WASHINGTON – The Centers for Medicare and Medicaid Services has begun auditing two of its four regions, affecting 32 states and two U.S. territories.

Thus begins Medicare's national Recovery Audit Contractor (RAC) program. The rest of the nation will see audits beginning in September or October.

Connolly Consulting, of Wilton, Conn., has launched RAC audits of physician and hospital Medicare billing in Region C, starting in South Carolina and expanding to Alabama, Arkansas, Colorado, Florida, Georgia, Louisiana, Mississippi, North Carolina, New Mexico, Oklahoma, South Carolina, Tennessee, Texas, Virginia, West Virginia, Puerto Rico and the U.S. Virgin Islands.

HealthDataInsights, Inc., of Las Vegas, the Medicare recovery audit contractor for Region D, also began audits in August. The Region D states are Alaska, Arizona, California, South Dakota, North Dakota, Hawaii, Idaho, Iowa, Kansas, Missouri, Montana, Nebraska, Nevada, Oregon, Utah, Washington and Wyoming.

Both auditors will initially check the accuracy of seven hospital outpatient and physician codes on Medicare claims paid since Oct. 1, 2007. They will review claims for blood transfusions, untimed codes, IV hydration therapy, bronchoscopy services, once-in-a-lifetime procedures, pediatric codes exceeding age parameters and injections of pegfilgrastim for 6 mg.

HealthDataInsights officials said they are conducting outreach sessions with hospitals and other healthcare providers before launching the audits.

Connolly Consulting issued letters to hospitals and physicians in South Carolina who may have billed Medicare incorrectly for the targeted codes. Notified providers will have to prove they billed Medicare correctly or return the reimbursements, according to the auditor.

According to CMS officials, the RAC program is a cost containment effort aimed to reduce improper payments in Medicare programs as well as identify process improvements to reduce or eliminate future improper payments. The government reportedly recovered nearly $700 million in improper Medicare payments through its RAC pilot program, conducted from 2005-2008.

CMS officials said the RAC pilot program had "a limited financial impact on most providers," with most hospitals in the pilot states impacted by less than 2.5 percent to their bottom line.

Providers and coding experts are concerned that RAC contractors are motivated to find errors that may not exist, because of the way they are rewarded by the government. Coding experts have warned that providers will need to take special care to document their services correctly, because without adequate proof of the service, CMS will ask for its reimbursement money back.