In a first-of-its-kind and closely followed case, a U.S. district court denied a New York health system's (Healthfirst’s) motion to dismiss the U.S. government's and State of New York's complaints in intervention under the federal False Claims Act (FCA) and New York state counterpart. This case represents the first time that the government has intervened in an FCA case based upon an allegation that a party violated the "60 day rule." The 60 day rule came into existence with the passage of the Affordable Care Act (ACA) in 2010 and subjects parties to FCA liability for failing to report and refund an overpayment within 60 days of identification, even if the defendant received the payment through no fault of its own.

The case, Kane ex rel. United States et al. v. Healthfirst et al., involves three hospitals that were part of the Healthfirst health system network and provided care to patients that were part of Healthfirst's Medicaid managed care plan. Healthfirst received payments from the New York State Department of Health (DOH) in return for services provided to Medicaid eligible enrollees.

The government's allegations stem from overpayments to Healthfirst as a result of a software glitch. Healthfirst was first questioned about the possible overpayments by the New York State Comptroller's office in 2010. The health system tasked Kane, an employee and the eventual whistleblower in the case, to look into the payments. Five months later Kane emailed Healthfirst management a spreadsheet listing over 900 claims totaling more than $1 million that contained an erroneous billing code that may have led to the overpayments.

The complaint and argument that the defendants had a duty under the 60 day rule to report and refund the overpayments, relied heavily on this email correspondence. Kane's email stated that "further analysis would be needed to confirm his findings" and that the spreadsheet gave "some insight to the magnitude of the issue." Kane's findings were, in fact, partially inaccurate, as approximately half of the claims listed were not overpaid. Kane was fired shortly after sending the email.

Kane filed a qui tam whistleblower suit under the FCA and the United States and State of New York intervened.

The complaint alleges that Healthfirst reimbursed New York’s DOH for five of the improperly submitted claims in February of 2011 (the same month that Kane sent the email), then reimbursed the DOH for the remainder of the improperly billed claims over a nearly two year period from April 2011 through March 2013. The plaintiffs allege that Healthfirst "fraudulently delay[ed] its repayments for up to two years after the Health System knew of the extent of the overpayments" in violation of the 60 day rule. Again, the 60 day rule requires repayment within 60 days of the "date on which the overpayment was identified."

Healthfirst filed motions to dismiss under FRCP 12(b)(6) and FRCP 9(b) (which requires a statement supporting "fraud with particularity"). Healthfirst argued that Kane's email did not specifically or conclusively identify overpayments, but rather identified a preliminary list of claims that may have been affected by the software glitch. The email, in other words, did not give rise to a duty to repay. Healthfirst argued that duty could only arise when they had actual knowledge of the overpayments. Plaintiffs countered that a provider has "identified" an overpayment when it "determined or should have determined through the exercise of reasonable diligence that it has received an overpayment."

The central issue in the case, therefore, is the meaning of "identify" under the ACA's 60 day rule. This court was the first to grapple with it.

In its analysis denying the motions to dismiss, the court held that the government's argument that Kane's email "identified" overpayments in accordance with the ACA, and that the overpayments became "obligations" in violation of the FCA when not identified and repaid within 60 days, was sufficient to survive the defendants' motion to dismiss challenge. The judge wrote:

To define “identified” such that the sixty day clock begins ticking when a provider is put on notice of a potential overpayment, rather than the moment when an overpayment is conclusively ascertained, is compatible with the legislative history of the FCA and the FERA highlighted by the Government. . . Congress intended for FCA liability to attach in circumstances where, as here, there is an established duty to pay money to the government, even if the precise amount due has yet to be determined. [emphasis added]. Here, after the Comptroller alerted Defendants to the software glitch and approached them with specific wrongful claims, and after [the whistleblower] put Defendants on notice of a set of claims likely to contain numerous overpayments, Defendants had an established duty to report and return wrongly collected money. To allow Defendants to evade liability because [the whistleblower’s] email did not conclusively establish each erroneous claim and did not provide the specific amount owed to the Government would contradict Congress’s intentions as expressed during the passage of the FERA.

Acknowledging that the 60 day rule can impose a difficult burden on potential defendants, the judge urged 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," and that "[s]uch actions would be inconsistent with the spirit of the law and would be unlikely to succeed."

While this is the first case to interpret a health provider's duty to "identify" overpayments, and is binding only in cases in the Southern District of New York, it likely will impact judges considering subsequent cases in other jurisdictions. Accordingly, providers should not assume that the 60 day rule will be enforced in anything but a strict manner, and should work expeditiously to identify and repay overpayments - even where evidence of overpayment is uncertain or unestablished. Continued uncertainty and litigation over the issue may also prompt the Centers for Medicare & Medicaid Services (“CMS”) to finally issue a final rule on the subject to provide some additional clarity to providers and the courts.

If a potential overpayment issue is discovered, it's important that providers consult with experienced legal counsel.