Medicare's Recovery Audit Contractor Initiative started as a demonstration program, mandated the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA).  It began in three states, was expanded to New York, Massachusetts, Florida, South Carolina and California and ended on March 27, 2008.  The program hired private contractors with the goal of discovering Medicare money that had been improperly paid, and recovering that money.  The contractors were paid a percentage of the money they recovered and returned to the Medicare Trust Fund.  Medicare's return on investment was high. For the initial phase of the demonstration project, which involved New York, Florida and California, the RAC contractors recovered $371 million dollars.  CMS esitmates that 3.9% of claims submitted to Medicare are incorrect.

Congress mandated an expansion of the program to the entire country, and this is now in place.  All states have a private RAC contractor.

The RAC contracontors receive paid claims data, and analyze that day using their own proprietary software.  Because they are paid a percentage of what they collect, their incentive is to look at large claims, rather than small claims.  In the demonstration project, the contractor that found the most errors and returned the most money to Medicare focused on inpatient and DME claims.  On the physician side, there were errors in expensive medications