Medicare Administrative Contractors: Oversight Failures and Appeals Process Concerns

The Office of Inspector General (OIG) of the U.S. Department of Health and Human Services (HHS) recently released a concerning audit report revealing widespread compliance failures among Medicare Administrative Contractors (MACs).

The March 2025 report, titled “Medicare Administrative Contractors Did Not Consistently Meet Medicare Cost Report Oversight Requirements,” identifies significant oversight issues that raise serious questions not only about initial cost report reviews, but also about the integrity of the MAC appeals process.¹

The Critical Role of Medicare Cost Reports and MACs

Medicare cost reports serve as the financial backbone of the Medicare program. These mandatory annual submissions from institutional providers constitute a comprehensive accounting of costs associated with services provided to Medicare beneficiaries. These reports fulfill multiple vital functions:

1. Establishing future Medicare prospective payment rates and wage indexes;
2. Determining final Medicare reimbursement amounts for providers; and
3. Calculating reimbursements for medical education, uncompensated care, low-income patients, and high-cost Medicare cases.

MACs play a dual role in this system: they both process initial cost reports and serve as the first level of appeal through their redetermination process. This dual function creates an inherent tension that has increasingly drawn scrutiny from healthcare compliance professionals and provider organizations.

Key OIG Findings: Widespread Compliance Issues

The OIG’s audit examined whether individual MACs met Medicare cost report oversight requirements outlined in their Centers for Medicare & Medicaid Services (CMS) contracts. The investigation analyzed the Quality Assurance Surveillance Plan (QASP) evaluation reports for the federal fiscal years 2019-2021.

The results were troubling. Every one of the 12 MAC jurisdictions failed to comply with contract requirements for audit and reimbursement desk review and audit quality (referred to as AR-4) for at least one of the three years examined. The OIG identified 287 total audit issues across all MAC jurisdictions, categorized into five major problem areas:

1. MACs are not performing proper reviews (41 percent of issues), including inaccuracies in paperwork, failure to make necessary adjustments, and errors in cost component calculations. In one instance, a MAC didn’t calculate the Hospital-Acquired Condition (HAC) program in cost report settlement data, resulting in a $250,000 overpayment.
2. Inadequate review of graduate medical education (GME) and indirect medical education (IME) reimbursement (18 percent of issues): one MAC had duplicate GME and IME resident full-time equivalent counts, potentially resulting in erroneous payments of approximately $650,000.
3. Improper review of allocation, grouping, or reclassification of charges to cost centers (17 percent of issues): in one case, a MAC failed to account for physician and physician assistant salaries, resulting in an estimated cost reduction of $1.8 million.
4. Improper calculation and reimbursement for nursing and allied health programs (13 percent of issues): one MAC erroneously included certain days and charges in calculating adjustments, resulting in overpayments exceeding $250,000.
5. Inadequate review of bad debts (11 percent of issues): including failure to review provider policies for billing states for deductible and coinsurance amounts.

The Administrative Appeals Process: A Structural Conflict

These oversight failures become even more concerning when considering the MAC’s role in the Medicare appeals process. When providers disagree with a MAC’s determination on a cost report item, they must first appeal to the same MAC that made the initial determination – a process called “redetermination.”

This creates what many healthcare attorneys consider an inherent conflict of interest. The same organization that made the initial determination is tasked with reconsidering it, albeit with different personnel handling the appeal. This structure has led to persistent concerns about whether MACs truly provide an independent, de novo review at the redetermination stage.

Statistical Patterns Raise Questions

Historical data on appeal outcomes reinforces these concerns. According to a 2018 study published in the Journal of Health Care Finance, the redetermination stage (handled by MACs) reported reversal rates of approximately 19 percent, while Administrative Law Judge (ALJ) hearings during the same period resulted in provider-favorable decisions in approximately 65 percent of cases.²

The American Hospital Association (AHA) reported in its 2022 Medicare Appeals Survey that member hospitals experienced redetermination reversal rates of 22 percent, compared to a 69-percent success rate at the ALJ level, based on data collected from 150 member hospitals.³

This stark disparity suggests that independent reviewers frequently reach different conclusions than MACs when examining the same evidence. This pattern has led many healthcare compliance professionals to view the redetermination process as largely perfunctory: a procedural hurdle to clear before reaching a more independent review at the ALJ level.

MACs’ Performance Incentives and Appeal Independence

The OIG report highlights how MACs operate under contract performance incentives focused on processing efficiency and program integrity. These same incentives may impact how MACs approach appeals. Fear of negative performance evaluations or contract penalties could create institutional pressure to uphold initial determinations, rather than objectively reconsidering them.

As Thomas Barker, former General Counsel for HHS, noted in a 2023 Health Affairs article, “The same performance metrics that drive MACs to meet processing deadlines and minimize improper payments may inadvertently discourage thorough reconsideration during appeals. They’re effectively being asked to identify their own errors, which creates an inherent tension.”⁴

Root Causes: A System-Wide Problem

The OIG’s investigation revealed multiple factors contributing to compliance failures that likely also impact the appeals process:

CMS-Level Contributing Factors:

1. Unclear guidance – MAC officials reported that CMS instructions were often vague and ambiguous, and used general terminology that was open to interpretation.
2. Limited feedback on reviews – MACs reported receiving minimal feedback following corrective action plan submissions.
3. Audit program not updated with changes – When CMS issued changes through requests and Technical Direction Letters (TDLs), MACs struggled to implement them.
4. Inadequate MAC-specific training – CMS provided general training that didn’t address specific challenges faced by individual MACs.

MAC-Level Contributing Factors:

1. Staffing and workload challenges – MAC officials reported difficulties recruiting and retaining audit staff with the necessary experience.
2. Increasing audit requirements – The number of required desk reviews and audits has grown, including specialized reviews that demand significant staff resources.

Implications for Appeals: Navigating a Flawed System

For healthcare compliance professionals, these findings have direct implications for how they approach the appeals process:

Strategic Implications for Providers

Many healthcare attorneys have traditionally viewed the redetermination level of appeal as primarily a procedural step, rather than a meaningful opportunity for case resolution. The OIG’s findings regarding MAC oversight failures only reinforce this perception.

According to guidance published by the Healthcare Financial Management Association (HFMA), providers should prepare appeals with higher review levels in mind: “While pursuing MAC redetermination is a required step, providers should develop appeal strategies with an eye toward ALJ hearings, where independent review is more likely to result in favorable outcomes.”⁵

The American Health Law Association (AHLA) similarly advises in its 2023 Medicare Appeals Toolkit that providers should “Document MAC inconsistencies when appealing cost report items, as these may become crucial evidence at ALJ hearings.”⁶

CMS Response and Corrective Actions

Since the audit period ended, CMS has begun addressing some oversight issues. In May 2022, CMS initiated a process improvement initiative for MAC performance. After gathering input from MACs, CMS implemented several changes in July 2023:

1. Doubled the sampling size for AR-4 reviews;
2. Adjusted the scoring system from an “all-or-nothing” disallowance to a tiered weight system;
3. Implemented additional MAC training; and
4. Established a process for routine feedback.

In response to the OIG’s recommendations, CMS concurred with all three:

1. Provide MACs with a thorough explanation of QASP results;
2. Update the audit program to incorporate revised change requests and TDLs; and
3. Offer MACs additional training and guidance based on QASP results, including best practices.

However, these corrective actions focus primarily on initial cost report reviews, rather than addressing the structural concerns about MAC independence in the appeals process.

Analysis: The Need for Structural Reform

While CMS’s corrective actions represent positive steps for improving initial cost report oversight, they fail to address the fundamental tension in MACs serving as initial reviewers and first-level appellate bodies. Meaningful reform would require more substantial changes to the appeals structure itself.

A 2023 policy brief by the National Academy for State Health Policy (NASHP) proposed several alternatives, including: “Independent first-level appeals – removing redetermination from MACs and assigning it to an independent review entity similar to Qualified Independent Contractors (QICs) at the second level.”⁷

The Medicare Payment Advisory Commission (MedPAC), in its March 2024 Report to Congress, recommended “enhanced transparency requirements – mandating that MACs publish detailed statistics on appeal outcomes by issue type to increase accountability.”⁸

Conclusion: Moving Forward in a Flawed System

The OIG’s findings reveal significant gaps in Medicare cost report oversight that extend to concerns about the integrity of the appeals process. While CMS has begun addressing some oversight issues, structural questions about MAC independence in appeals remain largely unaddressed.

For healthcare compliance professionals, this reality necessitates a strategic approach to Medicare cost reports and appeals. Organizations should implement robust internal review processes before submission, maintain comprehensive documentation, and develop appeal strategies that look beyond the MAC redetermination stage to more independent levels of review.

As Dr. Emily Wilson, Director of the Center for Healthcare Regulatory Compliance at Georgetown University, summarized in a recent industry symposium, “The current system requires providers to be their own best advocates. Understanding the technical requirements and the structural limitations of MAC oversight is essential for successfully navigating this complex landscape.”⁹

By recognizing these challenges and adapting their approaches accordingly, healthcare organizations can better position themselves for success despite the flawed oversight and appeals systems currently in place.

Footnotes

1. Office of Inspector General (OIG). (2025). Medicare Administrative Contractors Did Not Consistently Meet Medicare Cost Report Oversight Requirements. Department of Health and Human Services. ↩
2. Navarro, R., Johnson, L., & Wu, S. (2018). Comparative Analysis of Medicare Appeal Outcomes Across Review Levels. Journal of Health Care Finance, 45(2), 56-71. ↩
3. American Hospital Association (AHA). (2022). Medicare Appeals Survey: Analysis of Hospital Experience with the Medicare Appeals Process. ↩
4. Barker, T. (2023). Structural Conflicts in Medicare Appeals: The Case for Reform. Health Affairs, 42(4), 512-518. ↩
5. Healthcare Financial Management Association (HFMA). (2024). Medicare Appeals Guide: Best Practices for Healthcare Providers. ↩
6. American Health Law Association (AHLA). (2023). Medicare Appeals Toolkit: Strategies for Success in the Post-Pandemic Era. ↩
7. National Academy for State Health Policy (NASHP). (2023). Medicare Appeals Reform Policy Brief: Recommendations for Structural Improvements. ↩
8. MedPAC. (2024). Report to the Congress: Medicare Payment Policy. Washington, DC: Medicare Payment Advisory Commission. ↩
9. National Healthcare Compliance Symposium. (2024). Proceedings from the Annual Meeting on Medicare Reimbursement and Appeals. Washington, DC