In a decision that may eventually have a rippling effect on how providers and suppliers report and return overpayments under Medicare Parts A and B, on September 7, 2018, a federal district court vacated in its entirety the Centers for Medicare and Medicaid Services’ (CMS) regulations regarding the reporting and returning of overpayments by Medicare Advantage plan insurers.

Although the court’s decision is limited to Medicare Advantage and Part D insurers, its reasoning in UnitedHealthcare Insurance Co. v. Azar calls into question CMS regulations that impose liability on Medicare providers failing to proactively identify Medicare overpayments.

Statutory Background of the 60-Day Rule

The Affordable Care Act includes provisions to combat fraud and abuse in the Medicare and Medicaid programs. Section 6402 of the ACA requires any “person” that received an overpayment from the Medicare or Medicaid programs to report and return the overpayment and provide written notification of the reason for the overpayment. The deadline to report and return overpayments is the later of sixty days after the date on which the overpayment was “identified” or the date any corresponding cost report is due (the “60-Day Rule”).

The ACA links the 60-Day Rule with violations of the False Claims Act (FCA), which can expose providers and suppliers to civil penalties, treble damages, and potential exclusion from the Medicare program. Overpayments retained beyond sixty days become an “obligation” under the FCA. A provider or health plan violates the FCA if it “knowingly conceals” or “knowingly and improperly avoids” returning of an overpayment that has ripened into an obligation.

The ACA, however, did not define the term “overpayment” or how an overpayment is deemed to be “identified,” which triggers the 60-day repayment clock. The ACA also did not delineate the process for reporting and returning identified overpayments.

CMS Regulations on Reporting and Returning Overpayments

While CMS engaged in separate rulemaking processes for regulations governing Medicare overpayments for providers and suppliers (Medicare Parts A and B), and Medicare Advantage plans and prescription drug plan sponsors (Medicare Parts C and D), the agency proposed and finalized similar language for all overpayment obligations.

In its initial proposal, CMS moved to align the definition of “identified” with the definition of “knowing” and “knowingly” in the FCA. CMS originally proposed that the provider or health plan has “identified” an overpayment when “it has actual knowledge of the existence of the overpayment or acts in reckless disregard or deliberate ignorance of the existence of the overpayment.” These proposals were consistent with the FCA statutory standard.

However, CMS ultimately finalized a significantly broader interpretation of the term “identify” than that contained in the FCA. In both final rules, CMS interpreted the statutory requirement that an overpayment be reported and returned within 60 days of identification to actually require reporting and return when the overpayment “should have” been identified, even if the overpayment had not actually been identified.

Accordingly, under CMS regulations, providers and health plans are subject to liability based on merely negligent inaction (i.e., failing to proactively search for and find overpayments).

The proposed and final language in the two rules is provided below:

Proposed Rule for Parts A/B

A person has identified an overpayment if the person has actual knowledge of the existence of the overpayment or acts in reckless disregard or deliberate ignorance of the existence of the overpayment.

77 Fed Reg. 9179 (Feb. 16, 2012).

Proposed Rule for Parts C/D

The MA organization has identified an overpayment if it has actual knowledge of the existence of the overpayment or acts in reckless disregard or deliberate ignorance of the existence of the overpayment. An MA organization must exercise reasonable diligence to determine the accuracy of information it receives that an overpayment may exist.

79 Fed. Reg. 1918, 1918-2073 (Jan. 10, 2014).

Final Rule for Parts A/B

A person 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. A person should have determined that the person received an overpayment and quantified the amount of the overpayment if the person fails to exercise reasonable diligence and the person in fact received an overpayment.

42 C.F.R. § 401.305.

Final Rule for Parts C/D

The MA organization has identified an overpayment when the MA organization has determined, or should have determined through the exercise of reasonable diligence, that the MA organization has received an overpayment. 42 C.F.R. § 422.326.

STATUS: In Effect STATUS: Vacated

Judge Collyer’s Decision to Vacate the 60-Day Overpayment Rule for Medicare Advantage Plan Insurers

On January 29, 2016, UnitedHealthcare challenged the Part C/D Overpayment Rule under the Administrative Procedure Act on two separate grounds. First, UnitedHealthcare contended that the 60-Day Overpayment Rule was arbitrary and capricious because it violated the statutory principle of “actuarial equivalence” between CMS payments for coverage under Medicare Advantage plan insurers and CMS payments under traditional Medicare. The court agreed and concluded that since traditional Medicare payments are based on unaudited diagnosis codes, the Part C/D Overpayment Rule imposes a tougher standard that established a system where actuarial equivalence cannot be achieved.

UnitedHealthcare also took the position that CMS’s interpretation of “identified” was unlawful and, on that basis, sought to have the overpayment regulation set aside. Senior Judge Rosemary Collyer agreed that the ambit of CMS’s Part C/D Overpayment Rule extended far beyond the False Claims Act and, by extension, the Affordable Care Act. The court held that CMS lacked the authority to impose stricter regulatory standards than those within the statute. Specifically, the court determined that CMS was barred from implementing a regulation that defined “identified” in a “distinctly different and more burdensome” manner than the statute absent adequate notice. These two individual holdings in the case led the court to vacate the Part C/D Overpayment Rule.

Potential Impact on Providers

The court’s holding, while limited to Medicare Advantage Plan insurers and prescription drug plan sponsors, is potentially equally applicable to the provider overpayment rule (Parts A/B). Similar to the Part C/D Overpayment Rule, the Part A/B Overpayment Rule imposes liability on providers if an overpayment “should have” been identified, which is a stricter standard than provided by the FCA and ACA.

Although the Court’s order has no direct impact on the validity of the existing overpayment regulations for providers and suppliers, it lays the groundwork for future legal challenges. It is even possible that, given the court’s ruling in the UnitedHealthcare case, CMS may elect to revisit its regulations governing the overpayment rule for Medicare Parts A and B, and adopt the narrower statutory standard for “identifying” an overpayment.

A provider’s statutory duty to report and return overpayments is independent of CMS’s regulatory requirements. Accordingly, even if the provider overpayment regulations are set aside under the same rationale as the UnitedHealthcare case, providers failing to report and return overpayments may still face the FCA’s statutory penalties. Moreover, the decision does not affect CMS’s conditions of participation and state law licensing and accreditation standards that generally require providers to implement robust compliance programs that address, among other things, ensuring the accuracy of billing policies and procedures.