Medicare Administrative Contractors: Oversight Shortfalls and Appeals System Flaws

Alarming Findings from OIG: MACs Falling Short

The U.S. Department of Health and Human Services’ Office of Inspector General (OIG) recently published a critical audit report highlighting major compliance failures among Medicare Administrative Contractors (MACs).

The March 2025 report, “Medicare Administrative Contractors Did Not Consistently Meet Medicare Cost Report Oversight Requirements,” exposes serious shortcomings in both the cost report review process and the integrity of the MAC appeals system.

The Importance of Medicare Cost Reports and MAC Responsibilities

Medicare cost reports serve as essential financial documents, submitted annually by institutional providers, to account for the costs of treating Medicare beneficiaries. These reports play a key role in:

• Setting prospective payment rates and wage indexes;
• Determining final provider reimbursements; and
• Calculating payments for graduate medical education, uncompensated care, and high-cost cases.

MACs are tasked with processing these reports and handling initial appeals, a dual role that introduces potential conflicts of interest.

OIG’s Audit: Persistent Oversight Failures Across All Jurisdictions

OIG's audit reviewed MAC performance from 2019 to 2021, analyzing Quality Assurance Surveillance Plan (QASP) reports.

Troublingly, all 12 MAC jurisdictions failed to meet contract requirements during at least one of the years reviewed. Across these audits, 287 deficiencies were categorized into five primary areas:

1. Deficient Cost Report Reviews (41% of findings)

Including errors in paperwork, missed adjustments, and calculation mistakes—such as a $250,000 overpayment related to Hospital-Acquired Condition (HAC) data.

2. Inadequate GME and IME Reimbursement Reviews (18%)

Errors included duplicated full-time equivalent counts, leading to roughly $650,000 in potential overpayments.

3. Faulty Charge Allocation and Cost Center Grouping (17%)

One MAC missed physician and assistant salaries, causing a $1.8 million understatement in costs.

4. Incorrect Reimbursement Calculations for Allied Health Programs (13%)

Misapplied days and charges led to overpayments exceeding $250,000.

5. Weak Oversight of Bad Debts (11%)

MACs often failed to verify provider billing policies for state-covered deductibles and coinsurance.

Appeals in Question: Inherent Conflicts Undermine Trust

The MAC redetermination process requires providers to appeal disputes to the very MAC that issued the initial denial, raising longstanding concerns about impartiality.

Though different personnel handle appeals, critics argue this structure discourages objective, de novo review.

Appeal Outcome Disparities: A Systemic Red Flag

Historical data reveal a pattern:

• A 2018 Journal of Health Care Finance study found MAC redetermination reversal rates at 19%, versus 65% success rates at the Administrative Law Judge (ALJ) level.
• Similarly, a 2022 AHA Medicare Appeals Survey reported only a 22% redetermination reversal rate, compared to 69% at ALJ hearings.

Such discrepancies suggest that MAC appeals often serve as procedural checkpoints rather than meaningful opportunities for redress.

How Performance Metrics May Skew Appeals

MAC contracts emphasize processing speed and payment integrity. While important, these metrics may unintentionally pressure MACs to uphold initial decisions rather than correct errors during redeterminations.

As former HHS General Counsel Thomas Barker observed, MACs face an "inherent tension" when tasked with revisiting their own judgments under these performance standards.

Factors Driving Oversight Failures: A Dual Perspective

OIG’s findings show that systemic failures originate at both the CMS and MAC levels.

CMS-Level Challenges

• Ambiguous guidance and vague terminology;
• Limited feedback following corrective action plans;
• Difficulty updating audit programs to reflect CMS changes;
• Inadequate MAC-specific training.

MAC-Level Challenges

• Recruitment and retention struggles for experienced auditors;
• Growing audit demands requiring specialized expertise.

Preparing for Appeals: Strategic Adjustments for Providers

Given these systemic flaws, healthcare organizations must approach appeals with caution. The Healthcare Financial Management Association (HFMA) advises providers to treat redetermination as a procedural requirement and focus efforts toward succeeding at higher appeal levels, like ALJ hearings.

The American Health Law Association (AHLA) also recommends meticulously documenting inconsistencies at the MAC level to strengthen future appeals.

CMS Corrective Measures: Limited but Necessary Steps

In response to these concerns, CMS has begun implementing changes:

• Doubling AR-4 sampling sizes;
• Revising scoring to a tiered-weight system;
• Expanding MAC training efforts;
• Creating a structured feedback process.

While CMS agreed to enhance oversight practices following OIG’s recommendations, these measures largely address cost report reviews—not structural flaws within the appeals process itself.

Calls for Broader Reform: A Roadmap to True Independence

Policy experts argue that more sweeping reforms are needed.

The National Academy for State Health Policy (NASHP) proposed assigning first-level appeals to independent contractors, similar to the second-level Qualified Independent Contractors (QICs).

Meanwhile, the Medicare Payment Advisory Commission (MedPAC) recommended mandatory transparency on MAC appeal outcomes by issue type, to increase accountability.

Conclusion: Adapting to a Flawed Appeals Environment

The OIG’s findings reveal not just gaps in oversight but deeper structural vulnerabilities in Medicare's appeals system.

Although CMS’s corrective actions offer modest improvements, healthcare organizations must take proactive steps—strengthening internal documentation, anticipating future appeals, and preparing for independent reviews.

As Dr. Emily Wilson of Georgetown University's Center for Healthcare Regulatory Compliance emphasized, “Providers must be their own best advocates, understanding both technical requirements and the systemic limitations of MAC oversight.”

By adapting strategically, providers can better navigate the flawed system and position themselves for success in this challenging regulatory environment.