On December 27, 2022, the Centers for Medicare & Medicaid Services (“CMS”) published a proposed rule that would significantly revise the Medicare program’s rules for identifying overpayments. The proposed rule would replace the current “reasonable diligence” standard with the False Claim Act’s definitions of “knowing” and “knowingly.” Under this new standard, an overpayment would be identified when a provider “knowingly” receives or retains an overpayment. This includes having “actual knowledge” of the overpayment or acting in “reckless disregard” or “deliberate ignorance” of the overpayment.
Current Overpayment Framework
The Affordable Care Act required providers to report and return an overpayment within 60 days after the overpayment is “identified.” The term “identified,” however, was not defined in the statute.
In 2016, CMS issued a final rule implementing clarifying regulations for providers in the Medicare fee-for-service context. The new 42 C.F.R. section 401.305(a)(2) provided that an overpayment is identified when a provider has, or should have through the exercise of reasonable diligence, both determined an overpayment has been received, and quantified the overpayment amount. In the preamble to the final rule, CMS defined “reasonable diligence” as including 1) proactive compliance activities conducted in good faith to monitor for the receipt of overpayments, and 2) timely, good faith investigations if a provider receives “credible information” of a potential overpayment. Absent extraordinary circumstances, CMS stated that a provider generally has a maximum of 6 months to complete its investigation. According to this rule, the 60-day time-period to return the overpayment begins when the reasonable diligence is completed. This is commonly referred to as the “reasonable diligence” standard, and mirrors the standard imposed by CMS on Medicare Advantage Organizations (MAOs) and Medicare Part D sponsors in 2014.
The 60-day Rule is enforced via the False Claims Act (“FCA”). The FCA assigns liability that may result in treble damages and civil money penalties for a provider who “knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government.” This is known as the “Reverse False Claims” provision. Reverse false claims liability attaches to any provider that fails to report and return a Medicare overpayment within the 60-day deadline. The FCA defines the term “knowingly” to include both “actual knowledge” and situations where a provider “acts in deliberate ignorance” or “reckless disregard” of the truth or falsity of information.
Proposed Changes and Impact
The proposed rule would remove the reasonable diligence standard and adopt by reference the FCA’s “knowledge” standard. In other words, the 60-day clock to report and return overpayments would begin when a provider has actual knowledge of the existence of the overpayment or acts in reckless disregard or deliberate ignorance of the overpayment. This is an important development because our experience has been that even in the exercise of reasonable diligence, it can take over 6 months to quantify a payment, particularly in cases involving any level of complexity or statistical sampling.
CMS acknowledges that this regulatory change is at least in part a response to a 2018 adverse holding by a federal district court in UnitedHealthcare Ins. Co. v. Azar, 330 F. Supp. 3d 173, 191 (D.D.C. 2018). In that decision, the court held that by requiring MAOs to conduct proactive compliance activities as part of its reasonable diligence, CMS created FCA liability for mere negligence. In other words, CMS impermissibly lowered the FCA intent threshold to “knew or should have known.” The proposed rule now harmonizes Medicare’s regulatory language with the FCA’s scienter requirement.
The requirement for a provider to conduct proactive compliance activities to monitor for the receipt of overpayments will no longer be embedded in the regulation. However, we suspect CMS is likely to still expect providers to continue their practice of proactive compliance as a basic component of their effective compliance programs and to minimize the risk of acting with reckless disregard or deliberate ignorance of overpayments.
There remains substantial uncertainty surrounding a provider’s obligation and ability to investigate potential overpayment liabilities. For instance, it is unclear when a provider’s inability to quantify an overpayment may trigger the “identification” standard in the absence of the 6-month timeframe. When a similar regulatory definition was proposed in 2012, CMS provided that a provider had an obligation to conduct a “reasonable inquiry” upon receipt of information concerning a potential overpayment. Though the new proposed rule is silent as to investigations, we encourage providers to continue its practice of conducting good faith, timely investigations when credible information of overpayments is received. Anything less can be construed as reckless disregard or deliberate ignorance of the overpayment. As before, providers will not avoid FCA liability by utilizing the ostrich defense, i.e., hiding one’s head in the sand to avoid FCA liability.
We believe that CMS’ continued application of the 60-day requirement to overpayments from Medicare Advantage and Medicare Part D plans to CMS, rather than provider overpayments to the plans, reinforces the belief that the statutory 60-day rule may not apply directly to such overpayments to plans. This certainly makes sense given that most overpayments from plans to individual providers do not result in overpayments by the Government given that plans typically are paid on a capitated basis. However, this is somewhat in tension with the rule applicable in Medicaid managed care, requiring Medicaid managed care plans to impose contractual obligations on network providers to report and return overpayments to the plans within 60 days.
CMS is currently soliciting public comments on the proposed rule. The period for comment is open until February 13, 2023, and may be submitted online or by mail.
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For more information on Medicare overpayments or effective compliance practices, please contact Felicia Sze or Kyle Brierly.