On February 11, 2016, CMS issued a final rule clarifying the requirement of § 1128J(d) of the Social Security Act (created by § 6402(d) of the Affordable Care Act) that health care providers must report and return overpayments within 60 days of the date when they have identified the overpayment or the date any applicable corresponding cost report is due, whichever is later. The final rule relaxes the agency’s proposed rule on overpayments by shortening the lookback period and giving providers time to quantify their overpayments.

The final rule is scheduled to be published in the Federal Register on February 12, 2016 and will become effective 30 days thereafter.

Highlights from the final rule, as well as key changes from the proposed rule, include:

  • Definition of an overpayment – “any funds that a person [e., a provider or supplier] has received or retained under title XVIII of the Act to which the person, after applicable reconciliation, is not entitled under such title”; there is no scienter or intent requirement.
  • New “reasonable diligence” standard that replaces the “actual knowledge,” “reckless disregard” and “deliberate ignorance” standard for identifying overpayments, which must be reported and returned within 60 days.
  • Benchmark of 6 months for timely investigation: a more concrete approach than the proposed rule’s language of “all deliberate speed”— the standard for implementation of desegregation under Brown v. Board of Education that is now associated with endless delay.
  • Explanation that the 60-day time period for report and return begins when either reasonable diligence is completed (including determination of the overpayment amount) or on the day the person received credible information of a potential overpayment if the person failed to conduct reasonable diligence and the person in fact received an overpayment.
  • Confirmation that providers and suppliers have an affirmative duty to proactively determine whether overpayments have been made.
  • Shortened lookback period for identifying overpayments from 10 to 6 years, consistent with the False Claims Act’s statute of limitations; although longer than the 4-year timeframe set forth in the reopening regulations at 42 C.F.R. 405.980(b).
  • Expanded list of acceptable methods for reporting and returning overpayments to include applicable claims adjustment, credit balance, and other reporting processes.
  • Plan for CMS to refer overpayments arising out of an alleged kickback arrangement to the OIG for appropriate action and to suspend the repayment obligation until the government has resolved the kickback matter, generally supporting that an overpayment need only be disclosed to one government agency to satisfy a provider’s legal obligation.
  • Continued potential liability under the False Claims Act (FCA) and Civil Monetary Penalties Law (CMPL), as well as risk for exclusion from Federal health care programs.

How courts will interpret what it means to “identify” an overpayment, particularly in light of an August 3, 2015 court ruling, remains unclear. In Kane v. Healthfirst Inc. et al. (Case No. 1:11-cv-02325), the Southern District of New York concluded based on the “unforgiving rule” of the statute that the overpayment clock starts once the provider has a duty to return money to the government even when the provider has not yet determined the actual amount owed. In contrast, under this final rule, CMS emphasizes that “reasonable diligence” includes both identifying the existence of an overpayment and quantifying the amount of the overpayment. According to CMS, liability will only attach after the provider or supplier receives an overpayment and fails to conduct reasonable diligence (which reasonable diligence includes quantifying an overpayment). Although the final rule may give courts a basis to find that providers do have time to complete their review and quantification before the clock begins to run, the government and whistleblowers may challenge this interpretation.

Additionally, the expanded 6-year lookback period likely will affect the financial impact of disclosures and the scope of assessing documentation for Stark Law compliance under the liberalized requirements outlined in the November Medicare Physician Fee Schedule final rule. For overpayments reported to CMS under the CMS Voluntary Self-Referral Disclosure Protocol (SRDP) before the effective date of the final rule, the expanded 6-year lookback period will not apply. Rather, the existing 4-year SRDP lookback period will govern. Providers and suppliers will not be obligated or expected to return overpayments from the fifth and sixth years through any other means. This means that if you are thinking about submitting a self-disclosure to CMS or OIG, do it within the next 30 days so that you can limit your overpayment liability to 4 years instead of 6.

As expected, providers and suppliers are encouraged to file SRDPs and the Office of the Inspector General’s (OIG) Self-Disclosure Protocols (SDP) as soon as possible after identifying an overpayment. Generally, the requirement to return the overpayment is tolled for the full amount of time needed to negotiate a potential settlement with CMS or OIG. In the event that settlement negotiations with CMS or OIG are unsuccessful, the tolling ceases and the providers or suppliers risk running out of time to satisfy the overpayment return requirement within the 60-day time period after identification. In other words, providers should self-disclose issues as soon as possible after the quantification is complete so that they have some time on the 60-day clock if settlement negotiations fall through.

Stat Call 2_17

For a more detailed description of the final rule highlights, please see below.


Identifying an Overpayment

The final rule states that a person has identified an overpayment when the person has, or should have through the exercise of reasonable diligence, determined that the person has received an overpayment and quantified the amount of the overpayment. The final rule replaces the actual and constructive knowledge standard for identifying an overpayment, as proposed, with a “reasonable diligence” standard that imposes upon providers and suppliers an affirmative duty to investigate potential overpayments. CMS explains that “reasonable diligence” includes both proactive compliance activities to monitor receipt of overpayments and reactive activities aimed at investigating credible information received concerning an overpayment. While minimal or no compliance would likely expose a provider or supplier to liability under the “reasonable diligence” standard, CMS recognizes that compliance programs are not uniform and must be tailored to the size, type and complexity of a provider or supplier’s business. The key lesson here is that an organization’s monitoring systems need to be on the lookout at the very least for the overpayments the government might later deem to have been foreseeable.  One way to do this is to make sure that the organization is monitoring for potential overpayments in areas identified in OIG’s annual Work Plan.

The 60-day time period for returning the overpayment is triggered either when reasonable diligence is completed (with 6 months as the benchmark for timely investigation) or, in the event the provider or supplier failed to conduct reasonable diligence that resulted in an overpayment, on the day the person received credible information of a potential overpayment. This could mean that if a provider takes longer than 6 months to conduct diligence, its overpayment liability could be retroactive to the date of the overpayment.  The failure to conduct reasonable diligence does not by itself create liability under § 1128J(d) of the Act. Before liability can exist, the provider or supplier must have both failed to conduct reasonable diligence (which reasonable diligence includes quantifying an overpayment) and received an overpayment.

CMS clarifies in the final rule that part of identification of an overpayment is quantifying the amount. The agency instructs that the 60-day clock does not necessarily begin to run based on the finding of a single overpaid claim. Rather, CMS explains that it is appropriate to inquire further to determine whether there are more overpayments on the same issue before reporting and returning the single overpaid claim. In short, the final rule clarifies that identification occurs once the person has or should have through the exercise of reasonable diligence determined that the person received an overpayment and has quantified the amount of the entire overpayment. The 60 day report and return clock does not begin until the identification of that amount.

Notably, CMS, responding to a request for clarification on any duty to proactively search for overpayments, indicates that each provider and supplier has a “clear duty to undertake proactive activities to determine if they have received an overpayment or risk potential liability for retaining such overpayment.” This guidance indicates that the provider or supplier cannot wait to perform any overpayment analysis until it has reason to believe that a specific overpayment exists. Rather, CMS instructs that § 1128J(d) requires that persons subject to the report and return requirement must conduct continual monitoring activities to ensure that they have not received overpayments.

The final rule establishes that SRDPs and SDPs will toll a provider or supplier’s obligation to return an identified overpayment within 60 days. Under the SRDP, the requirement to return the overpayment is tolled for the full amount of time needed to negotiate a potential settlement with CMS. If negotiations with CMS cease at any time, the provider or supplier will then be required to comply with the 60-day overpayment return requirement under this final rule. Similarly, under the SDP, if a provider or supplier fails to reach an SDP settlement with OIG, the provider or supplier has the remaining balance of the 60-day time period to report and return the overpayment, measured from identification of the overpayment to suspension of that 60-day time period when OIG first acknowledged receipt of the SDP submission.

Lastly, for overpayments arising from Anti-Kickback Statute violations, providers or suppliers who are not a party to a kickback arrangement are unlikely in most circumstances to have “identified” the overpayment, and therefore do not have a duty to report the overpayment. But, to the extent that the provider or supplier who is not a party to the kickback arrangement has sufficient knowledge to have identified the overpayment, that provider or supplier has an affirmative duty to report the overpayment to CMS. This requirement could become particularly onerous for hospitals that became aware, either through media reports, examination of Sunshine Act data, or internal complaints, of potential kickbacks between one of its vendors and a member of its medical staff.

The Lookback Period

The final rule states that an overpayment must be reported and returned if identified within 6 years of the date the overpayment was received. The final rule shortens the lookback period to 6 years from 10 years, as first proposed.

According to CMS, the shortened lookback period will not impose an undue burden on providers and suppliers who are already obligated to comply with other legally mandated record retention requirements. Many providers and suppliers retain records and claims data for 6 to 7 years to comply with other federal and state laws.

Methods for Reporting and Returning Overpayments

The final rule expands the list of acceptable methods for reporting and returning overpayments beyond voluntary self-reported refunds, to include applicable claims adjustment, credit balance reconciliations, or other reporting processes set forth by the applicable Medicare contractor. CMS expands the acceptable methods for reporting consistent with comments received, which comments explained that other processes (e.g., the Fiscal Intermediary Standard System (FISS) and Medicare Credit Balance Report (CMS-838)) are equally effective and reliable reporting mechanisms.

CMS also eliminated from the final rule, as proposed, the 13 data elements that must be included on an overpayment report. CMS eliminated these 13 data elements to accommodate the different methods and forms of reporting now acceptable under the final rule. However, CMS maintains that when an overpayment amount is extrapolated based on a statistical sampling methodology, the overpayment report must explain how the provider or supplier calculated the overpayment amount.


*Blake Walsh is admitted only in Tennessee. Her practice is supervised by principals of the firm admitted in the District of Columbia.