United States: Final CMS Rule On The Reporting And Returning Of Medicare Overpayments Is A Wake-Up Call For Physicians

Last Updated: June 9 2016
Article by Wilson Hayman

Effective March 14, 2016, a final rule published in February 2016 by the Centers for Medicare and Medicaid Services (CMS) implements the 60-day rule included in the Affordable Care Act (ACA) (31 U.S.C. § 1320a-7k(d)). ACA requires providers and suppliers who receive Medicare funds to report and return overpayments by the later of either (1) 60 days after the date on which the overpayment was identified, or (2) the date any corresponding cost report is due, if applicable. Hospitals must also notify in writing the Secretary of DHHS, the state, an intermediary carrier, or contractor to whom the overpayment is returned of the reason for the overpayment. In addition, ACA provides that any overpayment retained by a person after the deadline is a violation that potentially triggers the provisions of the Federal False Claims Act, with substantial civil penalties plus treble the amount of damages sustained by the government due to the acts of that person, Civil Monetary Penalties and exclusion from federal health care programs.

The final rule addresses several concerns raised by providers about the proposed rule published on February 16, 2012. It clarifies the meaning of overpayment "identification" that triggers the 60-day period for the reporting and repayment of overpayments, and it reduces the "lookback" period for overpayments to providers from 10 years to six years. At the same time, it serves as a wake-up call for hospitals to implement these particular requirements of the ACA as enunciated in the new rule. We will answer some of the most important questions about the significance of the final rule for hospitals in this article.

To What Providers and Overpayments Does the Final Rule Apply?

The final rule applies only to Medicare Part A and Part B providers and suppliers, including hospitals. CMS has previously published separate rules covering the reporting and returning of overpayments for Medicare Part C and Part D, and a final rule concerning Medicaid overpayments has not yet been published. For hospitals that file cost reports with the Medicare program for Medicare Part A inpatient and outpatient services, the overpayments must be reported and returned by the date any corresponding cost report is due. For other services such as physician, lab, CORF and home health services reimbursed under Medicare Part B, the overpayments must be reported and returned by 60 days after the date on which the overpayment was identified.

The rule defines "overpayment" as any funds that a person has received or retained under the Medicare program to which the person is not entitled to retain. It includes payments for claims that lack sufficient documentation or medical necessity, primary payments by Medicare when a primary payment from a non-Medicare payer has been received, and even overpayments caused by a Medicare contractor or that were otherwise outside of the provider's control.

When is an overpayment identified?

For Medicare Part B services, CMS in its commentary indicates that the 60-day time period begins either (a) when the provider has completed reasonable diligence in investigating a potential overpayment and "identified" an overpayment, or, (b) if the provider failed to conduct reasonable diligence but had in fact received an overpayment, the day the provider first received credible information of a potential overpayment. The final rule provides that a provider has "identified" an overpayment "when the person has, or should have through the exercise of reasonable diligence, determined that the person has received an overpayment and quantified the amount of the overpayment." It thus clarifies that the process of determining and quantifying an overpayment must be completed before the 60-day period begins. CMS also indicates that reasonable diligence and a timely, good faith investigation of credible information may require up to six months from receipt of the credible information before the overpayment is "identified." Added to the 60-day period, this permits a total of up to eight months for due diligence, and CMS has acknowledged that extraordinary circumstances may require additional time. Written documentation of this process should be retained to demonstrate compliance with the rule.

What does the "reasonable diligence" standard mean in identifying overpayments?

"Reasonable diligence" according to CMS requires both (1) proactive compliance activities conducted in good faith by qualified individuals to monitor for the receipt of overpayments, and (2) investigations conducted in good faith and in a timely manner by qualified individuals in response to obtaining credible information of a potential overpayment. To exercise reasonable diligence under this standard, CMS considers it necessary for a hospital to have an effective compliance program that monitors the accuracy and appropriateness of the hospital's Medicare claims.

What does this standard mean from a practical standpoint?

CMS indicates that when a hospital or other provider receives information about a potential overpayment, the provider has a duty to make a reasonable inquiry. Such information may include, among others things, notice from a government agency, the hospital's discovery of a billing error that results in increased reimbursement, the discovery of services provided by an unlicensed or excluded individual, or an increase in the provider's Medicare revenue for no apparent reason. If the reasonable inquiry reveals an overpayment, then the provider has 60 days to report and return the overpayment. If the provider fails to make a reasonable inquiry conducted with all deliberate speed, then the provider could be found to have acted in reckless disregard or deliberate ignorance of whether he or she had received an overpayment. Failure to conduct reasonable diligence per se is not a violation of the statute, but failure to report and return an overpayment in fact received, and that the provider should have identified, renders the provider liable. Providers need to calculate an overpayment amount that is reliable and accurate, and may use statistically valid sampling methodologies and extrapolation to calculate the overpayment amount.

For Medicare Part A services, a hospital normally must return the overpayment at the time the cost report is filed. Sometimes CMS makes interim payments to a hospital through the cost year and the hospital reconciles these payments with covered and reimbursable costs at the time the cost report is due. The final rule creates the following two exceptions to the rule that the applicable reconciliation occurs with the hospital's submission of a cost report:

  • When a hospital receives more recent CMS information that affects the Supplemental Security Income (SSI) ratio used in calculating the disproportionate share hospital (DSH) payment adjustment, the provider is not required to return any overpayment resulting from the updated information until the final reconciliation of the hospital's cost report occurs; and
  • When the hospital knows that an outlier reconciliation will be performed, the hospital is not required to estimate the change in reimbursement and return the estimated overpayment until the final reconciliation of that cost report has been settled.

However, if a hospital self-identifies an overpayment after applicable reconciliation and the filing of a cost report, the hospital must follow this rule and return the overpayment within 60 days by the filing of an amended cost report.

What is the significance of the six-year lookback period?

The final rule establishes a lookback period of six years after the date the overpayment was received, a change from the 10-year lookback period in the proposed rule. A hospital must report and return the overpayment only if the hospital, using reasonable diligence, identifies the overpayment within six years of the date the overpayment was received. It is important for hospitals to review and revise their policies as needed to address this lookback period because the current Condition of Participation for hospitals regarding medical records retention only requires a retention period of five years. CMS has indicated that it will also amend its reopening rules so that a contractor will be able to reopen and revise its initial determination related to any overpayment reported and returned during the six-year lookback period in this final rule. This means that upon receiving findings of a Recovery Audit Contractor (RAC) audit (or other Medicare audit) that identifies overpayments, a hospital may have a duty to determine and quantify overpayments going back six years, prior to the three-year period covered by the RAC audit. Similarly, if a Medicare Administrative Contractor identifies an overpayment during a cost report audit, the hospital has a responsibility to conduct reasonable diligence on other cost reports in the lookback period to determine if it has received an overpayment for years not covered by the audit.

How are physicians to report and return overpayments?

The final rule states that hospitals should use the existing, most applicable process, including claims adjustment, credit balance (for hospitals), self-reported refund, or other appropriate process, to satisfy the obligation to report and return overpayments. The most applicable process could also include amending or reopening a previously filed cost report. Hospitals may request a voluntary offset from the contractor instead of submitting a check with the overpayment reporting form.

Although several of the changes made to the proposed rule are favorable to providers, the final rule creates a duty of reasonable diligence requiring providers to proactively monitor receipts and practices, as well as a duty to respond to credible information of a possible overpayment in a timely manner. Hospitals must incorporate these duties into a strong compliance program or risk substantial penalties if overpayments from any source are ultimately found.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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