In a recent decision, U.S. ex rel. Sibley v. Univ. of Chicago Medical Center, the U.S. Court of Appeals for the Seventh Circuit considered allegations that two medical billing and debt collection companies, Medical Business Office Corp. (MBO) and Trustmark Recovery Services, Inc. (Trustmark), and the University of Chicago Medical Center (UCMC), a client of one of the debt collection companies, violated the False Claims Act (FCA) by seeking inappropriate reimbursement from the Centers for Medicare and Medicaid Services (CMS) for Medicare “bad debts.”

The Seventh Circuit affirmed the grant of a motion to dismiss claims against UCMC and MBO based on the insufficiency of the allegations in the complaint but allowed claims to proceed against Trustmark.

While UCMC and MBO avoided FCA liability, Sibley is a reminder that healthcare providers and their contractors must be aware of the potential FCA risks associated with seeking Medicare bad debt reimbursement in a non-compliant manner.

Medicare Requirements for Seeking Reimbursement of Bad Debt

Under 42 C.F.R. § 413.89, Medicare providers can seek reimbursement for uncollected patient deductible and coinsurance amounts if the following four criteria are met:

1. The debt relates to covered services and is “derived from deductible and coinsurance amounts.”
2. The provider establishes that “reasonable collection efforts were made.”
3. The debt is “actually uncollectible when claimed as worthless.”
4. “Sound business judgment established . . . there was no likelihood of recovery at any time in the future.”

Among other requirements, before a bill can be written off as uncollectible, a provider must engage in reasonable collection efforts—such as subsequent billings, collection letters, telephone calls or other types of communication—for at least 120 days after the patient’s original bill is issued. If a provider complies with debt collection requirements, it may seek reimbursement from CMS for such bad debts on its annual cost report.

Reverse False Claim Against UCMC

In Sibley, the relators alleged that UCMC falsely certified compliance with Medicare laws when it sought reimbursement for bad debts on its 2017 cost report despite knowledge that MBO failed to engage in collection efforts that complied with 42 C.F.R. § 413.89. Thus, the relators asserted a reverse false claim against UCMC, alleging that UCMC violated the FCA by failing to repay the government the bad debts that MBO wrongfully caused UCMC to report.

Although the relators alleged that UCMC had conducted an internal audit that revealed MBO overbilled UCMC for its Medicare bad debt collection efforts by at least $270,000, the Seventh Circuit held that the relators failed to plead that UCMC had an “obligation” to repay the government under Rule 9(b)’s heightened pleading requirements. To meet the Rule 9(b) pleading standards, the Seventh Circuit explained that the relators needed to provide specific examples of non-compliant bad debts that were included on UCMC’s cost report, which the relators did not do. Further, even if the relators had established that an obligation to repay the government existed, the Seventh Circuit noted the relators failed to allege facts sufficient to demonstrate that UCMC “knowingly” avoided this obligation. While MBO allegedly falsified the number of staff it dedicated to UCMC’s bad debt collection efforts, understaffing alone created “at most . . . potential liability,” requiring the court to make too many “inferential leaps” to conclude UCMC acted with the requisite knowledge. Thus, the Seventh Circuit dismissed the relators’ claim against UCMC.

FCA Claims Against Debt Collection Agencies, MBO and Trustmark

At the outset, the Seventh Circuit rejected MBO’s and Trustmark’s arguments that they could not be liable under the FCA because they did not directly submit requests for payments to the government. The Seventh Circuit explained that the FCA explicitly authorizes liability premised on causing the presentation of a false claim or a record material to a false claim. But, for the same reasons the Seventh Circuit dismissed the relators’ claims against UCMC, it held that the relators failed to allege facts sufficient to state an FCA claim against MBO. Again, the relators’ allegations surrounding MBO’s suspect staffing arrangement for UCMC’s Medicare bad debt collection project were insufficient to demonstrate that UCMC sought government reimbursement for ineligible debts in its cost report.

In contrast, because the relators offered three specific examples of improper bad debts that Trustmark caused a client to include in its cost report, the Seventh Circuit reversed the district court’s dismissal of the FCA claims against Trustmark. During the relevant period, Trustmark conducted MBO’s bad debt collections for clients other than UCMC. The complaint described three instances where Trustmark wrote off a client’s patient deductibles as bad debts in violation of 42 C.F.R. § 413.89. Because the hospital client ultimately submitted these bad debts to CMS in its cost report, the relators alleged that the hospital’s subsequent certification of compliance with applicable Medicare regulations was false. Further, the Seventh Circuit explained that the complaint plausibly alleged that the reasonable collection efforts required under 42 C.F.R. § 413.89 were material to the government’s decision to reimburse a hospital for Medicare bad debts. According to the Seventh Circuit, “the prerequisite of reasonable collection efforts is hardly an archetypal example of an immaterial regulatory requirement.” Thus, the Seventh Circuit held that the relators pleaded facts sufficient to establish FCA liability against Trustmark.

Key Takeaways from Sibley

As Sibley demonstrates, compliance with Medicare bad debt collection requirements remains a critical area for government scrutiny and potential FCA liability for healthcare providers and their contractors. This is further evidenced by the fact that hospital Medicare bad debt collection is currently an active item on the Office of the Inspector General’s Work Plan, which identifies critical risk areas for Department of Health and Human Services programs that warrant further auditing and evaluation. Before claiming Medicare bad debts on cost reports, providers and debt collection agencies should have policies and procedures in place necessary to ensure that they are engaging in the requisite reasonable collection efforts.