Rising Scrutiny of Kwashiorkor Claims Places Hospitals at Risk

by Reed Smith
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Whistleblower lawsuits against health care providers have nearly doubled in the past five years, and have resulted in massive awards. According to the Department of Justice, the government recovered $4.3 billion from health care providers in fiscal year 2013, and whistleblowers received over $324 million from these recoveries. About thirty states have passed their own version of the False Claim Act, and claims under those statutes are likely to rise as well. Hospitals must be prepared for not only increasing government scrutiny but also a heightened risk of suit under federal and state False Claims Acts over the coming years.

Billing for a severe protein deficiency called kwashiorkor is a new area for particular scrutiny in this year’s Department of Health and Human Services Office of the Inspector General (“OIG”) Workplan. Kwashiorkor is primarily found in African famine victims, while Medicare is primarily focused on Americans over 65. This mismatch of known victim population and Medicare population has apparently motivated the scrutiny. Over the past three months alone, the OIG has released audit results at five hospitals, finding that not one of the 466 audited claims billed as kwashiorkor had a supported diagnosis. Each of these hospitals attributed the errors to either the medical coding software program used to code the diagnoses or to what they considered to be unclear coding guidelines for malnutrition cases.

This focus on fraudulent kwashiorkor billing in particular was likely spurred by an employee whistleblower suit recently unsealed. The complaint, brought in California under the False Claims Act, alleges that senior staff at a hospital network ordered employees to overbill Medicare by mis-coding or up-coding diagnoses, including those for malnutrition. One report on the case alleged the provider mis-billed Medicare for over 1,100 cases of kwashiorkor over the two-year period covered by the complaint. The health care provider in that case maintains that any errors in its billings were due to vague and misleading coding guidelines.

Hospitals can anticipate rising government scrutiny of kwashiorkor billing and potential whistleblower claims under the False Claims Act in the near future. To prepare, they should familiarize themselves with the types of insurance coverage that may be available for these claims and the key issues that are likely to arise.

Medicare Fraud and Abuse Insurance

Coverage specifically covering allegations of overbilling under Medicare is often offered as an endorsement to physicians and hospital professional liability insurance policies. While the cost of refunding any overpayment or any fines or penalties are typically not covered, this insurance will typically pay the costs of defending any suit alleging Medicare fraud, including those alleging overbilling for certain disease states such as kwashiorkor.

Professional Errors & Omissions (“E&O”) Insurance

Even if your policy does not include a Medicare Fraud endorsement, you may have coverage for allegations of overbilling under professional errors and omissions insurance. The availability of this coverage will depend on the specific allegations. While overbilling is generally not covered under professional liability policies, a suit alleging not mere fraud but misdiagnosis of simple malnutrition as kwashiorkor or similar medical judgment claims could be could be considered to allege professional malpractice, thus triggering coverage.

Directors & Officers (“D&O”) Liability Insurance

As the above-mentioned lawsuit demonstrates, directors and officers of a hospital may be sued in these cases. Lower-level employees who object to what they believe is wrongful billing may “blow the whistle.” Lawsuits may simply allege that a director or officer knew about overbilling, benefited from it financially, and did nothing to stop it. Unlike professional liability policies, a D&O policy may be triggered by any wrongful act, whether or not it relates to professional services, and usually provides defense coverage where fraud is alleged, unless fraud is later proven. Health care providers should keep in mind that D&O policies may cover not only the directors and officers, but also the hospital entity itself.

Cyber Insurance

Hospitals faced with potential overbilling liability sometimes claim that the miscoding is the fault of medical coding software. Cyber Liability policies may have coverage for software glitches that result in liability.

Hospitals facing potential kwashiorkor or similar Medicare overpayment liability should take several practical steps to preserve these coverages, maximize recovery, and minimize the chances of disputes with insurers. They should also be aware of key issues that are likely to arise in any dispute. These steps include:

  • Consider purchasing a Medicare Fraud & Abuse Endorsement or Cyber Liability coverage.
  • Be aware that you may need to notify your insurance of a “claim” even before suit has been brought, and set up protocols to help identify claims as they arise. Insurers require prompt notice once an insured learns of a “claim,” and may define “claim” to include investigations, subpoenas, and demands.
  • Consider giving a “notice of circumstances” if you are unsure whether there is a claim. Many policies also allow companies to protect against a later argument over whether notice was prompt by giving a notice of circumstances. Should the circumstances discussed in the notice later develop into an investigation or lawsuit, coverage is “hooked” into the policy under which the notice was given.
  • Anticipate coverage disputes regarding indemnity for any settlement or award even if your insurer pays defense costs. Your insurer may characterize such payments as a refund of wrongfully-gotten sums, or “disgorgement,” and refuse to pay. Insureds may also face resistance regarding the portion of any award or settlement that constitutes fines, penalties, or punitive damages. The arguments for coverage of these amounts will depend on your policy language.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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