[co-author: Jason Betke - Law Clerk]

Under the Affordable Care Act (ACA), healthcare providers that receive an overpayment from Medicare or Medicaid are required to report and return the overpayment to the government within 60 days after the date on which the overpayment was identified (commonly referred to as the “60-day rule”). An overpayment retained after 60 days constitutes an “obligation” for purposes of potential False Claims Act (FCA) liability. More specifically, it is those obligations that are knowingly concealed, or knowingly and improperly avoided or decreased, which often provide the legal basis for liability under the FCA.

In the overpayment scenario, however, one of the most vexing issues confronted by healthcare organizations concerns the determination as to when an overpayment has been actually identified. While it seems straightforward enough to say that the 60-day rule deadline starts ticking when an overpayment is identified, unfortunately, Congress failed to provide clear guidance in the ACA as to what this means.

Therefore, considerable uncertainty remains as to when that fateful 60-day clock should begin to run. When definitional voids are found in statutes, either agency policy or court rulings typically fill in the gaps going forward. In this situation, a recent court adjudication results in a somewhat disconcerting first taste as to how this issue may unfold.

In a United States District Court ruling from the Southern District of New York, Kane ex. rel. United States et al. v. Healthfirst, Inc., et al, Case 1:11-cv-023254-ER (S.D.N.Y. 2015) the Court squarely confronted the issue of FCA liability and the 60-day rule. In the Kane case, a computer glitch in a vendor’s billing software caused several hospitals to improperly bill Medicaid and secondary payors. After approximately 18 months of improper billing, state authorities raised questions as to the potential billing discrepancies, and software corrections were implemented. One of the defendants then assigned an employee in September 2010 to conduct an internal analysis to determine the scope of the past problem.

The employee (who ultimately became the whistleblower plaintiff in this case) created a spreadsheet listing over 900 potential overpayment claims (totaling over $1 million) and sent it to management in February 2011. In his communication to management, the employee stated that while further analysis was needed to confirm the overpayments, the spreadsheet indicated the “magnitude” of the issue. Although approximately half the claims listed had not been overpaid, in reviewing the facts of this case the Court noted that the spreadsheet did accurately include the “vast majority” of the claims erroneously billed. Management terminated the employee four days after he sent the spreadsheet and, approximately two months later, the FCA qui tam action against his former employer was filed.

Defendants argued that no obligation had been created under the FCA because no claim had been clearly identified and not re-paid within the 60-day time period. Defendants contended that the 60-day time period starts running when overpayments have been calculated and properly quantified. The Court rejected this argument and stated that for purposes of FCA liability, notice of potential overpayment is sufficient to start the 60-day clock ticking.

In reaching this statutory interpretation that a claim is “identified” upon notice, the Court found that:

(1) the FCA’s legislative history supported a finding that FCA obligations arise regardless of whether the amount of the overpayment is fixed;

(2) while the government’s definition that an overpayment is “identified” only upon notice imposes a “demanding standard of compliance,” the ACA provisions do not grant providers an extension to  report and return beyond the 60 days;

(3) Congress embedded the FCA with the purpose and power to provide a potent enforcement vehicle for recovering fraud against the Government; and

(4) it was consistent with its “more than 150-year commitment to deterring fraud,” that Congress expressly incorporated FCA liability into the ACA and intended providers to be responsible for  reporting and returning overpayments within the designated timeline.

Having stated the rule, which many may see as onerous or even unfair, it is also important to remember that in cases such as these, context, or the totality of the circumstances, is critically important. Here, at least for purposes of denying the motion to dismiss in the early stage of this litigation, the firing of an employee four days after he identified potential overpayments was not well received by the Court. Also, the alleged failure to investigate and take action to address the complete list of claims for almost two years could ultimately, in the Court’s opinion, be consistent with an ultimate finding of recklessness or deliberate ignorance.

While the 60-day rule presents a challenging task for providers, the Kane decision acknowledges the spirit of the FCA was not aimed at healthcare providers working in good-faith to address overpayments timely. Certainly, even though an overpayment may qualify as an FCA obligation, with respect to reverse false claims, the District Court in Kane aptly observed that an obligation normally will not ripen into FCA liability without the concomitant finding of knowing concealment of the obligation or the knowing and improper avoidance or decrease of the obligation.

Interestingly, in Kane, following this denial of the motion to dismiss, the parties last month jointly asked the District Court to stay the running of the discovery deadlines so that the parties could conduct settlement negotiations. So for now, as we await further agency guidance (which CMS has indicated will likely not occur until at least 2016) and additional court decisions, the watchword for healthcare organizations is to continue to respond diligently and in good faith to potential overpayments, with the understanding that being put on notice of potential overpayments is sufficient to start the 60-day clock.