United States: In Closely Watched Case, Federal Court Upholds The Government's Position On Provider Mandate To Report And Return Medicare And Medicaid Overpayments In 60 Days


The Patient Protection and Affordable Care Act ("PPACA"), signed into law on March 23, 2010, included a provision (the "Report and Refund Mandate"), broadly requiring health care providers, suppliers, Part D plans and managed care organizations that were overpaid by the Medicare or Medicaid program to report and return the overpayment within 60 days of the date when the overpayment was "identified."  See PPACA Section 6402(a).  Failure to comply with the Report and Refund Mandate exposes individuals and organizations to liability under the False Claims Act, Civil Monetary Penalties Law, and possible exclusion from participation in federal health care programs. 

Addressing a "novel question of statutory interpretation," the federal district court in Kane v. Healthfirst, Inc., No. 11-cv-02325-ER (S.D.N.Y. Aug. 3, 2015) has stepped in to fill a regulatory void left by the Centers for Medicare & Medicaid Services ("CMS")[1], and has provided long-awaited guidance to providers struggling to understand their compliance obligations and risks under the Report and Refund Mandate.  In a sweeping 44-page opinion, the court held that, for purposes of the Report and Refund Mandate, an overpayment is "identified"—and the 60-day clock begins to run—when a provider is "put on notice of a potential overpayment, rather than the moment when an overpayment is conclusively ascertained."  In rejecting the defendants' position, the court made clear that providers cannot wait until they are certain that they have been overpaid and by how much before reporting and refunding an overpayment from the government.  The opinion also makes clear that failing to report and refund within the 60-day time-frame may not always result in liability under the False Claims Act, where a "well-intentioned" provider undertakes and documents that it acted with "reasonable haste to address erroneous overpayments."


Defendant Hospitals.  In Healthfirst, Beth Israel Medical Center, St. Luke's-Roosevelt Hospital Center and Mount Sinai Roosevelt, and Long Island College Hospital (collectively, the "Hospitals") all belonged to a network of non-profit hospitals operated by Continuum Health Partners, Inc. ("Continuum" and the Hospitals, collectively, the "Defendants").  The Hospitals each participated in the Healthfirst, Inc. ("Healthfirst") provider network; Healthfirst is a Medicaid managed-care plan.  Pursuant to its contract with the New York State Department of Health ("DOH"), which administers the Medicaid program, Healthfirst received a monthly capitation payment from DOH to arrange for the broad range of medical services provided to its enrollees, including hospital care.  The Hospitals and other network providers agreed that any payment they received from Healthfirst constituted payment in full for those services (except for co-payments), and precluded them from separately billing Medicaid on a fee-for-service basis. 

The Billing Error.  The electronic remittances issued by Healthfirst to the Hospitals were supposed to include a code indicating to providers that the services could not be billed to any secondary payor or Medicaid.  However, as a result of a "software glitch," the remittances omitted the coding.  Starting in or around January 2009, Continuum submitted claims to Medicaid on behalf of the Hospitals for services rendered to Healthfirst enrollees, which DOH mistakenly paid.

The software glitch first came to light in September 2010, after auditors from the New York State Comptroller's office had questioned certain improper billings.  That December, the billing software vendor provided a corrective "patch" that was supposed to prevent Continuum from billing secondary insurers.  At this time, Continuum tasked one of its employees, Robert P. Kane ("Kane"), a technical director, to determine which claims had been improperly billed to Medicaid.  On February 4, 2011, five months after the glitch was discovered, Kane sent an email to Continuum's management with a spreadsheet containing 900 Medicaid claims totaling over $1 million of potentially improper billings.  In his email, Kane indicated that further analysis would be needed to confirm the findings.  Kane was terminated four days later.

The False Claims Act Allegations.  In April 2011, Kane filed a qui tam False Claims Act lawsuit against Defendants (among others) in the United States District Court for the Southern District of New York.  In June 2014, the United States and New York State (collectively, the "Government") intervened, alleging that the Defendants had violated the False Claims Act by knowingly concealing or knowingly and improperly avoiding or decreasing an "obligation" to refund Medicaid overpayments retained by Defendants – a so called "reverse false claim."  See 31 U.S.C. § 3729(a)(1)(G) and N.Y. State Financial Law § 189(1)(h).  According to the Government's pleading, the Defendants "did nothing further" after receiving Kane's spreadsheet analysis to remediate the overpayments, and made full restitution of more than 300 overpaid claims in 2012, only after the United States had served a Civil Investigative Demand on Continuum as part of its investigation into the qui tam allegations.  Healthfirst, p. 6.  On that basis, the United States and New York further alleged that Defendants had "fraudulently delay[ed] its repayments for up to two years after Continuum knew of the extent of the overpayments."  Id.  The Government's complaint continued, by "intentionally or recklessly failing to take necessary steps to timely identify claims affected by the Healthfirst software glitch or timely reimburse DOH for the overbilling," Defendants violated the Federal and New York State False Claims Act.  Id.

Defendants' Motion to Dismiss.  Defendants asked the court to dismiss the Government's complaint as legally insufficient to support claims under the federal and New York State False Claims Act.  Defendants argued (among other things) that Kane's email and spreadsheet only provided "notice of potential overpayments and did not identify actual overpayments so as to trigger" the 60-day clock.  Healthfirst, p. 17.  The Government countered that the email and spreadsheet "identified" overpayments within the meaning of PPACA, which then required the Defendants to report and return these overpayments within 60 days.  Specifically, the Government argued that an overpayment is identified when a provider has determined, or should have determined through the existence of reasonable diligence, that it has received an overpayment. 

The Court's Analysis

The court rejected the Defendants' position that an overpayment is  "identified" only when it can be "classified with certainty" or "conclusively ascertained," and embraced the broader definition urged by the Government that an overpayment has been "identified" when a provider is put "on notice" that a certain claim or claims may have been overpaid.  Finding no definition of "identified" in PPACA, the court concluded that the Government's interpretation is consistent with the purposes behind the statute as well as the legislative history of the False Claims Act.   

As the court observed, Congress had intended liability to attach under the False Claims Act for failing to report and refund even before the obligation has been "fixed."  Here, as alleged, after the Comptroller had alerted Defendants to the software glitch and to specific improperly paid claims, Kane then provided Defendants with a set of claims likely to contain numerous overpayments.  At this point, according to District Judge Ramos, Defendants were sufficiently "on notice" of "potential" overpayments, such that the overpayments were "identified" and Defendants were required to report and refund any overpayments within 60 days.  The court explained that to allow Defendants to "evade" liability because Kane's email had not conclusively identified the specific erroneous claims and exact amounts owed to the government would contravene Congressional intent to implement more "robust" anti-fraud measures.[2] 

At least on the facts pled in Healthfirst, the court found sufficient notice to Defendants via the Kane email and spreadsheets to conclude that the overpayments had been "identified."  We note that the level and specificity of notice in any given case will largely turn on the specific factual allegations that form the basis for the reverse false claim.

Saving Grace for Providers Acting in Good Faith?  Notably, the court did not pronounce a standard of absolute liability under the False Claims Act, in Healthfirst or otherwise, whenever a provider fails to meet the 60-day deadline to report and refund after having "identified" an overpayment.  The court acknowledged that such an "unforgiving" application of the Report and Refund Mandate could impose an unduly harsh standard of compliance on a provider that has proceeded in good faith to diligently investigate potential overpayments, "but has yet to isolate and return all overpayments sixty-one days after being put on notice of potential overpayments."  Healthfirst, p. 25.  Although the PPACA contains no language "to temper or qualify" this outcome, the court noted that such an outcome is not inevitable in every case involving an alleged violation of the Report and Refund Mandate.  Id.

First, the court remarked that "prosecutorial discretion would counsel against the institution of enforcement actions aimed at well-intentioned healthcare providers working with reasonable haste to address erroneous overpayments."  Id. at 26.  Even the U.S. attorney in Healthfirst allowed that the Government would not bring a claim against a provider that has diligently tried to comply with the 60-day deadline.  Id.  Stringently enforcing the 60-day deadline in the Report and Refund Mandate, the court added, could violate the spirit if not the letter of the False Claims Act.  Id.

Second, the court analyzed another element of a reverse false claims violation, that the Defendants "knowingly concealed" or "knowingly and improperly avoided or decreased" an obligation.  The court noted that the Government in Healthfirst clearly pled this element by alleging that Defendants "did nothing" after Kane had informed them of the potential overpayments.  Significantly, this discussion left open the possibility that, through discovery and at trial, the Defendants could demonstrate that they had in fact taken good faith steps to investigate and ascertain the overpayments, and continued to do so, past the 60-day window.  The court suggested that if Defendants could make such a showing, Defendants might not be liable for a reverse false claims violation.

What About CMS' Proposed Regulations?  While the Proposed Regulations have not been adopted and the court did not give much deference to CMS, the court did note that its interpretation of the term "identified" is consistent with CMS' published guidance.[3]  CMS may well have deferred finalizing the Proposed Regulations until the outcome of this case.

New York State False Claims Act.  As the court noted, the New York State False Claims Act is virtually identical to the Federal False Claims Act.  However, New York State's "reverse false claims" provision was not adopted until 2013.  Defendants argued that this provision could not be applied retroactively to the alleged violations in Healthfirst.  The court, however, found that the statute as amended may be applied retroactively, concluding that the potential per claim penalties of $6,000 to $12,000 plus treble damages in the State False Claims Act were not impermissibly "punitive" in nature. 


The decision may be appealed after a final judgment is entered, if adverse to Defendants.  Nonetheless, providers should take heed of the court's decision—the only federal court ruling to date on the issue—and conform their practices so that they act promptly and vigilantly when put on notice of potential overpayments.  This may require an initial disclosure to the government within the 60-day period, supplemented by further disclosures to the extent any ongoing review or investigation determines the full scope of the overpayments or exact amounts overpaid.

Notably, in cases where providers may be arguably unable to satisfy the 60-day period, it is critical that they proceed with "all deliberate speed" and document efforts to investigate any potential overpayments.  Plainly, a provider cannot "do nothing," stick its "head in the sand," and pretend that it is unaware of a potential overpayment, as the Government alleged in Healthfirst.  Otherwise, delaying and consequently risking non-compliance with the Report and Refund Mandate may well transform a mistaken overpayment, even one in which the provider had no culpability, into a costly False Claim Act liability.

[1]   In CMS' proposed regulations dated February 16, 2012 (the "Proposed Regulations"), CMS outlined the steps that providers reimbursed under Medicare Part A and suppliers reimbursed under Medicare Part B are to take to comply with the Report and Refund Mandate.  Specifically, as detailed in our prior memorandum of March 5, 2012, the Proposed Regulations explain when, from CMS' perspective, providers have "identified" an "overpayment," and provide some clarity as to what those key statutory terms actually mean. 

[2]   The Defendants also argued that an obligation did not arise in this case because the repayment of the claims was owed to the New York State Medicaid program, not the federal government.  The court rejected this argument noting that the Medicaid program is funded jointly by the federal and state governments, and Congress has repeatedly provided that claims submitted to Medicaid constitute false claims for purposes of the False Claims Act.

[3]   The court also noted that CMS issued a final rule implementing the Report and Refund Mandate with respect to the Part C Medicare Advantage program and the Part D Prescription Drug program.  In the final rule, CMS defined "identified overpayment" when an entity "has determined, or should have determined through the exercise of reasonable diligence, that it has received an overpayment."  Healthfirst, p. 30.  CMS specifically clarified that to identify does not require "actual knowledge."

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