Collecting Overpayments from Medicaid Providers

Today we want to address a topic that many state Medicaid agencies will no doubt be thinking about in the coming months, as the COVID-caused pandemic continues to threaten state finances and Congress has somewhat tied states’ hands in responding to increased Medicaid expenditures by prohibiting coverage disenrollments.  (Although as my colleague Ross Margulies has pointed out here, CMS has recently given states some additional flexibilities in this regard).

Nevertheless, we expect that states are going to be more aggressive in dealing with providers of services, perhaps by cutting rates or more closely auditing the provision of services.  And that’s what we want to focus on today:  what rights do states have under federal Medicaid law to audit the provision of services and collect overpayments?  This is, to us, an interesting area of the law and one that at least one state Supreme Court has dealt with in the past few months (more on that below).

Maybe we should start with the basic requirement that Congress has imposed on states in section 1902(a)(30)(A) of the Social Security Act.  States must, among other things, have provisions in their state Medicaid plan “as may be necessary to safeguard against unnecessary utilization of … care and services” that are covered under the state plan.  In other words, since the federal government has skin in the game – by way of the federal matching payment – CMS has an interest in ensuring that states are responsible with those matching funds.

This requirement of section 1902(a)(30)(A) led to an important decision by the Supreme Judicial Court of Massachusetts in 1999.  In Massachusetts Eye and Ear Infirmary v. Commissioner of Medical Assistance, 428 Mass. 805 (Mass. 1999), the court assessed a Massachusetts Medicaid (in Massachusetts, Medicaid is called “MassHealth”) policy under which MassHealth would conduct a retrospective utilization review policy involving admissions for inpatient services for MassHealth patients.  If, based on a retrospective review of a patient’s medical record, it appeared to the reviewer that the services could have been safely performed on an outpatient basis, the claim would be denied, the funds recouped, and the hospital was prohibited from then re-billing for the service as an outpatient claim.  MassHealth insisted that its policy was mandated by section 1902(a)(30)(A); how else, the state argued, could Massachusetts “safeguard against unnecessary utilization of … care and services” under the state plan?

But here was the problem:  the MassHealth program didn’t provide a meaningful definition of “inpatient” and “outpatient” services.  At the time, the state’s regulations simply defined “inpatient services” as services that were provided on an inpatient basis.  The state could have, of course, used a different definition:  it could have defined “inpatient” as a person who was in a hospital bed for 24 or 48 hours, or who was in an inpatient bed past midnight.  What the Supreme Judicial Court found problematic with the MassHealth policy was that it didn’t define “inpatient” in a meaningful way and penalized hospitals by denying all payment and prohibiting them from rebilling.  The Court told the state:

The [MassHealth] program may operate on a case-by-case basis to determine the appropriate level of care, defined in some meaningful way, and allow reimbursement at that level, provided there is adequate review of its decision.  Or it may promulgate clear rules and deny all reimbursement to providers who seek reimbursement at levels not in compliance with those rules.  What it may not do is promulgate criteria that are essentially tautological or meaningless, review claims on a case-by-case basis, and then deny all reimbursement to providers who have acted in good faith and guessed wrong.

Massachusetts has since revised its regulations, but this leads us to the second topic we wanted to discuss today, and that is:  what happens (for example, under the MassHealth policy before it was invalidated) when a state Medicaid plan identifies an overpayment?

CMS regulations provide an answer to this question.  CMS has explained, at 42 C.F.R. § 433.316, that once a state has identified an overpayment and wants to initiate a recoupment against a provider, it should (but is not required to) notify the provider in writing.  (A state may not want to notify the provider if, for example, it suspects fraud).  The regulations then defer to state collections law and tell the state to take “reasonable actions” to collect the overpayment.  And then finally, states have one year from the date that they “discover” an overpayment to return the federal share of the overpayment to CMS.

When does a state “discover” an overpayment?  The regulations say that an overpayment is discovered on the earlier of four dates:

  • The date that the state contacts the provider and specifies the amount of the overpayment;
  • The date on which the provider notifies the state of the overpayment;
  • The date on which the state formally initiates a recoupment (in those situations where the state has not notified the provider in writing); or
  • The date that a federal official has identified the overpayment.

As you can see, these regulations speak more to CMS’s relationship with the state rather than the state’s relationship with a provider.  At the end of the day, it’s almost always up to the state to determine (or, in the words of the regulation, “discover”) when an overpayment has occurred.  And as we said at the outset of this article, we think that states are likely to be more aggressive in discovering overpayments as finances continue to be tight and Medicaid enrollment continues to grow post-COVID.

So we close with a precautionary tale of a state that, like Massachusetts, went too far in its pursuit of providers.  This case was just decided by the Wisconsin Supreme Court in the past couple of months.  In Professional Home Care Providers v. Wisconsin Department of Health Services, 2020 WI 66 (Wisc. 2020), the Wisconsin Supreme Court assessed a Wisconsin Medicaid policy under which the state Medicaid agency would conduct an audit of home health claims.  The state of Wisconsin’s Medicaid program had adopted what the court called a “perfection” policy under which if, on audit, any aspect of the claim for services was faulty (a failure to sign a claim, for example), the claim would be denied and payment recouped.

The problem, according to the Wisconsin Supreme Court, is that Wisconsin law never granted the state Medicaid agency the authority to adopt a “perfection” policy.  Remember what we said above:  CMS regulations defer to state collections law when it comes to collecting an overpayment.  And so, as a result, the Wisconsin Supreme Court looked to Wisconsin law.

The relevant statute allowed the state to recover an overpayment in three circumstances:  where the provider’s records do not verify (1) the actual provision of services; (2) the appropriateness of claims or (3) the accuracy of payment amounts.  The Wisconsin Supreme Court decision gave as an example a home health nurse whose claim for services did not document that she had billed the beneficiary’s employer-based insurance even though she knew from past experience that the employer-based insurance would not cover the claim.  Because that denial did not relate to the provision of services (it was undisputed that the nurse had provided the service), the appropriateness of claims (there was no question but that the services were medically necessary) or the accuracy of payment amounts (the nurse billed the appropriate fee schedule), the Medicaid agency had no right to recover the payments.

We think that, as states look to address serious revenue shortfalls caused by COVID, there will be additional attempts to recoup overpayments from providers.  In fact, in December, the Massachusetts Supreme Judicial Court announced that it would consider a case involving the application of a statute of limitations in Medicaid collection efforts.  The decision of the Massachusetts Supreme Court decision in that case, the prior SJC decision, and a very recent Wisconsin Supreme Court decision illustrate the limits that states must contend with as they attempt to do so.

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