Provider Alert: CMS’ Proposal to Amend Medicare Overpayment Rule’s Knowledge Component Could Increase False Claims Act Liability for Healthcare Providers

A staple of Medicare and False Claims Act (“FCA”) law – the so-called “Overpayment Rule”[1] – may soon be undergoing a dramatic shift, and doing so in a way that could increase liability for healthcare providers while potentially reducing liability for Medicare Advantage Organizations (“MAOs”). More precisely, on December 27, 2022, the Centers for Medicare & Medicaid Services (“CMS”) issued a Proposed Rule, which, if adopted, among other things, would “amend the existing regulations for Medicare Parts A, B, C and D regarding the standard for an ‘identified overpayment’ and will align the regulations with the statutory language in . . . the False Claims Act at 3729(b)(a)(A). Specifically, [the Proposed Rule] propose[s] to remove the existing ‘reasonable diligence’ standard and adopt by reference the False Claims Act definition of ‘knowing’ and ‘knowingly[.]’”[2] Whereas providers such as physicians and pharmacists engage in patient encounters and are therefore naturally in a better position to “know” whether a particular claim or diagnosis code submitted to Medicare or Medicare Advantage (“MA”) is accurate and “clean,” because MAOs are further “upstream” from patient encounters, CMS’ proposed change could push federal regulatory fraud waste and abuse scrutiny – particularly in the MA risk adjustment space – towards providers and away from MAOs.

Currently, the Overpayment Rule provides, among other things, that MAOs, physicians, and other providers receiving reimbursement through Medicare or MA must “report and return any overpayment it received [from Medicare or MA] no more than 60 days after the date on which it identified it received [the] overpayment[.]” It further provides that “overpayment” is defined to mean funds received by an MAO or provider to which they were not entitled.[3] Failure to comply with the Overpayment Rule may subject the violator to liability under the False Claims Act, the penalties for which can be crippling and draconian from both a financial and licensure standpoint.[4] Of critical importance, therefore, is the knowledge threshold to which the MAO or provider is held in determining whether an overpayment “identif[ication]” has occurred under the Overpayment Rule – the higher the standard, the more difficult it is for the government to demonstrate that an overpayment identification and, by extension, an FCA violation has occurred.

The Overpayment Rule’s knowledge threshold as presently articulated is arguably a low one. The government need only demonstrate that an overpayment is identifiable as such if, through the “exercise of reasonable diligence” an MAO or provider could have done so.[5] By contrast, the FCA’s knowledge threshold is comparatively and significantly higher, providing that no violation occurs unless the defendant otherwise violated the statute “knowingly[,]” which is defined, in turn, as having “actual knowledge of the information” or “act[ing] in deliberate ignorance of the truth or falsity of the information” and/or “act[ing] in reckless disregard of the truth or falsity of the information[.]”[6]

Because the physician or pharmacist, as opposed to the MAO, is the party actually conducting and charting the provider-patient encounter, it stands to reason that, should the Proposed Rule be finalized, they may bear the brunt of regulatory oversight and civil and even criminal prosecutions for Overpayment Rule violations. This is because, in light of the proposed heightened knowledge requirement, provider prosecutions will be, in effect, the “path of least resistance” for regulators.

How Frier Levitt Can Help

Frier Levitt, a national boutique healthcare law firm, has experience counseling and defending providers in both the False Claims Act and MA risk adjustment space. If your practice is under audit or investigation by an MAO or the government in connection with alleged risk adjustment fraud or is otherwise seeking to increase and tighten internal protocols and procedures to mitigate such risks, Frier Levitt can help. We also offer robust white collar and civil False Claims Act defense services for those providers who are being prosecuted or sued for alleged MA risk adjustment misconduct. Contact Frier Levitt for a consultation.

[1] The Overpayment Rule is codified, among other places, at 42 C.F.R. 401.305, 42 C.F.R. 422.326, and 42 C.F.R. 423.360.

[2] 87 FR 79452-01 (emphasis supplied).

[3]  42 C.F.R. 422.326(a), (d).

[4] See 31 U.S.C. § 3729(b)(3).

[5] 42 C.F.R. 401.305(a)(2) (emphasis supplied); see also 42 C.F.R. 422.326(c), and 42 C.F.R. 423.360(c).

[6] 31 U.S.C. § 3729(b)(1) (emphasis supplied).