A recent report issued by OIG finding an Indiana community hospital owed over $22 million in extrapolated overpayments carries some important lessons for hospitals audited under OIG’s hospital compliance program.  As described in the report, OIG focused its review on the hospital’s inpatient rehabilitation claims over a two-year period, and ultimately concluded that most of the sampled claims did not meet Medicare medical necessity standards for coverage and documentation.  The hospital compliance program under which the audit was undertaken involves a series of audits by OIG to measure hospital compliance with Medicare rules.  OIG’s report illustrates the complexity and scope of the billing issues and compliance challenges triggered by these compliance audits.

Using “computer matching, data mining and data analysis techniques,” OIG has assessed hospital claims based on risk of noncompliance with Medicare billing requirements.  The Community Hospital audit was focused primarily on a risk area identified during prior OIG reviews at other hospitals:  claims for inpatient rehabilitation services.  A stratified sample of 170 inpatient and outpatient claims was selected for audit, for purposes of determining the hospital’s compliance with Medicare requirements for billing services on selected types of claims.  Over half the claims in the sample were for inpatient rehabilitation services.  OIG found that 86 inpatient claims did not fully comply with Medicare billing rules, of which 63 were inpatient rehabilitation service claims.  In finding that Medicare criteria for the inpatient rehabilitation level of care were not met for these 63 claims, OIG cited both Medicare rules and sections of the Medicare Benefit Policy Manual for the coverage and documentation requirements that must be met for intensive inpatient rehabilitation services to be considered “reasonable and necessary.” 

The audit of the sampled claims resulted in net overpayments of $1,266,758.  Based on the sample results, OIG extrapolated that the hospital had received overpayments in excess of $22 million for the two-year audit period, which it recommended the hospital refund to the Medicare contractor.  Further, OIG recommended that, in accordance with the 60-day overpayment rule, the hospital should exercise reasonable diligence to identify similar overpayments outside the two-year audit period.

The hospital’s extensive response appended to the report takes issue with OIG’s findings with respect to all of the inpatient rehabilitation claims.  The hospital’s defenses raise a number of legal and factual issues with respect to the audit sample, the extrapolation process, and the substantive findings with respect to the coverage of the inpatient rehabilitation admissions:

• The hospital argued that its inpatient rehabilitation claims during the same two-year period had been audited repeatedly, with some of the denials overturned on appeal and other denials still in the appeals process.  Aside from skewing samples and extrapolation, the hospital protested that neither these audit/appeal results nor its Programs to Evaluate Payment Patterns Electronic Report (PEPPER) reports showed its inpatient rehabilitation billings were outliers.  However, OIG’s audits will target providers submitting claims for services determined to be a risk to the Medicare program generally, and inpatient rehabilitation claims have been so identified.

• In the course of the audit, the hospital engaged an independent board-certified physiatrist to review each of the challenged claims for inpatient rehabilitation.  The hospital’s expert confirmed that he would have personally admitted all but 12 of the 63 patients in issue for inpatient rehabilitation services, and that a physician having direct contact with the patients could have reasonably admitted those patients as well.  Although this independent expert analysis was provided to OIG prior to the issuance of its final report, OIG, having engaged a contractor to review these claims, did not modify its contractor’s findings or re-engage the contractor to conduct further reviews.  The hospital also challenged the expertise of OIG’s contractor in reviewing these types of specialized services.

• The hospital argued that OIG’s reliance on the Medicare Benefit Policy Manual in evaluating its claims was inappropriate, insofar as this sub-regulatory guidance does not carry the force of rules formally adopted under the Administrative Procedure Act after public notice and comment.  The hospital urged that inpatient rehabilitation services must be evaluated under the fairly detailed provisions of the Medicare rules setting out conditions for coverage of these services.  Some judicial precedent supports the hospital’s position in this regard, as do certain policy memoranda issued last year by the Department of Justice.  However, not all authorities are unanimous on this point. 

• The hospital engaged a statistician to challenge OIG’s sampling methodology, the basis for extrapolation over the two-year period to arrive at the $22 million overpayment amount, and the recommendation that the hospital further examine additional periods outside that two-year time frame.  In addition to technical questions based on OIG’s elimination of some claims from the original sample and the extrapolation methodology as applied to the stratified sample, the hospital argued that extrapolation is improper when the claims denial is based on medical necessity and where coverage standards require professional review of individual cases.  While at least one case supports this position in the context of inpatient rehabilitation claims, the authorities are generally split on this point as well.

As noted in the report, OIG’s audit recommendations are not final determinations by the Medicare program, but recommendations to CMS.  However, when OIG audit recommendations are passed to CMS and the MAC, the provider is faced with a formal demand for refund of the extrapolated overpayment.  At that point, the provider must be prepared to appeal within a relatively short period (30 days) in order to stay recoupment.  Medicare Part A/B administrative appeals involve five levels of review, requiring that the provider invest significant time and expense to engage experts and attorneys in order to counter the findings of OIG’s audit contractor, and to challenge statistical sampling and extrapolation.  Further, after the second level, the agency may initiate recoupment even if the provider proceeds with additional levels of appeal. 

This audit report reflects a rising tide in the overpayment demands stemming from OIG hospital compliance audits, particularly where OIG has hired third party contractors to serve as auditors.  The extrapolated overpayment amount, coupled with OIG’s recommendation that the hospital undertake a broader review of claims outside the two-year audit period to comply with the 60-day overpayment refund rule, illustrates the serious financial consequences that may flow from adverse audit findings.  Hospitals would be well-advised to approach these audits with significant caution, and be prepared to channel substantial compliance, legal and expert resources to engage OIG and its contractor during the audit process, and to respond to adverse recommendations.