Centers for Medicare & Medicaid Services (CMS) has issued a proposed rule to implement Section 6402(a) of the Affordable Care Act (ACA) regarding reporting and returning of overpayments from Medicare and Medicaid. The proposed rule was published in the Federal Register on Feb. 16, 2012. If finalized, this rule will have a profound impact on the obligations of healthcare providers to identify and timely report overpayments and may expose them to potential False Claims Act liability and other penalties if they fail to comply.

ACA Section 6402(a) (Social Security Act 1128J(d)) requires a person who has received an overpayment from Medicare or Medicaid to report and return the overpayment, including a written notice explaining the reason for the overpayment, within 60 days of the date the overpayment is “identified” (or for cost-reporting overpayments, the later of 60 days or the date the cost report is due). One of the common criticisms of the law is that it does not set forth in sufficient detail when the obligation to report an overpayment has been triggered for purposes of meeting the 60-day deadline (i.e., when an overpayment has been “identified”).

The proposed rule includes regulations for implementation of Section 6402(a) and sets forth in further detail the requirements for reporting, including definitions for key terms used in determining when a reporting obligation is triggered. At this time, the scope of the proposed regulations is limited to implementation of Section 6402(a) with respect to Medicare Part A and Part B providers and suppliers. CMS has stated that other persons or entities that receive payment from Medicare or Medicaid, such as Medicare Advantage Plans, Medicaid managed care plans, and Prescription Drug Plans, are to be addressed at a later date. Highlights from the proposed rule are:

Definition of “Overpayment” – The proposed rule adopts the definition of “overpayment” contained in ACA Section 6402(a): “any funds that a person receives or retains under [Medicare or Medicaid] … to which the person, after applicable reconciliation, is not entitled.” CMS provided several examples of what constitutes an overpayment, including payment for noncovered services, payments in excess of the allowable amount, and amounts paid by Medicare as primary where Medicare should have paid secondary to some other payment source.

When an Overpayment is “Identified” – The interpretation of when an overpayment is “identified” is significant because it triggers the 60-day deadline for reporting. There has been great uncertainty among providers regarding when an overpayment has been, in fact, identified and how this determination should be applied as a practical matter. CMS proposes that a person has “identified” an overpayment where there is “actual knowledge of the existence of the overpayment or acts in reckless disregard or deliberate ignorance of the existence of the overpayment.” CMS states that the “reckless disregard” standard is intended to give providers an incentive to exercise reasonable diligence in determining whether an overpayment exists. In attempting to further explain how this is to be applied, CMS provides the following example: a provider receives an anonymous compliance hotline tip about a potential overpayment. According to CMS, this causes the provider to incur an obligation to diligently conduct an investigation into the matter and report and return any resulting overpayments within 60 days in order to satisfy the requirements of the regulation. Failure to make a reasonable inquiry within this timeframe would be regarded as acting in reckless disregard or deliberate ignorance of any overpayment. CMS also provides a number of more clear-cut examples of when an overpayment has been identified, such as: a review of billing reveals incorrect coding; a provider learns that the date of patient death is prior to the date of service; or a provider learns that services were provided by an unlicensed or excluded provider. A less clear-cut example provided by CMS is where a provider experiences a significant increase in Medicare revenues for no apparent reason and fails to make a reasonable inquiry. The examples provided by CMS suggest that the obligation to identify overpayments will be broadly interpreted and that a greater impetus is being placed upon providers to more proactively identify overpayments.

10-Year Look-Back Period for Reporting Overpayments– CMS has proposed requiring providers to report and return overpayments under these regulations for any overpayment that is identified within 10 years of the date the overpayment was received. While CMS states that this is consistent with the outer limits of the statute of limitations for the False Claims Act, this would significantly increase the look-back period for providers when compared to the existing rules for the reopening of payments by Medicare. It is likely that CMS will receive a number of comments in opposition of this proposal.

Process for Reporting Overpayments– CMS adopts the procedure for reporting and returning overpayments that is currently set forth in the Medicare Financial Management Manual, Chapter 4 (Pub. 100-06). This process generally entails reporting of overpayments using a form created by the Medicare contractor that requires the provider to identify the affected claims and include, among other information, a summary of how the error was discovered, a description of the corrective action plan for preventing future errors, the reason for the refund, and the timeframe and total amount of the refund.

Penalties for Failure to Comply– CMS reiterates that under existing law, any overpayment retained by a person after the 60-day deadline for reporting the overpayment can result in the person being found liable under the False Claims Act. CMS has further proposed including a regulation that states that knowingly failing to report and return an overpayment can result in liability under the Civil Monetary Penalties Law and exclusion from participation in federal healthcare programs.

The proposed rule provides additional details for providers in assessing how to comply with the existing statutory requirement under ACA Section 6402(a), but leaves open a number of questions. When an overpayment has been “identified” will continue to be an amorphous concept for providers, in particular, under facts and circumstances that do not lend themselves to a clear determination of whether an overpayment has occurred. Furthermore, depending upon the nature of the overpayment, the 60-day time period may be insufficient to complete a thorough investigation. There is also some speculation as to whether there will be any threshold dollar amount for overpayments necessary to trigger the obligation to report, explain, and refund the overpayment or whether this obligation will apply equally to all overpayments, no matter how small the dollar amount. In addition, the prospect of a 10-year look-back period is particularly daunting for providers and will create a more long-term outlook on potential overpayment liabilities.

There is a comment period for the proposed rule that will remain open until April 16, 2012.