The Centers for Medicare and Medicaid Services (CMS) recently issued its final rule for Reporting and Returning of Overpayments (Final Rule). The Final Rule implements section 1128J(d) of the Social Security Act, which requires Medicare providers and suppliers to report and return overpayments within 60 days after the overpayment was identified in most instances. Failure to report and return overpayments in accordance with this provision could expose a provider to False Claims Act liability, civil monetary penalties, or exclusion. The Final Rule establishes a complicated set of standards that together make up a process that providers and suppliers must complete with respect to reviewing potential Medicare overpayments and reporting and returning overpayments that are identified.

The “Identified” Standard

The obligations of the Final Rule begin when an overpayment is identified. The Final Rule provides that a person will be deemed to have “identified an overpayment when the person has, or should have through the exercise of reasonable diligence, determined that the person received an overpayment and quantified the amount of the overpayment.” Of particular note, CMS opined that if a provider undertakes “no or minimal compliance activities to monitor the accuracy and appropriateness” of its claims, it could face liability under this “identified” standard based on the failure to exercise reasonable diligence. CMS believes that the Final Rule provides “bright line” standards; however, we believe there will be many complexities in practice.

Under the Final Rule, the 60-day time period begins either: (1) when the reasonable diligence is completed and the overpayment is identified, or (2) when “credible information” of a potential overpayment is received if the person fails to conduct reasonable diligence and did in fact receive an overpayment. The requirement to exercise reasonable diligence arises when a person receives “credible information” regarding a potential overpayment. CMS’s commentary states that a person may receive credible information as a result of a contractor or government audit. In these instances, the person would have a duty to conduct reasonable diligence to determine whether additional overpayments exist outside of the audit, for example, beyond the time limits that were part of the audit.

CMS’s commentary in the Final Rule states that reasonable diligence includes both proactive compliance activities to monitor for the receipt of overpayments and investigations conducted in a good faith and timely manner in response to obtaining credible information of a potential overpayment. With respect to retrospective investigations, CMS believes that reasonable diligence is demonstrated through the “timely, good faith investigation of credible information, which is at most six months from receipt of the credible information, except in extraordinary circumstances.” While this standard allows providers some time to investigate and quantify the overpayment before the 60-day deadline begins, CMS has taken the position that investigations should normally be wrapped up within six months. Whether extraordinary circumstances exist to extend the investigation timeline is a factual inquiry, and CMS indicated that Stark Law violations that are referred to the Voluntary Self-Referral Disclosure Protocol (SRDP) as well as situations involving natural disasters and states of emergency may be considered extraordinary. With respect to quantification of the overpayment, CMS recognizes that statistical sampling and extrapolation may be appropriate auditing methods.

The Lookback Period

CMS originally proposed a 10-year lookback period to correspond with the outside bounds of the False Claims Act statute of limitations. In light of concerns raised by stakeholders that a 10-year lookback period would be inconsistent with long-standing CMS policies regarding reopening and administrative finality and would exceed record-retention requirements, CMS has adopted a six-year lookback period in the Final Rule. The lookback period is measured from the date the overpayment is identified. CMS believes that providers will not be significantly burdened by the six-year lookback period (compared to the traditional reopening period of four years), because other state and federal laws require them to retain records and claims data for between six and seven years.

The Final Rule amends the reopening rules to permit a Medicare contractor to reopen an initial determination upon a provider’s request for the purpose of reporting and returning an overpayment. In 2002, CMS had proposed extending the reopening period to five years, but did not finalize the proposal after many commenters raised concerns about the burden of locating documentation on older claims. In commentary to the Final Rule, CMS summarily dismissed commenters who raised concerns that the lookback period under the 2012 proposed rule and the Final Rule would extend even longer by asserting that the adoption of the statutory provision justifies changes to the reopening rules. CMS’s discretion to interpret the statute in a way that destroys 40 years of Medicare precedent with respect to the reopening rules may face legal challenge as providers contend with enforcement actions.

CMS confirmed that the Final Rule is not retroactive, and the six-year lookback period would not apply to overpayments that are reported and returned before March 14, 2016. To that end, providers and suppliers that have reported overpayments through the SRDP would be subject to the four-year reopening period. CMS is currently only permitted to require a financial analysis of overpayments for the four-year reopening period in the SRDP, but it is seeking approval to require reporting of the additional two years of financial data. In the interim, providers entering the SRDP should carefully consider whether to voluntarily report data for the fifth and six years to toll the obligation to return overpayments attributable to the Stark Law violations during the entire lookback period.

Finally, given the six-year lookback period, providers should review the findings in contractor and government audits carefully. These findings could be considered “credible information” that require the provider to exercise reasonable diligence to report and return similar overpayments for the entire six-year lookback period.

The Reporting and Refunding Process

The Final Rule permits providers to report and return identified overpayments through claims adjustment, credit balance, self-reported refund processes, or “another appropriate process to report and return overpayments.” CMS declined to finalize its proposal to create a standardized refund form and eliminated the specific list of data elements to be reported in recognition of the burden providers would face in furnishing this breadth of information. CMS also confirmed that if a contractor identifies a payment error and notifies a provider that it will adjust the claims to correct the error, the provider does not have an obligation to report and return the overpayment separately. Finally, CMS stated that only submissions to the SRDP and the OIG Self-Disclosure Protocol would toll the deadline to return the overpayment, while self-disclosure to other government entities such as the U.S. Department of Justice would not toll the deadline.

The Details

In addition to establishing a process for providers to take when reviewing potential overpayments, the Final Rule clarified a number of issues raised by stakeholders. First, CMS clarified that while the statutory provision applies to Medicare and Medicaid generally, the Final Rule is applicable only to Medicare Parts A and B. A separate regulation published in 2014 applies to reporting and returning of overpayments for Medicare Parts C and D. CMS also clarified that only those errors and non-reimbursable expenditures in cost reports that result in increased reimbursement would be considered “overpayments” for purposes of the Final Rule.

Providers and suppliers should review their existing internal auditing practices and strengthen them where necessary in anticipation of the Final Rule’s March 14, 2016 effective date.