Americans understand that Medicare and other federal benefit programs are critical to the health and strength of our country. But they also want to know that our collective investment in these programs is safe from fraud, waste, and abuse. Establishing effective methods for recovering improperly spent taxpayer money is essential for safeguarding these programs and improving the public’s confidence in how they are managed.
The Traditional Medicare (or fee-for-service) program provides care to more than 65 million Americans. Although vital to the health and well-being of older Americans and those with disabilities, the program is costly. In 2023, Traditional Medicare cost taxpayers almost $500 billion, and Medicare as whole is the second largest mandatory federal expenditure after Social Security.
As a large, complex healthcare program, Medicare is also especially vulnerable to fraud, waste, and abuse. In 2024, the Centers for Medicare & Medicaid Services (CMS) estimated $31.7 billion in improper fee-for-service Medicare payments (7.66 percent of its budget). To fully realize the return on investment for American taxpayers, CMS should consider every available tool to reduce improper payments and ensure that the money invested in providing these critical services for millions of Americans is spent effectively and efficiently.
One potentially powerful but underused tool to curb improper Medicare fee-for-service payments is extrapolation audits.
How extrapolation audits can help curb improper Medicare fee-for-service payments
Extrapolation audits use findings from a review of a representative sample of payments, randomly selected from a provider’s full payment list, to estimate that provider’s total overpayments and establish how much CMS should recover from the provider. Through extrapolation audits, payers can recover overpayments that may be orders of magnitude larger than those recovered through other types of audits.
Let’s say a provider that was paid $10 million in the 2022 calendar year is flagged because of substantial claim submission errors for an extrapolation audit. The payer selects a representative sample of payments from the universe of the provider’s 2022 payments and audits each of the payments in that sample. The within-sample overpayments found through the audit would then be extrapolated to the universe of the provider’s 2022 payments to estimate the total overpayments. For example, if the payer found that 30 percent of the dollar value of the payments in the sample were overpayments, the payer would then be able to extrapolate the findings to all payments and potentially demand recovery of 30 percent of the dollar value of the total payments, or $3 million.
How current policies limit the effectiveness of extrapolation audits as a payment recovery strategy
CMS already uses extrapolation audits in Traditional Medicare, but at least two key factors limit their full potential as a cost recovery and savings strategy. First, existing CMS policy limits extrapolation audits to providers that (a) already have a “sustained or high level of payment error” or that (b) have received educational interventions to correct their payment errors and failed to change their behavior—meaning the providers have repeatedly submitted a high percentage of incorrect claims. Second, CMS encourages its contractors to cap the amount that it recovers as a result of an extrapolation audit to the lower limit of a one-sided 90 percent confidence interval.
To comply with the first policy on extrapolation audits, CMS must show that the provider had a history of higher levels of payment errors or didn’t respond to education interventions before it conducts the audit. Until that standard is met, the provider continues to be paid for potentially improper claims. And even if the provider met the criteria and CMS performed the extrapolation audit, CMS typically seeks to recover only a portion of the estimated overpayments to which it may be entitled.
How CMS can maximize extrapolation audits for recovering and avoiding improper payments
We suggest that CMS use extrapolation audits whenever it reasonably believes it would be cost effective to do so and should seek to recover overpayments using the point estimate.
The Medicare Prescription Drug, Improvement, and Modernization Act (MMA) of 2003 grants CMS substantial discretion to define “sustained or high levels of payment errors.” It states “there shall be no administrative or judicial review…of determinations by the Secretary of sustained or high levels of payment errors…” CMS could interpret this authority to focus on the “or.” In other words, a single instance of a high level or monetarily meaningful payment error could be substantial enough to justify using extrapolation, rather than engaging in continued education of the provider before extrapolation is permitted. We recommend the agency use extrapolation audits any time the audit and subsequent recovery are expected to result in a positive return on investment. Importantly, interpreting the MMA to be more favorable to the agency will not increase appeals because there is no judicial review of this determination.
CMS’s preference for using the lower limit instead of the point estimate as the basis for recovery is a policy that likely could be changed immediately. Doing so would enable CMS to initiate recovery enforcement actions or negotiations from a higher dollar amount and increase recoveries and cost avoidance. Although it may also modestly raise the cost of conducting extrapolation audits in the near term, as larger sample sizes may be advisable to defend the extrapolation efforts in hearings or negotiations, we expect that artificial intelligence (AI)-assisted audits may reduce these costs and improve CMS’s ability to perform these audits more efficiently.
Besides these changes, CMS could consider other extrapolation audit strategies. It could conduct:
- Extrapolation audits with longer lookback periods that subject more provider payments to review. Although Medicare payment and billing policies are more likely to change over a longer audit lookback period and using a longer lookback period could modestly increase the effort required to complete an audit, the estimation of a provider’s overpayments remains the same and is equally valid regardless of the length of the lookback period.
- Corporate extrapolation audits, where CMS would audit an entire healthcare enterprise at once rather than conducting individual audits of providers that are part of that enterprise. These corporate extrapolation audits could have enormous potential to increase CMS’s return on investment, accelerate recoveries, and close the gap between what CMS estimates its overpayments are and what it currently recovers.
Although all these approaches could result in a dramatic improvement in CMS’s recoveries and cost avoidance, there are risks. Their use could require providers to commit additional resources to compliance, potentially impacting patient care and providers’ level of Traditional Medicare program participation. Nonetheless, federal leaders seek fast, effective ways to curb improper spending at a large scale. CMS can and should start by fully leveraging existing tools like extrapolation audits to root out fraud and abuse.
