Providers should be aware of these emerging strategies for defending against audits.

For years, providers have been plagued with defending claims for medically necessary services that have been denied due to insufficient documentation and technical reasons. This leads to the Medicare program and commercial payers unduly benefitting, as the programs’ beneficiaries continue to receive medically necessary treatment that payers can deny payment for, due to these minor mistakes. However, recent case law may help strengthen overpayment appeals by using materiality as a defense and claiming “offsets” to retain claim value. It is important to understand the relationship between a provider and a payer of medical services. United States v. Salus Rehab., LLC provides that the relationship between a payer and a provider assumes a course of dealing between a payer and supplier of services. Salus Rehab further holds that this relationship is based on “proven and successful principles of exchange – fair value given for fair value received.”

In United States ex rel. Escobar v. Universal Health Services, a Medicaid beneficiary received counselling at a Universal Health facility. This beneficiary had an adverse reaction to medication and died. Very few of the facility’s employees were actually licensed, and a qui tam suit was brought, seeking to hold Universal Health liable under an “implied false certification theory of liability.” The plaintiff alleged that Universal Health defrauded Medicaid by submitting claims that made representations about specific services provided by specific professionals, but failed to disclose any violations pertaining to staff qualifications and licensing. The U. S. Supreme Court held that the implied certification theory can be a basis for False Claims Act (FCA) liability. Liability for false and fraudulent claims is not limited to only express conditions of payment, but can attach when a defendant knowingly fails to disclose noncompliance. In other words, defendants will still be held liable for violating requirements that are not expressly designated as conditions of payment. Conversely, even if a requirement is expressly designated as a condition of payment, not every violation gives rise to liability. The key to the analysis is whether or not the requirement is material to the government’s payment decision. In this case, the provision of services by unlicensed and unqualified personnel was deemed material.

The definition of “material” is central to this analysis. A requirement is not material merely because the government designates compliance with a particular requirement as a condition of payment. It is not sufficient that the government would have the option to decline to pay if it knew of the deficiency. In other words, minor noncompliance is not material.

How does this apply to overpayment appeals? Escobar provides a definition of “material” that is applicable to such appeals. Examples of material medical necessity denials would include aspects such as objectively poor-quality services, services not being provided, providers that are unqualified to provide the services involved, and documentation that does not support the services rendered. However, examples of immaterial denials include cases in which the rendering provider’s clinical judgment upheld eligibility or the services provided, cases in which the patient’s condition supports the services rendered, and cases in which the services delivered were cleared, delivered, and medically necessary, but the reviewer determined that an overpayment was appropriate due to a harmless error that has no effect on the course of treatment involved and required. This would also include paperwork errors, such as missing provider names and dates on forms, dates by signature, or information not being on a specific form when the relevant information is located elsewhere in the file. Examples of these overly technical denials are commonplace in home health provider audits, particularly associated with the face-to-face requirement. In these immaterial cases, providers should argue that an overpayment demand is improper.

Another novel argument in defending audits pertains to offsets. In the event an overpayment is upheld, an offset would include a claim for the value of the services. Generally, when a payer denies a claim due to lack of medical necessity or a technical reason, the entire amount of the claim is demanded. The argument is that the entire amount should not be recouped, but payment should be made for the difference between what was billed and the value of the services rendered. In other words, the payer should pay for any service performed that is supported by the record, rather than denying full payment as coded. This is supported by the Medicare Appeals Council decision O’Connor Hospital v. National Government Services. In this case, a beneficiary received inpatient hospitalization services that were initially paid by Medicare. The Recovery Audit Contractor (RAC) reopened this claim and determined that the services provided to the beneficiary were not reasonable and necessary under the Social Security Act, and that appellant O’Connor Hospital received an overpayment. The administrative law judge (ALJ) denied Medicare coverage for the inpatient hospitalization services, because it was not reasonable and necessary for the beneficiary to be treated in an inpatient setting. Despite the determination that the inpatient setting was not medically necessary for the beneficiary, the ALJ still ruled that the observation and underlying care of the beneficiary were warranted in an outpatient setting, and thus, Medicare payment was due for those services. The Centers for Medicare & Medicaid Services (CMS) claims that the Medicare payment for the observation and care provided in an outpatient setting should not be ordered, because those services cannot be billed separately under Part A. However, the Council held that CMS’s view was inconsistent with CMS policy. This Appeals Council decision supports the offset policy of readjusting the payment only for the services that are medically necessary and supported by the medical record, even if this is different than how it was billed. Importantly, this practice is used often in evaluation & management services, which are frequently “downcoded” by reviews that determine that too high of a code was billed.

Finally, there is an argument to be made that in regard to the Medicare and Medicaid programs, many conditions of payment are not binding, as they are merely sub-regulatory guidance not subject to a notice-and-comment period, and thus cannot be used as a basis for denial. In Azar v. Allina Health Services, the U.S. Supreme Court held that the government violated Medicare’s requirement to provide public notice and a 60-day comment period for a rule, requirement, or other statement of policy that established or changed a substantive legal standard governing services payment – because it posted on its website the Medicare fraction for the 2014 fiscal year that retroactively reduced payments to hospitals serving low-income patients. In essence, this case supports the notion that any sub-regulatory guidance not subject to the notice-and-comment process is not binding, and merely acts as a guidance for providers in the provision of services. This means that Local Coverage Determinations (LCDs) and any other sub-regulatory guidance, such as Medicare manuals, that provide conditions for payment are not binding, and should not be used as the sole reason for denial when services are otherwise medically necessary and supported by the medical record.

As both government and commercial audits continue to ramp up after the pause that occurred in 2020 due to the COVID-19 pandemic, providers should be aware of these emerging strategies for defending against audits, in addition to the traditional methods of defense.