On August 3, 2015, the United States District Court for the Southern District of New York issued an opinion and order in Kane v. Healthfirst, Inc., et al.[1] that provides the first judicial interpretation of the requirement under the False Claims Act (“FCA”) that providers report and refund overpayments identified within sixty days (the “60 Day Rule”).

The court denied the Defendants’ Motion to Dismiss, finding that the Plaintiffs properly stated a claim by alleging that the Defendants violated the FCA by not refunding overpayments within 60 days of identification. In so holding, the court concluded that identification occurs when a provider is “put on notice” of a potential overpayment.

There are several notable aspects of this opinion for providers:

• The case involves bad facts regarding a delay in investigating and refunding claims -- Defendants were notified about a potential issue by Medicaid auditors in September 2010, received a Civil Investigative Demand (“CID”) regarding the issue in mid-2012, and did not complete refunds until mid-2013. The issue triggering the refund related to a software glitch pursuant to which bills were dropped that should not have been billed at all. Therefore, there does not appear to have been a dispute or need for medical review, etc., to determine whether the claims were justifiably billed.
• Even with the bad facts in this case, the court did not conclude that the providers were “put on notice” in September 2010, the first time that the provider had received notice of a potential overpayment. 
• The court states that an obligation must be knowingly concealed or knowingly and improperly avoided or decreased to trigger FCA liability. In particular, the Court states that

the mere existence of an “obligation” does not establish a violation of the FCA. Rather, in the reverse false claims context, it is only when an obligation is knowingly concealed or knowingly and improperly avoided or decreased that a provider has violated the FCA. Therefore, prosecutorial discretion would counsel against the institution of enforcement actions aimed at well-intentioned healthcare providers working with reasonable haste to address erroneous overpayments. [2]

• This notion of reasonable haste is consistent with previous CMS commentary regarding reasonable diligence of providers in determining overpayments in the Medicare Part C and D final rule. Additional rulemaking and case law will be critical to assisting providers in better understanding how they can demonstrate reasonable haste and diligence.

Background
The 60 Day Rule was originally introduced as part of the Patient Protection and Affordable Care Act of 2010 (“ACA”), and requires a provider, supplier, Medicaid managed care organization, Medicare Advantage organization, or prescription drug plan sponsor who has received any overpayment (“Recipient”) to report and return such overpayment no later than 60 days after “identifying” the overpayment or the due date for the corresponding cost report, if applicable.[3] An overpayment is defined as any Medicare or Medicaid fund that a Recipient improperly received or retains after an applicable reconciliation.[4]

As addressed in a K&L Gates LLP client alert[5] in March 2012, CMS released a Proposed Rule in February 2012 stating that an overpayment is “identified” when a Recipient either “has actual knowledge of the existence of the overpayment or acts in reckless disregard or deliberate ignorance of the existence of an overpayment.”[6] The Proposed Rule has never been finalized, and as discussed in another K&L Gates LLP client alert,[7] on February 17, 2015 CMS announced that it was delaying the publication of a Final Rule for one year. There was speculation that, in addition to the time it was taking to review the numerous comments received regarding the Proposed Rule, CMS was waiting for the resolution of the Kane case before publishing the Final Rule.[8]

Overview of Kane v. Healthfirst
Kane represents the first time that “identification” under the 60 Day Rule has been interpreted by a court in a FCA case. The allegations in Kane are that three hospitals, each of which is part of the Continuum Health Network (“Continuum”), failed to return overpayments within 60 days of identification, as is required by the 60 Day Rule. The overpayments relate to improper claims submitted as a result of a software glitch on the part of Healthfirst, Inc. (“Healthfirst”), a private insurance company with a network to which all three Continuum hospitals at issue belong. Healthfirst, as a Medicaid managed-care plan, receives capitated per member per month fees from the government, and in turn is responsible for paying providers for covered services provided to its members. As a result of the software glitch, Healthfirst notified the Continuum hospitals that they could seek additional reimbursement from secondary payors, despite the fact that the claims related to covered services for which Healthfirst was solely responsible. As a result, the Continuum hospitals improperly submitted claims to secondary payors, included Medicaid, for these covered services, and these claims were mistakenly paid.[9]

Continuum was first notified about this issue by auditors from New York State in September 2010.  On February 4, 2011, relator Robert Kane, who at the time was Continuum’s Technical Director, Revenue Cycle Operations, Hospital Systems & Operations, sent Continuum management a spreadsheet listing 900 claims that were potentially problematic. Mr. Kane was terminated four days later, and Continuum failed to further investigate the problem. On April 5, 2011, Mr. Kane filed a qui tam FCA complaint. The United States Government issued a CID requesting more information about the potential issues in June 2012.[10] While Continuum ultimately did refund the money it had received for improperly billed claims, the allegations assert that it did not complete such refunds until March 2013, approximately two years after it became aware of the potential issues. On June 27, 2014, the United States Attorney’s Office for the Southern District of New York and the State of New York both intervened in the case.

On September 22, 2014, Continuum filed a Motion to Dismiss. Continuum argued that under the 60 Day Rule a claim has only been “identified” if it has been “classified with certainty.”[11] Under this definition, as Mr. Kane’s email only listed claims with potential issues, the 60 day clock would not have started running at that time, and therefore no obligation existed on which a FCA case against Continuum could be based. The Government supported “a definition of ‘identified’ that would be satisfied where… a person is put on notice that a certain claim may have been overpaid,” under which Continuum’s failure to return the overpayment would have matured into an obligation. [12]

Holding of the Court
In denying Continuum’s Motion to Dismiss, the Court agreed that identification only requires a person to be put on notice that a certain claim may have been overpaid.  In making its decision, the court examined the legislative history of the ACA, finding that Congress “intended for FCA liability to attach in circumstances where… there is an established duty to pay money to the government, even if the precise amount has yet to be determined.”[13] It also said that Continuum’s proposed definition of identification would lead to absurd results, as entities would be able to avoid FCA liability by deliberating ignoring potentially problematic findings, and cited both the legislative purpose of the FCA and the interpretation of the 60 Day Rule provided by CMS.

Limitations on Holding
While the court agreed with the Government’s more expansive definition of “identify,” it also took efforts to note the limits of the holding. As discussed above, the court stated that “the mere existence of an ‘obligation’ does not establish a violation of the FCA.”[14] Instead, a provider must also have “knowingly concealed or knowingly and improperly avoided or decreased” an obligation for a violation to occur in the context of reverse false claims. [15]

In this case, a specific list of potentially problematic claims was sent to Continuum management in February 2011. Notably, however, Continuum was first made aware of the billing problem by the New York State Comptroller’s office in September 2010, and the software error was patched by December 13, 2010. Despite the fact that Continuum was technically “put on notice” five months before, the court stated that it was only after Kane had put the Defendants on notice of a set of claims likely to contain numerous overpayments that the Defendants had an established duty to report and refund money.

Considerations for Providers
Providers should be aware going forward of the expansive definition of “identify” adopted by the court.   As the first FCA case to interpret the 60 Day Rule, the Kane decision may have significant impact on other courts beyond the Southern District of New York. In addition, CMS may consider this finding in its Final Rule, which is due to be released by February 16, 2016.

Providers should also be cognizant of the running of the 60 day clock and when identification of an overpayment may occur. The court recognized that “Congress intentionally placed the onus on providers, rather than the Government, to quickly address overpayments and return any wrongly collected money.”[16] The key element for providers, if questioned on this timeframe, will be in demonstrating that they were “working with reasonable haste to address erroneous overpayments.”[17] We note that Kane represents an extreme example of a failure to investigate after being notified by the government about potential issues. Based on the court’s opinion, providers should work with “reasonable haste” to avoid FCA liability based on a violation of the 60 Day Rule. [18]

It remains an open question as to how the 60 Day Rule will be interpreted in terms of extrapolation. Statistical analysis has been increasingly utilized as a tool to analyze the validity of large universes of claims. A statistically valid sample of claims is often reviewed, with the results extrapolated across an entire universe of affected claims. This process may also include an initial “probe” sample, where a group of approximately 30-100 claims is reviewed first, and the larger statistically valid sample is only reviewed if an issue is identified. Under the Kane opinion, it is unclear where in this process identification would occur. Possible options include when the relevant universe is defined, when an issue is first identified in a probe sample, or when an error rate is determined.

Ultimately, upon potential notice of a potential overpayment, providers should promptly inquire, investigate, and refund, as indicated. Providers may further wish to conduct such inquiries under the attorney-client privilege.

Notes:
[1] Kane v. Healthfirst, Inc., No. 1:11-cv-02325-ER (S.D.N.Y. Aug. 3, 2015).

[2] Kane at 26.

[3] See 42 U.S.C. § 1320a – 7k(d).

[4] See 42 U.S.C. § 1320a – 7k(d)(4)(B).

[5] K&L Gates Health Care Reform Client Alert Series: CMS Issues Proposed Regulations on Liability for Failure to Disclose and Return “Identified” Overpayments in 60 Days

[6] See Medicare Program; Reporting and Returning of Overpayments, 77 Fed. Reg. 9179 (proposed Feb. 16, 2012). The Proposed Rule only applies to Medicare Part A and Part B providers and suppliers, and states that rules for other providers and supplies will be addressed later.

[7] K&L Gates Health Care Alert: 60 Day Rule

[8] Topor, Eric, “CMS Might be Waiting on N.Y. Court Ruling in Delay of 60-Day Overpayment Final Rule,” Bloomberg BNA (April 1, 2015) available at http://www.bna.com/cms-waiting-ny-n17179924852/.

[9] Kane at 4.

[10] Kane at 17.

[11] Id.

[12] Id.

[13] Kane at 24.

[14] Kane  at 26.

[15] Id.

[16] Kane at 29.

[17] Kane at 26.

[18] Id.