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Medicare Chiropractic Audits are Increasing!

Medicare Chiropractic Audits(June 5, 2017):   Despite the fact that only three treatment services are covered by Medicare, the number of Medicare chiropractic audits conducted by the Department of Health Human Services (HHS), Office of Inspector General (OIG), has remained high over the last decade and is anticipated to grow throughout 2017 and 2018.  As you are aware, the Department of Health and Human Services (HHS), Office of Inspector General (OIG), concluded that in Fiscal Year 2016 the Improper Payment Rate for chiropractic services was 46.0%.  Even more alarming is the fact that OIG has found that the Improper Payment Rate of chiropractic Part B Medicare claims was the highest of any Part B service type in both FY 2015 and FY 2016.[1]

I.   Medicare Chiropractic Audits are Anticipated to Intensify in FY 2017 and FY 2018:

The already-active Medicare audit landscape facing chiropractors is likely the proverbial “calm before the storm.”  When you think of “Medicare Access and CHIP Reauthorization Act of 2015” (MACRA),[2] it’s likely you first think of the statute’s Quality Payment Program provisions which are intended to tie Medicare’s payments to the quality of the medical being provided.   Unfortunately, the documentation of chiropractic services have the unique distinction of being the only Part B service that are expressly address in MACRA.  A detailed discussion of the documentation requirements for chiropractic services under Medicare Part A will be addressed in a separate article.  The bottom line is simple – chiropractors participating in the Medicare Part B program are strongly encouraged to have a comprehensive assessment of their services conducted as soon as possible.  An overview of the current audit landscape is discussed below.

II.   Almost All Part B Medicare Chiropractic Audits Find Documentation Problems:

As set out in OIG’s Improper Payment Report for FY 2016, when examining the 46% of chiropractic services that were denied, the Centers for Medicare and Medicaid Services (CMS) found that  98.4% of the chiropractic denied claims were denied because of NO DOCUMENTATION or INSUFFICIENT DOCUMENTATION.  We believe that this is due, in large part, to the fact that the clinical reviewers employed by a Zone Program Integrity Contractor (ZPIC) or a Medicare Administrative Contractor (MAC) to audit your chiropractic claims (primarily Registered Nurses), aren’t really qualified to conduct these reviews. Sure, they can read Medicare’s guidelines governing medical necessity, coverage, documentation, coding and billing – but that doesn’t mean that they truly understand what constitutes a “subluxation” or that they can recognize that the patient’s condition warrants manual manipulation. The vast majority of medical reviewers examining your claims have little or no substantive knowledge and training in the field of chiropractic care.  Therefore, why are you surprised that the ZPIC reviewer is now alleging that 80$ – 100% of the claims you have billed to Medicare do not qualify for coverage or payment?

III.   Medicare’s Position with Respect to “Medical Necessity”:

Under Medicare, the definition of “medical necessity” is generally defined under Title XVIII of the Social Security Act, Section 1862(a)(1)(a):  As the statute provides:

“No payment may be made under Part A or Part B for expenses incurred for items or services which are not reasonable and necessary for the diagnosis or treatment of necessary for the diagnosis or treatment of illness or injury or to improve the functioning of a malformed body member.”

Despite the fact that chiropractors are recognized as physicians by Medicare, CMS has steadfastly refused to cover most of the traditional care and treatment services that are offered by licensed chiropractors around the country.  Medicare Part B only covers treatment by means of manual manipulation of the spine that is used to correct a subluxation (i.e. spinal manipulation). Moreover, the coverage policies developed by CMS and its contractors make it clear that the agency has restricted the definition of what is considered to be “medically necessary” chiropractic care to only include spinal manipulation services that are active or corrective in nature.

IV.   Maintenance Therapy is Not Covered by Medicare:

CMS has essentially taken the position that maintenance therapy does not qualify as medically necessary care and therefore does not qualify for coverage and payment.   As set out in the Medicare Benefit Policy Manual, Section 30.5.B:

Under the Medicare program, Chiropractic maintenance therapy is not considered to be medically reasonable or necessary, and is therefore not payable. Maintenance therapy is defined as a treatment plan that seeks to prevent disease, promote health, and prolong and enhance the quality of life; or therapy that is performed to maintain or prevent deterioration of a chronic condition. When further clinical improvement cannot reasonably be expected from continuous ongoing care, and the chiropractic treatment becomes supportive rather than corrective in nature, the treatment is then considered maintenance therapy.  (emphasis added).

The fact that chiropractic care used to “prevent deterioration of a chronic condition” remains non-covered is especially frustrating in light of the 2013 settlement in the case Jimmo v. Sebelius.   Earlier this year, the court approved a Corrective Statement that is to be used by CMS to affirmatively discontinue the use of an “Improvement Standard” for Medicare coverage.  Unfortunately, chiropractors and dentists were specifically carved out of this new rule by CMS.  As CMS noted in its January 14, 2014 guidance intended to clarify the agency’s new position after the settlement in Jimmo v. Sebelius, Pub. 100-02 Medicare Benefit Policy.  Transmittal 179 expressly provides that:

Chiropractors and doctors of dental surgery or dental medicine are not considered physicians for therapy services and may neither refer patients for rehabilitation therapy services nor establish therapy plans of care. (emphasis added).

V.   The Types of Chiropractic Services Covered by Medicare are Extremely Limited.

Under Medicare, the types of chiropractic services that are eligible for coverage and treatment are limited to three chiropractor-administered services.  To ensure that claims are processed in in an orderly and consistent fashion, Medicare employs the Healthcare Common Procedure Coding System (HCPCS) developed by the American Medical Association (AMA).  Level I of this standardized coding system is comprised of Current Procedural Terminology (CPT) codes that the AMA maintains.  The CPT uniform coding system consists of descriptive terms and identifying codes that are used primarily to identify medical services and procedures furnished by physicians and other health care professionals.  The CPT codes of the three chiropractic manipulation services that may qualify for payment by Medicare include the following:

98940: Chiropractic Manipulative Treatment (CMT); spinal, one or two regions;

98941: CMT; spinal, three to four regions; and

98942: CMT; spinal, five regions.[3]

To add insult to injury, even though a number of Medicare procedures may be within a licensed chiropractor’s state-defined scope of practice, with the exception of the three services described above, no other diagnostic or therapeutic service furnished by a licensed chiropractor, or under his / her order, is considered a covered service under Medicare.  We have handled a number of cases in recent years where the medical necessity of these manipulative treatments was never challenged by the auditing ZPIC.  Nevertheless, almost all of the otherwise-covered chiropractic claims were denied because the CMS program integrity contractor concluded that the services were improperly documented.  The primary reasons that these claims have been denied have been documentation-related.

VI.   Medicare’s Position with Respect to the Documentation of Chiropractic Services:

When providing one of these three covered services, it is essential that you carefully review Medicare’s current documentation requirements. The documentation mandates described under MACRA are not the necessarily the litmus test you should be applying.  The statutory requirements mandated under MACRA have been reviewed and interpreted by CMS so that appropriate regulations and policies implanting any applicable statutory provisions have been developed.  Additionally, as described in Section IX below, MACs are given some latitude in further defining what they require in terms of documentation.

VII.   Risks in Using a “Travel Card” if Your Practice is Subjected to a Chiropractic Audit:

Chiropractic services primarily documented with a “travel card” are likely to be denied if you are audited by a CMS program integrity contractor. Although it has been a while since we have defended a case of this type, they still occasionally arise.  For decades, travel cards have been used by chiropractors to document the care and treatment services they have provided.  Travel cards were easy and could provide an excellent picture of whether a patient was progressing.  While additional information (such as x-rays and other diagnostic studies) were also recorded in the patient’s medical record, the travel card was, and still is, utilized in a number of practices as a documentation tool.  Unfortunately, if your Medicare claims are ever audited by a ZPIC or MAC, you are likely to face a multitude of problems if you are relying on a travel card to document your services.  Unfortunately, CMS contractors (such as ZPICs and MACs)) don’t know how to read a travel card.  While there may be isolated exceptions to this statement, in the cases we have handled over the last decade, none of the auditors working for a ZPIC or for the MAC had been trained on how to read and interpret a travel card.  Additionally, most travel cards still in use don’t even come close to documenting all of the various points are set out in a MAC’s LCD.  As a result, when auditing chiropractic claims billed to Medicare, they almost always found a 100% error rate.

VIII.   Are Applicable Documentation Requirements Met if We Utilize Both a Travel Card and SOAP Note to Record the Chiropractic Services Provided?

Efforts to address the travel card problem by also documenting their services in a SOAP note format[4] have often been unsuccessful. Many experienced chiropractors love travel cards.  Their ease of use and ability to provide a quick, accurate picture of the patient’s prior care and progress are invaluable in a busy practice.  Recognizing that both government and private payors now require that a more detailed discussion of the patient’s care be documented, some chiropractors also document the care provided in a SOAP note format.  Unfortunately, in the cases we have seen, this approach typically fails to fully document the points that are now required by governmental and private payors alike.

IX.   Basic Rule for Documentation Under the Social Security Act:

Medicare’s documentation requirements are based on the fundamental obligation set out in Section 1833(e) of the Social Security Act which states that:

“no payment shall be made to any provider of services or other person under this part unless there has been furnished such information as may be necessary in order to determine the amounts due such provider or other person under this part for the period with respect to which the amounts are being paid or for any prior period.”  (emphasis added).

X.   Complying with Medicare’s Documentation Requirements:

If you intend to bill Medicare for one of the three manual manipulation services set out above, it is essential that you regularly check to ensure that your documentation practices fully comply with Medicare’s requirements. When is the last time you reviewed the documentation and coverage requirements issued applicable for your jurisdiction?  MACs have been delegated the responsibility for developing Local Coverage Determination (LCD) guidance by the Secretary for the Department of Health and Human Services (HHS) under section 1395y(a)[5] of the Social Security Act.  This responsibility also includes the promulgation of reasonable and necessary coverage determinations.[6] Therefore, in the absence of applicable National Coverage Determination (NCD) guidance,[7] MACs are responsible issuing LCD guidance.  LCDs must adhere with applicable requirements set out under the Social Security Act, federal regulations, CMS rulings, Medicare Manual Provisions, and other forms of guidance.

An overview of the coverage and documentation requirements that must be met when providing Medicare-covered chiropractic services is set out in the Section 240.1. of the Medicare Benefit Policy Manual.  Additionally, the Medicare Program Integrity Manual (PIM), mandates that any LCD that is promulgated must reflect local medical practice within the contractor’s jurisdiction and must be supported by substantial medical evidence.[8]  A CMS contractor must ensure that LCDs are consistent with applicable Medicare statutory provisions, regulations, NCDs, and other federal guidance.[9]

When developing an LCD, MACs also consider medical literature, the advice of medical societies and consultants, public comments, and comments from the Medicare provider community.[10]  Like NCDs, an LCD’s coverage guidance on whether an item is medically “reasonable and necessary” means that the item is safe and effective and not experimental or investigational as determined by the Food and Drug Administration (FDA) approval process.[11]  Working within these parameters, it is important to recognize that the specific requirements for documenting your chiropractic claims may vary from one MAC region to another.

For instance, National Government Services (NGS) has issued an LCD titled “Chiropractic Services – L27350.” [12]   For chiropractic services to be medically indicated in the region managed by NGS:

“The patient must have a significant health problem in the form of a neuromusculoskeletal condition necessitating treatment, and the manipulative services rendered must have a direct therapeutic relationship to the patient’s condition and provide reasonable expectation of recovery or improvement of function. The patient must have a subluxation of the spine as demonstrated by x-ray or physical exam. (CMS Publication 100-02, Medicare Benefit Policy Manual, Chapter 15, Section 240.1.3).”

Under its section titled Limitations, NGS essentially set out the coverage requirements that must be met in order for chiropractic services to qualify for coverage and payment.  Moreover, ICD codes that support medical necessity are laid out in the guidance.  Should you code a chiropractic service with a diagnosis code that does not qualify for coverage, edits in the claims processing programs run by the MAC will automatically identify and deny the claims.

The documentation requirements set out in the LCD issued by NGS are typical of what you are likely to find in your particular region.  Nevertheless, you cannot assume that they are the same.  Check the LCD documentation requirements that have been published by your MAC.  The documentation requirements that are applied by NGS and other MACs are quite extensive.  A chiropractic audit of your Medicare claims will heavily rely on the coverage requirements set out in the LCD covering your region.

XI.   Elements to Review When Assessing Your Claims in Advance of a Medicare Chiropractic Audit:

The best time to assess your compliance with applicable Medicare medical necessity, coverage, documentation, coding and billing requirements is NOW, not after an audit has already been initiated by Medicare.  There are seven elements to be considered when assessing whether any chiropractic claims will qualify for coverage and payment.  These elements are:

Element #1: Medical Necessity – In addressing this element, every treating health care provider should ask the following question: “Were the services administered medically necessary?”

Element #2: Services Were Provided The second issue addressed is whether the services at issue were actually provided.

Element #3No Statutory Violations Are the services “tainted” by any statutory or regulatory violation, such as the Stark Law, federal Anti-Kickback or a False Claims Act violation?

Element #4Meets all Coverage Rules – Do the services meet Medicare’s coverage requirements?

Element #5Fully Documented Have the services been properly and fully documented?

Element #6: Properly Coded – Were the services correctly coded?

Element #7: Properly Billed – Were the services correctly billed to Medicare?

XII.  Consultants and Device Manufacturer Representatives:

Take care when conducting an internal review of your documentation and billing practices.  Should you decide to bring in an outside consultant to assist you in preparing for a chiropractic audit, you should be prepared to apply the doctrine of “caveat emptor” (let the buyer beware).  The types of problems our clients have faced when engaging consultants generally fall within one of two categories, both of which are discussed below.

  • If it sounds too good to be true – it probably is!

Unfortunately, some consultants and device manufacturer representatives have used the challenging financial environment now facing chiropractic practices to their advantage.[13]  If a chiropractic consultant claims to have “proprietary” or “special” methods that can raise your billing revenues, or makes similar claims, be careful.

We have represented numerous chiropractic and medical practices over the years that have been led astray by coding and / or billing consultants, device manufacturers and others purporting to have identified supposed legal methods of coding and billing non-covered services so that they will, in fact, pass through the MACs edits and be paid. Years later, the chiropractic practice may learn that the practices they taught to employ are improper and do not qualify for payment.

  • Even Well-Meaning Consultants May Adversely Impact Your Practice.

Imagine for a moment that in an effort to improve your level of regulatory compliance, you have decided to engage a well-known coding and billing consultant to review your medical necessity, coverage, documentation, coding and billing practices. Assuming that the consultant is thorough, chances are that he / she will present you with a list of problems at the end of their review, you need to keep in mind that their findings are not privileged.  In other words, any reports that they issue, work papers that they prepare and actions that they take are discoverable by the government.  As a result, a list of problems identified by a coding or billing consultant can essentially be used as a roadmap for the prosecution.

You should therefore consider having a qualified health lawyer engage the consultant and direct his or her work.  Any reports would be issued to the attorney, not to you or your chiropractic practice. As a result, the work product prepared by the consultant would likely qualify and privileged and would not be discoverable by the government.  Does this mean that any errors, improper claims or other problems identified by the consultant could be “swept under the rug”?  No, not at all, but it may give the practice considerably more latitude in how they ultimately take remedial action.  Improper payments must be reported and repaid to Medicare in a timely fashion.. The problem we typically see is that non-attorneys are imprecise in how they describe a problem.  We have seen reports prepared by well-meaning consultants that are full of hyperbole and characterize certain conduct as possible fraud, when in fact, the actions that led to an overpayment were nothing more than a mere accident, error or mistake.

  • Call Liles Parker if Your Chiropractic Practice is Being Audited.

Liles Parker attorneys are not merely dedicated health lawyers.  We require that our associate attorneys study for and pass the certification requirements to be a Certified Medical Reimbursement Specialist.  Additionally, most of our attorneys and paralegals are Certified Medical Compliance Officers. Our staff has extensive experience conducting pre-audit assessments of provider documentation, coding and billing practices.  To the extent that your practice is undergoing a Medicare chiropractic audit by a UPIC, ZPIC or MAC, it isn’t too late to obtain a favorable result. Our health lawyers have extensive knowledge and experience of the Medicare appeals process, up to and including post-ALJ appeals to the Medicare Appeals Counsel and Federal Court.

Medicare Chiropractic AuditsRobert W. Liles, M.S., M.B.A., J.D., has worked on the provider side in health care management, served as a federal prosecutor and now represents chiropractors and other health care providers around the country in connection with Medicare and private payor audits and investigations.  For a complementary consultation, please call us at: 1 (800) 475-1906.

 

 

[1] Chiropractic services were not separately broken out in OIG’s Medicare Fee-For-Service 2014 Improper Payment Report. https://www.cms.gov/Research-Statistics-Data-and-Systems/Monitoring-Programs/Medicare-FFS-Compliance-Programs/CERT/Downloads/MedicareFeeforService2014ImproperPaymentsReport.pdf

[2] Effective January 1, 2017.

[3] These three claims are expressly covered in Local Coverage Determination (LCD) guidance issued by National Government Services (NGS) and other Medicare Administrative Contractors (MACs).  For additional information please see:  https://apps.ngsmedicare.com/lcd/LCD_L27350.htm

[4] The acronym “SOAP” is a long-standing approach utilized by a variety of medical disciplines when documenting their evaluation of a patient and the plan of care to be followed.  SOAP stands for Subjective, Objective, Assessment, and Plan.

[5] See 42 U.S.C. § 1395h.

[6] See 42 U.S.C. § 1395ff(f)(2)(B).

[7] LCDs are defined as “determination[s] by a [contractor] under. . . part B. . . respecting whether or not a particular item or service is covered. . . in accordance with section 1395y(a)(1)(A).”[7]

[8] See 64 Fed. Reg. 22,619, 22,621 (Apr. 27, 1999) (stating that the purpose of local medical review policies is to explain to the public and the medical community “when an item or service will be considered ‘reasonable and necessary’ and thus eligible for coverage under the Medicare statute”); PIM Ch.1, §§ 2.1.B, 2.3.2.1, 2.3.2.

[9] PIM, supra note 17, at § 2.1.B.

[10] PIM, supra note 17, at §1.2.

[11] See Abbott Laboratories, at 29.

[12] https://apps.ngsmedicare.com/lcd/LCD_L27350.htm

[13] Unscrupulous business consultants are nothing new. Almost 20 years ago, HHS, Office of Inspector General (OIG) recognized this problem and issued guidance to providers outlining its concerns. In June 2001, OIG issued a “Special Advisory” titled “Practices of Business Consultants” which detailed the agency’s concerns in this regard.  As OIG noted, health care providers and suppliers need to be wary of potential:

  • Illegal or Misleading Representations.
  • Promises and Guarantees.
  • Encouraging Abusive Practices.
  • Discouraging Compliance Efforts.

 

Individual Liability for Medicare Overpayment Claims

(October 19, 2012): This article addresses the case where an individual or “natural person” owns an interest in a Medicare health care provider which is incorporated[1] under the laws of a state, as a corporation, limited liability company, limited partnership, or  another type of legal person. The individual may be a shareholder, member, limited partner, or some corresponding term for an owner of the company, but in all these cases the common factor is limitation of liability of owners.  Owners of providers facing ZPIC or other Medicare contractor audits or appealing an overpayment demand often ask what risk they face of being held personally liable for the overpayment claims, or otherwise punished personally, if their appeals are unsuccessful.

I.  Hypothetical Case:

The hypothetical situation addressed here is a common one, namely a provider organized as a corporation or LLC (the “Company”) with one or more individual owners (i.e. individual shareholders or members) is enrolled with Medicare, has provided services to Medicare beneficiaries over a substantial period of time, and has received payments from one or more Medicare contractors. Then, a ZPIC or similar contractor selects the Company for post-payment audit. After reviewing a sample of records, the contractor determines that overpayments have occurred and issues an audit results letter assessing an amount claimed to be overpaid in the sample, and an extrapolated (much larger) amount deemed to be overpaid in all of the Company’s Medicare receipts during the period under review. The Medicare Administrative Contractor (the “MAC”) then makes a written formal demand for refund by the Company of the extrapolated amount.

Our hypothetical assumes the Company either fails to appeal the above overpayment determination (referred to as an “Initial Determination”), or appeals and loses. Either way the Company owes the full extrapolated amount to CMS, plus interest from the date of the formal demand by the MAC. Assume further that this sum amounts to several years’ gross revenues for the Company; and it has no means to repay it. The MAC begins recoupment from payments of new Medicare billings by the Company, and the Company shuts down as it exhausts its funds available to cover payroll and operating expenses. Finally, assume (as is commonly the case) that the Company has no significant assets which CMS can seize and liquidate to satisfy the overpayment.

Given the above, the question presented is whether the individual owner or owners of the Company are on the hook for the unpaid amount of the CMS overpayment claim? Are other provider entities owned by the same individuals on the hook? Phrased another way, under what circumstances can CMS or its contractors lawfully collect the above overpayment from the individual owners or their other provider companies? And what other sanctions can the Government apply against the individuals and affiliates in such a case?

II. Concept of Limited Liability:

In the US and most Western legal systems the concept of incorporation of a business is available to shield its owners from claims for the business’s debts. This is the concept of limited liability, meaning the owners’ personal liability for the debts of the business is usually limited to the amount of the capital they have invested in it. If the business owes money to a creditor, the creditor will have recourse to the business, meaning the money and other assets the business itself owns. In this way, the creditor can collect the capital the owner has bound up in the business; but the creditor has no right to make the owner pay from his own assets.

III. Threshold Rule of Limited Liability; Exceptions and “Piercing the Corporate Veil”:

The general rule of limited liability applies to CMS and its contractors when dealing with shareholders of incorporated health care providers, just as it does to other creditors. No statute or case law makes owners of incorporated Medicare health care providers personally liable for their companies’ debts to CMS, except in certain very narrow circumstances which apply to all debtors and creditors. And nothing about the health care industry makes these circumstances more likely to arise than in other industries.

The principal exceptions to the rule of limited liability of shareholders are collectively known as piercing the corporate veil. Under certain circumstances, courts will allow creditors of an insolvent corporation, LLC or other legal entity to reach through the corporate structure and collect their debts from shareholders or similar owners. Numerous factors have been cited by courts to justify imposing liability of shareholders for corporate debts, and an exhaustive discussion of this topic is beyond the scope of this article; but common examples of circumstances which can justify veil piercing are as follow:

(a) Defective Incorporation. Failure to meet legal the statutory requirements for organizing the corporation or LLC can and will result in shareholders being liable for corporate debts. A better statement of this rule is that, without compliance with the requirements for incorporation, no corporation ever exists in the first place to shield the shareholders from liability.

(b) Ignoring the Separateness of the Corporation. Entering into contracts and otherwise transacting business variously in a corporate name and an individual name can justify piercing the corporate veil. Likewise, commingling corporate and individual assets, or transferring assets without formalities between company and owner, or company and sister company, can give the same result.

(c) Significant Undercapitalization. A requirement of incorporation is injecting money or other capital into the new company reasonably sufficient to pay its expected debts. Failure to do this is called undercapitalization, and is grounds to impose liability on the shareholders. The adequacy of capital, however, is judged at the time it is injected, not when the liability arises, and courts tend to defer to any good-faith estimate of how much capital will be needed, so undercapitalization is normally difficult to prove.

(d) Excessive Dividends or Other Payments to Shareholders. When owners are actually working for a corporation they can in most cases pay themselves whatever compensation is even remotely fair, as long as it is clearly characterized as salary or wages. Dividends and other non-compensation distributions, however, are judged very differently, and can safely be taken out by shareholders only to the extent of profits. When shareholders take non-compensation distributions in excess of profits, they constitute a return of capital and can give rise to an undercapitalization claim by any corporate creditor who is subsequently not paid[2]. If such distributions are made when the corporation is actually insolvent, the creditors’ claims against the shareholders will be almost impossible to defend.

(e) Misrepresentation and other Unfair Dealings with Creditors. Dishonesty and false statements to corporate creditors, asset concealment and other deceptive practices, can make shareholders liable for corporate debts.

(f) Absence or Inaccuracy of Records. If corporate records go missing or prove to be inaccurate, they can form a basis to pierce the corporate veil, especially if they hinder a creditor’s collection efforts against the corporation.

(g) Failure to Maintain Ongoing Legal Requirements. Each state’s statutes impose annual franchise fees and various report-filing requirements on corporations and similar entities. Although these have generous grace periods and cure provisions, if they are neglected long enough, the corporation or LLC will legally cease to exist and shareholder liability will result[3].

Given any of the above fact circumstances, CMS and its Medicare contractors can seek to pierce the Company’s corporate veil and collect the overpayment from the Company’s owners in our hypothetical. These circumstances however are not typical for health care providers, and are easily avoided. Veil piercing depends on facts which by their nature are difficult to prove in a court of law, often involve subjective judgments, and in most cases are subject to dispute. The burden of proving the facts is always on the creditor. Correspondingly, courts tend to disfavor veil-piercing claims and narrowly construe the applicable law, so veil piercing has a reputation as a difficult remedy to invoke successfully.

IV.  Rules in Bankruptcy:  

While CMS does enjoy certain advantages and unique rights under US Bankruptcy laws, this doesn’t include any advantage over other creditors in reaching the pockets of shareholders of a bankrupt company.  A basic rule in Bankruptcy is that filing a petition automatically halts or “stays” all acts by creditors to collect debts which pre-date the petition[4]. Since 2005, this “automatic stay” has been ruled not to impair CMS’s right to exclude providers from its programs[5]. Additionally, Federal case law appears to hold that the automatic stay does not prevent CMS and its contractors from recoupment against new Medicare billings by a provider in bankruptcy[6]. But no bankruptcy law gives Government health care programs special debt collection rights against shareholders of providers, so CMS and its contractors, like other creditors, can collect Medicare overpayments from shareholders and other owners of a bankrupt entity only in the Veil Piercing circumstances described above, which are narrowly-drawn and strictly interpreted against the creditor.

V.  Federal Agency Practice on Pursuing Individual Liability: 

Federal agencies are not as a rule aggressive in collection of their debt claims, and CMS is no exception.  For example, in government loan programs where shareholders are required personally to guarantee the debt, once corporate assets are exhausted in default cases, Federal agencies rarely pursue the guarantors’ personal credit, and discourage their contractors and even private holders of Government-guaranteed loans from doing so. With this in mind, it should be no surprise that most Federal agencies seldom if ever seek to pierce any corporate veil[7]. As was noted, veil-piercing involves lots of gray areas and disputed facts and is hard to do successfully; and Government agencies are reluctant to risk the time and money required. Government agencies also fear the adverse publicity that regularly arises from collection efforts against individuals. While Federal authorities could be moved to pursue such remedies in an extreme case or under the glare of unusual publicity, they are otherwise unlikely to do so. In 30+ years of representing participants in Federal programs, I have never been involved in any case where such a remedy was sought against a client or any other individual.

VI. Successor Liability:

In our hypothetical, the individual owners won’t be able to continue in the health care industry using the Company itself as a practice vehicle. They may wish to organize and capitalize another entity to provide the same or a similar type of services. In what circumstances can new entities organized by the owners after the Company’s demise be held liable for the Company’s overpayment obligation? This area of the law is referred to as successor liability, and it provides remedies which do indeed allow creditors to pursue the new entity in some cases. Like veil piercing, this remedy is an exception to the general rule of limited liability of corporate owners, is available to creditors generally in certain narrow circumstances, and is not specific to Government creditors or health care provider debtors.

Simply stated, successor liability flows from state statutes and state court case rulings which allow the creditors of a debtor company to collect their debt claims from another company to which one or more assets of the debtor have been transferred, if it is a successor to the original debtor. The exact circumstances which make the other company a successor vary from state to state. In most states the law gives a list of elements which can establish successor status, but uses a balancing test, meaning there is no hard and fast rule of which or how many elements have to be present to prove the claim. The creditor sues the transferee company to initiate such a claim, and the court hearing the case decides not only which elements are present, but also whether they are enough to make the defendant a successor[8]. But if a creditor can prove enough of them, it can make the transferee pay the debt.

Elements commonly listed to impose liability on the transferee of a debtor’s assets include, (i) common ownership (whole or part) between the original debtor and the separate company; (ii) the transferee was established to hinder the creditors of the debtor; (iii) the original debtor and the transferee company provide the same goods or services; (iv) the same or recognizably similar company name or DBA; (v) same business location; (vi) same customers or customer sources; (vii) same officers or managers; (viii) same employees; and (ix) the transferee pays other debts of the original debtor, or states that it will do so. In most cases, one or two elements alone will usually be insufficient to establish liability[9].

Successor liability is not as uniformly disfavored in courts as is veil piercing, but remains uncommon in practice. Like veil piercing, it is rarely if ever used by Federal agencies and contractors. Whether any specific circumstances will make a transferee company liable as a successor to another is beyond the scope of this article; but asset transfers between commonly-owned companies occur frequently, and many not easily be identifiable as such to a non-lawyer. In our hypothetical, the Company’s owners may be sorely tempted to use the same business location or same employees or managers in the new provider as in the Company, and may wish to have the new entity collect unpaid receiveables. Any of these steps could subject the new entity to the overpayment, or to any other creditor claim. Successor liability can be invoked against pre-existing entities under common ownership with the Company as well. Owners of health care providers having other companies which are subject to any Medicare contractor collection action need to avoid any such transfers scrupulously, and bear in mind that they can make their other provider liable in common for an overpayment claim.

VII.  Other Government Sanctions Against Owners and Affiliates for Non-payment by an Incorporated Provider:

 Pursuing owners personally for repayment of a provider’s overpayment liability isn’t the only sanction CMS and its contractors might logically seek to apply to punish non-payment. Excluding related persons and companies from health care program participation comes to mind. This could take at least 3 forms, each of which we will examine in turn.

(a) Exclusion of Individual Owners. The authority for HHS to exclude both companies and individuals from involvement in its health care programs has been established at the statute, regulation, and policy manual levels.  The basic authority for exclusion is granted to the Secretary of HHS under Sections 1128 and 1156 of the Social Security Act.[10]  These sections list all the grounds for which a party may be excluded[11]. Most of these sections are written so that if an entity commits acts which are grounds for exclusion, the owners are likewise at risk[12]. Most of the grounds for exclusion are not relevant here, such as conviction for felonies, or health care related misdemeanors. Three grounds for exclusion however are listed which relate to providers’ services, namely submitting charges to any Federal health care program in excess of the provider’s usual charges, furnishing services in excess of the needs of patients, and furnishing services of a quality not meeting recognized professional standards[13]. The lack of medical necessity grounds for denial which appear in most overpayment cases, corresponds to the furnishing services in excess of the needs of patients grounds for exclusion. So the question is whether lack of medical necessity of our Company’s services is, in and of itself, valid grounds to exclude it, and therefore also exclude its owners?  These service-related grounds for exclusion are addressed in the Medicare Program Integrity Manual (the “PIM”) in Chapter 4, Sec. 4.19. This section states that in order to prove such cases, the PSC and the ZPIC BI unit shall document a long-standing pattern of care where educational contacts have failed to change the abusive pattern. Isolated instances and statistical samples are not actionable. Medical doctors must be willing to testify.[14]  Only this service-related grounds for exclusion could plausibly be applied to the facts of our overpayment hypothetical, without serious wrongdoing being present beyond simple failure to repay. The contractor documentation in a typical post-payment audit would not appear to satisfy the PIM requirement of “document[ing] a long-standing pattern of care where educational contacts have failed to change the abusive pattern”.  No practitioner at this health care law firm has seen exclusion attempted or threatened against the provider or its owners in a simple overpayment case. Accordingly, exclusion of the provider and its individual owner does not appear to be a substantial risk in our hypothetical situation.

(b)  Bars to Subsequent Applications.  In our hypothetical, the individual owners won’t be able to continue in the health care industry using the Company itself as a practice vehicle. They may wish to organize and capitalize another entity to provide the same or a similar type of services.  If our hypothetical is extended to such a case, what are the risks that CMS and its contractors might punish the Company’s failure to satisfy its proven overpayment demand, by barring the enrollment application of the owner’s new provider entity? In order to bar a new provider owned or controlled by owners of our hypothetical defaulting provider, however, CMS and its contractors must be aware of the relationship between the 2 companies. So our initial inquiry must be whether the new-provider enrollment process will itself call the attention of CMS or its contractors to the relationship between the non-paying Company and the new applicant. This process is largely embodied in the enrollment application document. The current form of Medicare enrollment application for most incorporated providers, CMS-855A (07/11)[15] requires disclosure of any “Adverse Legal Actions/Convictions” of individuals with ownership or control of the entity (in Sec. 6), and so would clearly be required for the Company’s owners in our hypothetical. The listing of adverse adjudications which constitute Adverse Legal Actions/Convictions is at page 16 in the CMS-855A, and includes most criminal convictions, state license and Government program revocations, suspensions, exclusions and debarments, and also 4. Any current[16] Medicare payment suspension under any Medicare billing number.

This form does not require the new applicant’s owner to disclose the problems of the Company in our hypothetical, or even mention its existence, for 2 reasons. First, “payment suspension” is a very specific Medicare sanction, and usually not present in an overpayment demand case. Second, the disclosure is explicitly directed at the individual owner, and its wording does not extend it to other entities under the owner’s ownership or control. The operative text at Section 6 is:

1. Has the individual in Section 6A, under any current or former name or business identity, ever had a final adverse legal action listed on page 16 of this application imposed against him/her?

New program developments in Medicare, however, may change the above situation and extend required disclosures to entities under common ownership or control with new applicants. In the HHS OIG Work Plan for FY 2012, under Part IV: Legal and Investigative Activities Related to Medicare and Medicaid, there is an item captioned Providers and Suppliers with Currently Not Collectible Debt.

VIII.  Conclusion:

In sum, the established legal rule of limited liability of owners of incorporated businesses appears to be alive and well in the Medicare service provider area, and Federal agencies and their contractors by and large respect it. The separateness of legally-distinct incorporated businesses under common ownership also remains in effect. These rules however have significant exceptions.

Owners of incorporated health care provider entities, absent some written agreement to the contrary, are insulated from personal liability for overpayment obligations owed by their companies to Federal health care authorities by the same state laws which insulate them from their companies’ other debts. Generally, Federal health care laws do not change these rules. If your company’s assets are insufficient to satisfy its debts, procedures exist for Federal claimants (like other creditors) to try to reach through your company and pursue your personal credit to satisfy their claims. But this requires a lawsuit to be filed against you personally; and the laws of the states specify only certain narrow circumstances where they can be successful. Accordingly, creditors rarely try to “pierce the corporate veil”, and this is probably more true of Federal creditors than private ones.

The most likely situation where an insolvent provider’s creditor can successfully reach the personal credit of the owner is when the owner has taken dividends and other sums from the company which cannot be characterized as salary or compensation for employment, at times when the debtor company was already insolvent. Likewise, the most likely way a new provider company being organized by an existing provider’s owner can become liable to its creditors is for assets to be transferred from the old provider to the new. Owners of multiple providers should consult legal counsel to examine all dealings between them for successor liability and similar issues whenever one provider becomes liable for overpayments, because many risk-creating activities will not be recognizable as such without legal training.

Apart from debt collection risks, procedures exist for HHS to exclude owners of providers from Federal programs, which will operate to exclude other provider entities under common ownership. The available grounds for exclusion, however, do not normally arise in an overpayment case. Similarly, HHS regulations provide for the revocation of the enrollment of health care providers in certain cases. The grounds for revocation do not include a defaulted overpayment by a separate provider under common control.

The main area of risk for the affiliates of a defaulting provider subject to an overpayment appears to be the enrollment application by a new provider entity under common ownership. While the strict wording of the current enrollment application forms does not compel disclosure of the overpayment situation in our hypothetical, and  overpayment by a commonly-owned provider is not currently a listed basis for denial of the new enrollment, in practice the existence of a defaulted overpayment obligation poses a substantial risk to any related party’s enrollment. Initiatives are under way inside HHS which could change these risks to certainties.

Medicare OverpaymentDavid Parker is an attorney practicing at Liles Parker PLLC, a health care and business law firm in Washington D.C. Mr. Parker was formerly a partner at Dickstein Shapiro in Washington, DC. Before entering private practice, Mr. Parker served for 16 years as the in-house general counsel of Allied Capital, a publicly-traded group of mezzanine finance companies headquartered in Washington. For more information, contact David at (202) 298-8750.


[1] The term incorporated will be used here to refer to the legal process of creating any form of legal entity providing limited liability to its owners (e.g. limited partnerships and LLCs) not just to the creation of a corporation.

[2] This practice is harder to defend than a claim for initial undercapitalization, because in this case there is evidence that at the time of organization, the owners believed the capital later taken out was needed in the business.

[3] Failure to hold annual meetings, and failure to keep corporate minutes have seldom been the basis for shareholder liability.

[4]. 11 U.S.C. §362.

[5]  11 USC §362(b)(28)

[6]  See In re Slater Health Center, Inc. 398 F.3d 98 (C.A. 1 2005). The US Bankruptcy Code does not explicitly address recoupment, and the Slater ruling may not apply in all circumstances. Among other things, its application turns on the overpayment and the new billing being part of the “same transaction.” Otherwise, the contractor’s claim against the new billing is a setoff which is specifically addressed in the Code and is generally halted in bankruptcy by the automatic stay. See for example In re University Medical Center 973 F.2d 1065 (C.A.3 1992).

[7] The notable exception to this rule is the Internal Revenue Service’s pursuit of shareholders to collect corporate tax liability. The IRS has in recent years successfully pierced the corporate veil in a number of well-publicized cases.

[8] See e.g. Cab-Tek v. E.B.M. Inc. 153 Vt. 432 (Vt. 1990).

[9] Typical statements of states’ successor liability rules can be found in Marks v. Minn Mining & Mfg. Co 187 Cal. App. 3d 1429 (Cal. Ct. App. 1986) and Sweatland v. Park Corp 587 NYS 2d 54 (App. Div. 1992).

[10] Codified in 42 USC §§1320a-7 and 1320c-5

[11] A convenient chart provided by HHS summarizing the various grounds on which exclusion from Federal health care programs may be based, can be found here.

[12] The recurring text appears, for example, in 42 USC §1320a-7(b)(6). That section provides that the Secretary of HHS may exclude “Any individual or entity that the Secretary determines… has furnished or caused to be furnished … items or services to patients substantially in excess of the needs of such patients….” Since owners of a provider entity are normally in control of it, if the entity has done the described act, the owner can be said to have caused the act, and is therefore subject to the same grounds for exclusion [emphasis added].

[13] 42 USC §1320a-7(b)6)

[14]  PIM Ch. 4 Sec. 4.19.2. Similar procedural requirements for exclusion appear at 4.19.2.2 and 4.19.2.3.

[15] Other versions of CMS-855 (used for other types of providers and entities) contain sections corresponding to Sections 6, page 16 and Section 15 of CMS-855A, discussed herein.

[16] Sec. 15 of CMS-855A extends the required disclosure to all subsequent periods, effectively making it an Evergreen requirement.

[17] For example, CMS-855 program application forms have long required owners of all applicants to be identified by name and Social Security Number. A simple cross-checking of these identifiers against identifiers of owners from the CMS-855 of defaulting debtors could easily be implemented.

[18] Grounds for denial of enrollment are repeated, but not expanded, in the Medicare Program Integrity Manual in Chapter 15.8.

[19] 42 CFR §424.530(2).

[20] 42 CFR §424.530(6). The regulation defining the term owner includes holders of 5% and greater ownership interests. Grounds for denial of enrollment based on payment suspension are set forth in nearly identical language in §424.530(7)

[21] See 42 CFR §424.535. Note that this revocation regulation includes a grounds for revocation corresponding to §424.530(a)(2) [felony conviction, debarment or suspension by the provide, its owner or key personnel] but no grounds for revocation corresponding to §424.530(a)(6) [existing overpayment by the provider or its owner].

Medicare Fraud Strike Force Operation Leads to Charges against 94 Defendants, including 4 in South Texas

July 17, 2010 by  
Filed under HEAT Strike Force

Medicare Fraud Strike Force(July 17, 2010): Yesterday, the Department of Justice (DOJ) announced charges against 94 physicians, medical assistants, and health care company owners and executives in connection with alleged false Medicare claims amounting to more than $251 million.  24 defendants from Miami account for approximately $103 million of that amount.  Four defendants were charged in Houston for their alleged roles in a $3 million scheme to submit fraudulent claims for durable medical equipment (DME).  Other arrests were made in Baton Rouge, Brooklyn, and Detroit.

The offenses charged include conspiracy to defraud the Medicare program, criminal false claims, violations of the anti-kickback statutes, and money laundering.  The charges are based on a variety of fraud schemes, including physical therapy and occupational therapy schemes, home health care schemes, HIV infusion fraud schemes and durable medical equipment (DME) schemes.

Announcing the arrests, Attorney General Eric Holder said, “With today’s arrests, we’re putting would-be criminals on notice: Health care fraud is no longer a safe bet.  It’s no longer easy money.  If you choose to engage in health care fraud, you will be found; you will be stopped; and you will be brought to justice.”

The operation was conducted by the joint DOJ-HHS Medicare Fraud Strike Force, multi-agency teams of federal, state, and local investigators designed to combat Medicare fraud through the use of Medicare data analysis techniques and an increased focus on community policing.  Strike Force teams are operating in seven cities in the United States: the five aforementioned cities, Los Angeles, and Tampa.  AG Holder noted that the ongoing Strike Force initiative in South Florida has resulted in the indictments of 810 organizations and individuals since March 2007 and uncovered $1.85 billion in improperly billed claims.

The Strike Forces are a part of Health Care Fraud Prevention and Enforcement Action Team (HEAT), which is made up of top level law enforcement and professional staff from the DOJ and HHS and their operating divisions.  HEAT is dedicated to joint efforts across government to both prevent fraud and enforce current anti-fraud laws around the country.

Should you have any questions regarding these issues, don’t hesitate to contact us.  For a complementary consultation, you may call Robert W. Liles or one  of our other attorneys at: 1 (800) 475-1906.

RAC Audits of Physician Practices, Home Health, Hospice, and DME Providers, are Expected to Increase.

June 25, 2010 by  
Filed under Home Health & Hospice

RAC Audits of Physician Practices are Expected to Increase.(June 25, 2010): The purpose of this series of articles is to assess the Recovery Audit Contractor (RAC) Program from the perspective of physicians, home health, hospice, durable medical equipment (DME) providers, and other relatively small Medicare providers.  As many non-hospital providers will acknowledge, early cries of wolf by law firms and consultants did a fine job of initially publicizing the RAC threat.  Unfortunately, the threat of a RAC audit now appears to be largely ignored by non-hospital providers due to the seemingly widespread sense that RACs will likely continue to focus their efforts on large, institutional Medicare providers – the ultimate “low hanging fruit” in terms of potential Medicare overpayments. RACs are, in fact, a real threat to physicians and other small Medicare providers, despite the fact the contractors have passed over these providers in the past.

I.  Recent CMS Efforts to Promote RAC Audits of Physician Practices and Other Non-Hospital Providers:

Over the last six weeks, the Centers for Medicare and Medicaid Services (CMS) has sponsored nationwide conference calls titled “Nationwide RAC 101 Call” specifically aimed at physicians, home health, hospices, and DME providers. Further, CMS conducted two general nationwide conference calls discussing the RAC program that were open to all Medicare providers.

These seemingly innocent informational calls were in fact extraordinarily significant, servicing almost as a “touchstone” for CMS and its RAC auditors.  With the completion of these nationwide teleconferences, outreach has now been completed and CMS can affirmatively state that these non-hospital providers have been given multiple opportunities to learn about the RAC program and prepare for a RAC audit.   All states are now eligible for review.

While CMS must still approve “issues” prior to their widespread review by the RACs, the contractors now have the billing data that they need to analyze and identify possible targets.

As physicians and other non-hospital providers prepare for possible audit, it is helpful to review hospitals’ experiences when preparing for and responding to a RAC audit.  On June 22, 2010, the American Hospital Association (AHA) released its findings that the RAC program is having a widespread impact on almost all hospitals, even though many have not even been subjected yet to a RAC audit.[1] In fact, for the first quarter of 2010 alone:

  • 84% of responding hospitals reported that RACs impacted their organization;

  • 49% of responding hospitals reported increased administrative costs; and

  • 17% of the hospitals using external resources to address RACs hired consultants at an average cost of almost $92,000.

So, what do providers and non-hospital Medicare providers need to know about RACs?  This multi-part series will address the following:  First, the purpose and impact of RACs; Second, how to respond to RACs when they come calling; Third, some of the emerging issues for physicians and other small Medicare providers regarding RACs.

II.   What is a RAC?

The RAC program was created by Section 306 of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA).  Operating under the direction of the Department of Health and Human Services (HHS), RACs are independent third-party contractors tasked with identifying and correcting improper past Medicare payments.  Each of four RACs has jurisdiction over a separate region of the United States.

After a three year demonstration in which RACs identified $1.03 billion in improper Medicare fee-for-service payments, the program became permanent earlier this year.  RACs join scores of other Medicare audit contractors.  CMS created the following table to clarify the role RACs are supposed to play compared to other contractors.[2] However, as we will see later in this series, these roles are not clearly delineated and the overlap in the review process can create substantial confusion and waste.

Role of Medicare Review Contractors

Improper Payment FunctionContractor Performing Function
Preventing future improper payments through pre-pay review and provider educationMedicare claims processing contractors
Detecting past improper paymentsRACs
Measuring improper paymentsCERT [Comprehensive Error Rate Testing]
Performing higher-weighted DRG [diagnosis related group] reviews and expedited coverage reviewsQIOs [Quality Improvement Organization]

RACs are highly incentivized to hunt for evidence of overpayments in high-cost categories of service and to needle out errors that have nothing to do with actual patient care. RACs are paid on a contingency basis so it stands to reason that, during the initial program demonstration, only 4% of improper payments identified were underpayments.  This “bounty hunter” approach also helps to explain why prior audits have focused almost exclusively on high-cost inpatient care services. Recent GAO testimony shed light on this situation and may cause RAC audits or other contractors to shift their focus to entities that do not have hospitals’ long history of review and compliance, namely physicians and other relatively small Medicare providers.  Finally, a substantial percentage of overpayments collected by RACs during the demonstration program resulted from preventable coding errors, countering the myth that CMS is primarily focused on weeding out unnecessary service claims.

Providers in Region C may want to consider that the AHA found hospitals in that region, encompassing nearly 40% of all U.S. hospitals including those in Texas, Florida, and Virginia, reported the highest number of medical records requested, the highest amount of dollars targeted in medical record requests, and the highest number of denied claims (47% of the $2.47 million in denied claims reported in the first quarter of 2010).

III. Are There Any Safeguards to Protect Physicians and Other Small Group Providers From RAC Audits?

Based on the demonstration program, numerous providers and others have expressed concern that RACs are overly aggressive auditors.  Despite some improvements, concerns about the RAC process are likely to persist.  As recent testimony by the GAO Health Care Director pointed out, the oversight of RACs leaves something to be desired.

Changes have been made to reduce the RACs’ unintended incentive to drive up fees (through the improper denial of claims). RACs are now required to pay back their contingency fee if the claim is overturned at any level of appeal, rather than just the first level as in the demonstration program.

Additionally, there are some limitations in place regarding the RACs’ ability to overwhelm providers with record requests.  RACs may not request records more frequently than every 45 days and, for instutitional providers, their requests are limited to 1% of all claims submitted for the previous calendar year.  This is an overall limit, however, meaning that a RAC may determine the composition of the records in an additional document request.  They can – and do – request categories of records up to the limit even if the request is disproportionate the provider’s business.

Finally, none of these improvements address the concern that the first several levels of the appeals process do not provide meaningful recourse for the overly aggressive auditing.

Read A Look at RACs — Part II

Read A Look at RACs — Part III

Should you have any questions regarding these issues, don’t hesitate to contact us.  For a complementary consultation, you may call Robert W. Liles or one  of our other attorneys at 1 (800) 475-1906.


[1] Available at http://www.aha.org/aha/content/2010/pdf/Q1RACTracResults.pdf

[2] Available at http://www.racaudits.com/uploads/RAC_Demonstration_Evaluation_Report.pdf.