A federal court recently issued a decision in the first case addressing a pivotal area of interest for healthcare providers following enactment of the “60-day rule” under the Affordable Care Act (ACA). In United States ex rel. Kane v. Healthfirst,1 the Southern District of New York denied the defendants’ motion to dismiss government allegations that the defendants had knowingly and improperly failed to report and return “identified” overpayments from a federal health care program, in violation of an amended “reverse false claims” provision of the civil False Claims Act (FCA). The court held that the federal government (and the relator) sufficiently alleged that, after the health system had been put on notice that some of the payments were likely erroneous, the health system was liable under the FCA for the “intentional or reckless” failure to take steps to report and return Medicaid overpayments in a timely manner. The court’s decision provides additional guidance for healthcare providers2 struggling to understand their obligations under the ACA’s 60-day overpayment provision and the related provisions of the FCA.  

Background

The decision addresses a question of first impression under the 60-day rule—when is an overpayment “identified” for purposes of the statute.  Under Section 6402 of the ACA,3 a person who has received an “overpayment” must report and return the funds to the government (or appropriate contractor) and state the reason for the overpayment, by the later of 60 days after the date on which the overpayment was “identified,” or 60 days after the date when any corresponding cost report was due. The potential consequences for the failure to return an overpayment are severe. If an identified overpayment is retained beyond the 60-day deadline, the ACA makes clear that the duty to return the funds becomes an “obligation” for purposes of the FCA’s reverse false claims provision. As amended by the Fraud Enforcement Recovery Act of 2009 (FERA), the FCA subjects a person to liability (including treble damages and penalties) if he or she knowingly conceals or knowingly and improperly avoids or decreases an “obligation” to pay money to the federal government.4

In this case, the alleged overpayments were not received as the result of any intentional misconduct, but instead as the result of a software glitch that effectively caused claims for Medicaid managed care beneficiaries to be submitted twice (which the state then paid without catching the error). In September 2010, the New York State Comptroller’s office posed questions to the health system regarding the potential billing issue. The health system then asked an employee—Robert Kane (who subsequently filed the case as a qui tam relator)—to identify all claims potentially affected by the glitch.  Kane compiled hundreds of such claims in an email and spreadsheet transmitted on February 4, 2011.5 But, the health system did not issue a comprehensive refund until June 2012, after it had received a Civil Investigative Demand from the U.S. Department of Justice inquiring about the incorrect billing. Because Kane’s spreadsheet did not conclusively identify the universe of affected claims (some of the included claims were ultimately determined to be proper) or quantify the overpayment received, the defendants argued that no overpayment had been “identified,” and thus there was no “obligation” to report the matter and make a refund under the ACA and FCA.

Notice of a Potential Overpayment and What It Means to “Identify” an Overpayment

The government alleged that Kane’s email and spreadsheet properly “identified” overpayments within the meaning of the ACA, and that these overpayments became “obligations” when they were not reported and returned by the health system within 60 days. The health system countered by insisting that Kane’s email only provided notice of potential overpayments and did not identify actual overpayments that would trigger the 60-day clock under the ACA. The court characterized the defendant’s definition of “identified” as “classified with certainty.” The government’s proposal, on the other hand, treated “identified” as synonymous with the term “known” as it is defined in the FCA.6

The key allegation the court considered was that the defendant health system “did nothing” in response to a potential overpayment, and instead waited nearly two years to act on Kane’s spreadsheet of claims. With those circumstances in mind, the court evaluated whether the allegation of defendants’ deliberate ignorance or reckless disregard with respect to a potential overpayment means that an overpayment may have been “identified,” which would trigger an “obligation” to report and return under the ACA and FCA. Considering in particular the parties’ arguments regarding legislative history and intent,7 the court found that because “Defendants [were put] on notice of a set of claims likely to contain numerous overpayments, Defendants had an established duty to report and return wrongly collected money” (emphasis added). In rejecting the defendants’ arguments, the court stated that starting the 60-day clock upon notice of a potential overpayment, rather than upon reaching a definitive conclusion, was “compatible with” with the legislative history of the ACA and FERA amendments. The court ultimately found:

Congress intended for FCDA 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 . . . To allow Defendants to evade liability because Kane’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.

Notably, although the court did not grant any weight to the 60-day overpayment rule proposed by the Centers for Medicare & Medicaid Services (CMS) in February 2012, the court did state that its holding in Healthfirst is “at least consistent with” the CMS proposed rule. The CMS proposed rule therefore may be helpful in interpreting the court’s decision—including the CMS statement in rulemaking commentary that, given notice of a “potential overpayment,” providers would have “an obligation to make a reasonable inquiry to determine whether an overpayment exists.” 

Fundamentally, what the decision makes clear is that the court believed the defendant health system’s alleged failure to act was not a reasonable response to its employee’s determination of potential overpayments, and that the health system’s explanation of that failure was, at best, a question of fact not to be resolved on motion to dismiss.

Potential Protection (and Risk) for Providers Taking Reasonable Steps

As healthcare providers are aware, in some circumstances it can be difficult to fully investigate the facts, conduct a legal analysis, and quantify affected claims within 60 days of receiving the first suggestion that an overpayment may exist. While finding that the failure to take reasonable steps to investigate a potentially erroneous payment could lead to liability for reckless disregard of an overpayment, the court also seems to have constructed barriers to protect diligent providers. Recognizing the realistic constraints for providers, the court acknowledged that requiring providers to report and return all potential overpayments within 60 days could impose a significant and “potentially unworkable” burden.

To address this issue, the court accepted the government’s assertion that “providers working with reasonable haste to address erroneous overpayments” would not be sued under the FCA for the failure to report and return overpayments, based on the exercise of the government’s prosecutorial discretion. But, the court’s findings arguably went even further—using a hypothetical example posed by the government, in a situation where a provider is “diligently working on the claims … on the sixty first day and … scrambling to go through [the] spreadsheets,” the court concluded that “the provider would not have acted with the reckless disregard, deliberate ignorance, or actual knowledge of an overpayment required to support an FCA claim.” In other words, under the guidance of the Healthfirst ruling, it is reasonable to assert that diligent providers would not be subject to liability for violating the FCA based on the improper retention of overpayments. 

While this description of a hypothetical situation in which a provider would not have acted with reckless disregard or deliberate ignorance offers some comfort to providers, it also highlights the remaining risk of relators attempting to enforce the overpayment provision through FCA qui tam litigation. The opinion offers no guarantee that relators’ attorneys would exercise the same discretion as DOJ stated it would exercise or be dissuaded by the Court’s hypothetical, even if such qui tam suits would be imposing a “potentially unworkable” burden on providers.

Key Takeaways for Health Care Providers

Even when overpayments are received through no intentional misconduct by the provider or plan, the Healthfirst court’s ruling indicates that after receiving credible notice of potential overpayments from federal healthcare programs, providers should take reasonable steps to investigate them with deliberate speed. Long delays in investigating credible allegations of potential overpayments increase the risk of liability under the ACA 60-day provision and the FCA. Exactly when prudent investigation crosses over into significant delay or avoidance, however, remains unclear.

In February 2015, CMS delayed finalizing a final rule to implement the ACA provision regarding the 60-day deadline for reporting and returning overpayments, citing extraordinary “internal stakeholder feedback” and “significant policy and operational issues that need to be resolved” (in addition to a potential desire to wait for the Healthfirst decision). After Healthfirst, and pending further case law, a final rule from CMS takes on increased importance in filling out further details for providers seeking to avoid FCA liability based on the retention of overpayments.