proposals because it failed to consider fully the vendors' positive points or gave too much consideration to its negative points. In a press release, PRG-Schultz said it "understands from CMS that it received one of the highest technical scores, but it was not awarded a contract because it ultimately did not have the lowest contingency fee bid in any region." According to Ralston, what this probably means is that the vendor is challenging the best value trade-off performed by CMS, in which CMS appears to have chosen the lower technically ranked, but also lower-cost, proposal. PRG-Schultz would argue that the CMS trade-off decision was flawed because PRG-Schultz offered greater value that more than offset its additional cost, he says.

Protests are common with high-value contracts, Ralston says. "In the vast majority of contracts, there aren't any protests," he adds. Vendors fear alienating the government agencies whose business they vie for, he maintains. In this case, he says, RAC contracts are quite valuable and too good to pass up, considering that they will yield contingency fees on potentially hundreds of millions of dollars a year.

If the protest is denied, CMS can immediately lift the stop-work order, says Ralston. Meanwhile, the vendor also gets "a second bite at the apple," he says. If unhappy with the outcome, the vendor can try again to get the contract decision overturned by the U.S. Court of Federal Claims in Washington, D.C. However, the RAC program would resume unless the vendor got an injunction from the court to stop it, he says. If the vendor loses in this court, it has one final chance to win back the RAC contract: the U.S. Court of Appeals for the Federal Circuit.

Vernaglia says providers may see this development as a stay of execution, the same way they perceived the Federal Trade Commission extension for compliance with the "Red Flag Rules," which require an identity theft-prevention program. But with the RACs, it won't change the October 2007 look-back date, which means even if RACs have to start later, they still will audit claims paid as far back as that date. "Any delay is good for hospitals from a planning perspective," he asserts. "It allows more time to get ready for RAC audits. If the first letters had dropped in January, a lot of hospitals would have been unprepared."

Hospitals should spend this unexpected time cushion auditing their processes to (1) identify past areas of vulnerability that they might need to proactively report, and (2) flag areas for process improvements to ensure medical-necessity compliance and coding accuracy moving forward, recommends Robert Corrato, M.D., president and CEO of Executive Health Resources in Pennsylvania.