CMS’s New Overpayment Rule: Important Implications for Medicare Secondary Payer Compliance

Secondary Payer Refunds, Overpayments and Obligations

CMS’s new rule regarding the reporting and returning of Medicare overpayments (effective March 14, 2016) makes clear that secondary payer refunds owed by health care providers to Medicare may become overpayments for purposes of the new rule. Without sufficient oversight, such overpayments may expose a health care provider to liability under the Civil Monetary Penalties Law (“CMPL”) and the False Claims Act (“FCA”). Specifically:

1. If a health care provider does not pay a secondary payer refund owed to Medicare within the period required by the secondary payer regulations,^1,2 the unpaid refund becomes an “overpayment” under the overpayment rule (for purposes of this article, this type of overpayment is hereinafter referred to as an “unpaid refund/overpayment”).
2. The overpayment rule requires that a health care provider report and return an unpaid refund/overpayment to Medicare within the earlier of 60 days after the health care provider:

(i) Determined that the unpaid refund/overpayment (and the amount of the unpaid refund/overpayment) was not paid to Medicare within the period required by the secondary payer regulations; or

(ii) Should have determined, through the exercise of “reasonable diligence,” that the unpaid refund/overpayment (and the amount of the unpaid refund/overpayment) was not paid to Medicare within the period required by the secondary payer regulations.

3. If a health care provider “knows”³ that it is in possession of an unpaid refund/overpayment and does not report and return it to Medicare within the above-described applicable 60-day period, the provider may incur penalties under the CMPL.⁴
4. If a health care provider does not report and return an unpaid refund/overpayment within the above-described applicable 60-day period, the overpayment rule provides that the unpaid refund/overpayment becomes an “obligation” under the FCA (for purposes of this article, this type of obligation is hereinafter referred to as an “unpaid refund/obligation”). The provider may incur penalties under the FCA for failing to pay the unpaid refund/obligation to Medicare.^5,6 

The Importance of Proactive Compliance Activities

As noted, the period for reporting and returning an unpaid refund/overpayment is 60 days from the date the health care provider determines, or should have determined through the exercise of “reasonable diligence,” whichever is earlier, that the unpaid refund/overpayment (and the amount of the unpaid refund/overpayment) was not paid to Medicare within the period required by Medicare’s secondary payer regulations.

By operation of the overpayment rule, if a health care provider does not exercise reasonable diligence in determining when it fails to pay secondary payer refunds within the period required by the secondary payer regulations and, in fact, an instance occurs where the provider fails to pay a refund within the required period, the provider, according to CMS, “should have” determined that the refund was not timely paid to Medicare under the secondary payer regulations.⁷ Stated differently, for a health care provider that is unaware that it is in possession of a secondary payer refund that was not paid to Medicare within the period required by the secondary payer regulations, the provider may be excused from the overpayment rule’s requirement to report and return the unpaid refund/overpayment (and thereby avoid potential liability under the CMPL and the FCA in the event the provider does not report and return the unpaid refund/overpayment within the overpayment rule’s applicable 60-day period) so long as the provider is exercising reasonable diligence in determining when such refunds are not timely paid to Medicare under the secondary payer regulations.

According to CMS, reasonable diligence includes proactive compliance activities by qualified individuals to monitor for the receipt of overpayments, as well as investigations conducted in good faith and in a timely manner in response to obtaining credible information of a potential overpayment.⁸ CMS maintains that health care providers “have a clear duty to undertake proactive activities to determine if they have received an overpayment or risk potential liability for retaining such overpayment.”⁹ After a health care provider finds a single overpaid claim, CMS expects the provider “to inquire further to determine whether there are more overpayments on the same issue before reporting and returning the single overpaid claim.”¹⁰ Examples of proactive compliance activities recognized by CMS include self-audits, internal statistical analysis, compliance checks and “other additional research.”¹¹

Practical Takeaways

To avoid potential exposure under the CMPL and the FCA resulting from a failure to report and return to an unpaid refund/overpayment within the above-described applicable 60-day period, health care providers should incorporate within their current compliance programs proactive compliance activities that focus on ensuring: (i) the identification of secondary payer refunds owed to Medicare; (ii) the payment of secondary payer refunds to Medicare within the period required under the secondary payer regulations; and (iii) that, in the event a refund is not paid to Medicare within the period required under the secondary payer regulations, the resulting unpaid refund/overpayment is paid to Medicare within 60 days from the date the health care provider determines, or should have determined through the exercise of reasonable diligence, whichever is earlier, that the unpaid refund/overpayment (and the amount of the unpaid refund/overpayment) was not paid to Medicare within the period required by the secondary payer regulations.

If you have any questions on this topic, please contact Tim Kennedy at (317) 977-1436 or tkennedy@wp.hallrender.com or your regular Hall Render attorney.

¹ Pursuant to 42 C.F.R. § 411.24(h) of the secondary payer regulations, health care providers must refund “conditional payments” (conditional payments are sometimes referred to as “duplicate primary payments,” see 73 Fed. Reg. 9679, 9681-82 (February 22, 2008)) received from Medicare within 60 days of receiving the primary payment from the primary payer (see CMS’s discussion of the refund of “duplicate primary payments” in the preamble to the new overpayment rule at 81 Fed. Reg. 7654, 7658 (February 12, 2016)). Given that the overpayment rule defines “overpayment” as Medicare funds received or retained by a health care provider to which the provider is “not entitled” (see 42 C.F.R. § 401.303), a conditional payment required to be refunded to Medicare under 42 C.F.R. § 411.24(h) would not become an overpayment until 61 days after the primary payment from the primary payer is received by the health care provider (because, as indicated by 42 C.F.R. § 411.24(h), the provider would be entitled to retain the conditional payment for 60 days after the primary payment is received).

² Significantly, CMS states in the preamble to the overpayment rule that an overpayment also occurs under the scenario addressed in 42 C.F.R. § 411.24(l), where Medicare makes a conditional payment to a health care provider and no primary payment is made by the primary payer because the provider failed to file a proper claim with the primary payer (and Medicare is unable to recover its conditional payment from the primary payer) (see CMS’s reference to 42 C.F.R. § 411.24(l) at 81 Fed. Reg. at 7658). Unfortunately, it is not clear when a conditional payment received under this scenario would become an overpayment for purposes of the overpayment rule (this is critical because a conditional payment of the type addressed in 42 C.F.R. § 411.24(l), upon becoming an overpayment, triggers the health care provider’s responsibility under the overpayment rule to report and return the overpayment within the applicable 60-day period in order to avoid potential liability under the CMPL and FCA). As noted previously, the overpayment rule defines “overpayment” as Medicare funds received or retained by a health care provider to which the provider is not entitled (see 42 C.F.R. § 401.303).  It is possible, therefore, that a conditional payment of the type addressed in 42 C.F.R. 411.24(l) would become an overpayment immediately upon receipt by a health care provider (because the provider did not file a proper claim with the primary payer) – or, at the latest, when Medicare is unable to recover its conditional payment from the primary payer (but how would a health care provider determine when Medicare is unable to recover from the primary payer?). The lack of clarity about when such a conditional payment becomes an overpayment under the new rule is problematic and, ultimately, could pose a risk under the CMPL and the FCA. Consequently, health care providers need to be especially alert for this type of secondary payer scenario and act quickly to refund the conditional payment to Medicare.

³ In this context, “knows” means to have actual knowledge of the unpaid refund/overpayment, to be deliberately ignorant of whether the unpaid refund/overpayment exists, or to recklessly disregard whether the unpaid refund/overpayment exists (see 42 U.S.C.A. § 1320a-7a(a)(10)).

⁴ Penalties under the CMPL consist of, in addition to any other penalties that may imposed under any other law, a civil money penalty of not more than $10,000 for each unpaid refund/overpayment and an assessment of not more than three times the amount of each unpaid refund/overpayment (moreover, the Secretary of HHS may exclude the health care provider from the Medicare and Medicaid programs).

⁵ In order to be subject to FCA penalties, the health care must fail to pay an unpaid refund/obligation to Medicare with actual knowledge that the unpaid refund/obligation is owed to Medicare, in deliberate ignorance of whether the unpaid refund/obligation has been paid to Medicare, or in reckless disregard of whether the unpaid refund/obligation has been paid to Medicare.

⁶ Penalties under the FCA consist of a civil fine of not less than $5,000 and not more than $10,000 (adjusted for inflation), double or treble damages (depending on certain circumstances), and the costs incurred by the federal government in pursuing the “obligation.”

⁷ See 42 C.F.R. § 401.305(a)(2).

⁸ 81 Fed. Reg. at 7661.

⁹ Id. at 7664.

¹⁰ Id. at 7663.

¹¹ Id. 7659, 7664.

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