ZPIC Audits Involving Extrapolated Damages Can Bankrupt Your Practice.

(January 30, 2013): The Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (also referred to as “BIPA”), amended Section 1869 of the Social Security Act, resulting in a number of significant changes to the way administrative appeals of denied Medicare claims are handled. One change in particular has greatly simplified the Medicare appeals process.  BIPA established a uniform process for handling both Medicare Part A and Part B administrative appeals.

I.          ZPIC Audits Involving Extrapolated Damages Have Become Quite Common.

Unlike the Medicaid administrative claims appeal process (which varies from state to state), thanks to BIPA, the Medicare administrative appeals process is relatively straightforward in terms of its applicable deadlines and its filing procedures.  Unfortunately, a number of potential pitfalls remain, especially if a health care provider is inexperienced and has been subjected to an audit involving multiple claims where the Zone Program Integrity Contractor (ZPIC) has engaged in statistical sampling and has “extrapolated” the alleged damages in order to arrive at a projected overpayment.  Although most providers can handle the appeal of individual (or even a handful) of claims, if you are facing a “big-box”[1] appeal where alleged damages have been extrapolated, it is strongly recommended that you obtain the assistance of experienced legal counsel to represent you in the proceedings.

II.          How Are ZPIC Audits Initiated?

A ZPIC may initiate a post-payment audit of your Medicare claims for a variety of reasons. After handling the administrative appeal of literally tens of thousands of claims, we have found that the two most common reasons for an audit are:  (1) Data-Mining and (2) Complaints. 

Data-mining  may result in a provider being targeted based on the number of patients he or she is allegedly seeing each day, the frequency that a specific Code Procedural Terminology (CPT) code is being billed, or countless other factors examined by a contractor when assessing coding and billing practices.  Alternatively, a provider may be reviewed as a result of a complaint filed by a former employee, a dissatisfied patient, or even a competitor.  Regardless of the source, once a provider is targeted and an audit has been initiated, it is imperative that the provider diligently work to address any operational, coding, or billing concerns that may arise.

While the nature of a contractor’s initial contact with a Medicare provider can vary (it often is made by an unannounced site visit), a provider may also receive a written request for information from the ZPIC. In past years, written requests were primarily focused on supporting medical documentation related to specific claims for services or devices billed to Medicare.  This focus has seemingly changed over the past few years. Although many requests continue to seek only supporting medical documentation, we have seen an appreciable increase in the number of requests for business records sent out by Medicare contractors such as ZPICs.  These requests often seek copies of contracts, medical director agreements, and copies of accounting records.  Essentially, these document requests are meant to provide the contractor with an accurate picture of the provider’s business and referral relationships.  Should the contractor identify any questionable relationships, they will then refer their findings to the Inspector General of the Department of Health and Human Services (HHS-OIG) and / or the Department of Justice (DOJ) for further consideration.

After you have received a request for supporting documentation (either in writing or as a result of an unannounced visit) and have submitted the information sought, the requesting ZPIC will subsequently send you a letter, outlining the ZPICs findings.

While practices vary from ZPIC to ZPIC, a provider typically first learns that an auditing contractor intends to extrapolate an alleged overpayment in one of two ways.  In some cases, the initial letter sent to the provider requesting medical records associated with a group of claims may expressly state that the claims identified constitute a statistically relevant sample.  As such, when the audit is completed, the ZPIC will then extrapolate the alleged damages to the universe of claims at issue in the case.  In most cases, the contractor has examined a universe which consists of a two year period of claims.  Alternatively, a provider may not learn that the contractor intended to extrapolate damages until the results of the ZPIC audit are received.

It is not uncommon for a ZPIC to take from 6 months to 2 years to complete its review of your documentation. Shortly after receiving the ZPIC results letter, you should receive a “demand letter” from your Medicare Administrative Contractor (MAC).[2]  While the letter from your ZPIC will typically lay out the audit results and discuss the reasons for denying certain claims, you should pay careful attention to see if the ZPIC has extrapolated the alleged damages in your case from the sample of claims reviewed to the universe of claims at issue.

In most cases, the ZPIC letter will expressly state that their correspondence is not a demand letter. Instead, the second letter, sent by the MAC, will state the amount of the alleged overpayment and lay out when payment is due.  Normally, the date of the MAC letter is also used to calculate the due date of the provider’s rebuttal and redetermination appeal.  While this process has become fairly uniform, we have continued to see exceptions to the general rule.  In at least one case, the demand letter was sent out in a third letter. In another case, the contractor’s demand letter language was incorporated into the first letter. As a result, it is imperative that you carefully review any and all correspondence sent by a ZPIC.

III.            What is an “Extrapolation”?

An extrapolation is the process of using statistical sampling in a review to calculate and project or extrapolate alleged overpayments made in connection with Medicare claims.  Medicare contractors seek out errors in a purported “statistically relevant sample” of the provider’s Medicare claims and then calculate and apply the “error rate” to the entire universe of claims covering a given period of time.

The practice dates back twenty years to a decision by the HHS to authorize the use of statistical sampling in lieu of engaging in onerous claim-by-claim reviews.  In Chaves County Home Health Services v.  Sullivan,[3] the Court of Appeals for the District of Columbia Circuit upheld extrapolation as within the Secretary’s discretion.

When faced with a potential case where the universe of claims to be reviewed is so large that a claim-by-claim review is not administratively feasible, CMS has authorized its contractors (including ZPICs) to use statistical sampling to arrive at a projected overpayment.  As HCFA Ruling 86-1 reflects:

“Intermediaries and carriers may use statistical sampling to project overpayments to providers, physicians and suppliers when claims are voluminous and reflect a pattern of erroneous billing or overutilization and when case-by-case review is not administratively feasible.  Providers can appeal the overpayment determination by challenging the statistical validity of the sample or the correctness of the determination in specific cases identified by the sample.”

As HCFA Ruling 86-1 expressly notes, a provider or supplier who is concerned about the correctness of the projected overpayment can challenge the “statistical validity” itself or the correctness of the “specific cases identified by the sample.”  As HCFA Ruling 86-1 further notes, statistical sampling is appropriate when:

“. . . The intermediary [has] decided that this method of determining the amount of the overpayment was not administratively feasible, given the volume of records involved and the cost of retrieving all the beneficiary records for the period in question.  The cost of identifying and calculating each individual overpayment itself would constitute a substantial portion of the amount the intermediary might reasonably be expected to recover.  Further, the allocation of sufficient staff to reexamine all individual claims for the period in question would interfere with current claims processing activities to an unacceptable degree.”

While a provider may still challenge the denial of claims in the sample reviewed, the use of extrapolation greatly increases the potential financial harm that a provider mat suffer as a result of an audit.  Moreover, the reliance of ZPICs on statistical sampling only seems to be growing.  This makes it essential for providers to involve experienced counsel and qualified experts as soon as possible in cases where damages have been extrapolated.

The use of extrapolation can greatly increase a provider’s potential liability.  It is not at all uncommon for a sample of denied claims which would normally add up to a mere $10,000, to be magnified to the universe of claims, to an extrapolated alleged overpayment of $500,000 or even more.  As we will discuss, there are a number of business reasons why everyone except the provider benefits from the use of extrapolation.  

IV.            Challenging a ZPIC’s Extrapolation of Alleged Damages.

In recent years, we have seen Medicare contractors (such as ZPICs) increasingly rely on statistical extrapolation estimates when assessing claims overpayments.  In early cases, we successfully challenged countless extrapolations by identifying relatively basic reasons for why the calculations were inconsistent with accepted statistical principles and practices.  Now, however, providers should expect ZPICs, and soon, Recovery Audit Contractors (RACs) to send a team made up a statistician, one or more clinical reviewers and an attorney, to vigorously oppose most, if not all, hearings challenging the validity of the extrapolation.

Imagine that a ZPIC or RAC hands you a claims analysis rife with alleged errors, an indecipherable list of statistical formulas, and an extrapolated recovery demand that will cripple your practice or clinic.  What steps should you take to analyze their work?  Based on our experience, providers should carefully assess the contractor’s actions, use of formulas, and application of the RAT-STATs program when selecting a statistical sample and extrapolating the alleged damages based on the sample pulled.  Over the years, we have challenged the extrapolation of damages conducted by Medicare contractors around the country, covering tens of thousands of claims.  Regardless of whether you are providing E / M, home health, physical therapy, hospice, or other services, it is imperative that you work with experienced legal counsel and statistical experts to analyze the statistical sampling and extrapolation steps taken by the contractor.

Should you succeed in invalidating the extrapolation, the whole game will change.  The question is—“How can you go about fighting an extrapolation calculation?” As your legal counsel can attest, there are a number of both legal and substantive statistical arguments that should be analyzed by your counsel and expert statistician when challenging the validity of a statistical extrapolation.  The weight given to a specific argument may vary from judge to judge.  As a result, it is often in your best interest to assert any and all legitimate arguments in support of your assertion that the statistical extrapolation is fatally flawed.

V.          Questions You Should Ask When Retaining Legal Counsel to Represent Your Interests.

When faced with extrapolated damages, it is almost always necessary to retain qualified legal counsel to represent the provider in the Medicare administrative appeals process.  Possible considerations include, but are not limited to:  

(1)  Has the law firm ever handled large, complex contractor audits before? Some firms will happily take your case, despite the fact that they have little or no experience in this area of health law.  Do not pay for your attorneys to learn how to handle your case.  While every case is different, an experienced firm will have developed a number of arguments and defenses that may be readily used in your case without having to conduct costly, extensive legal research. 

(2)   Can the firm provide client references? You should not hesitate to ask the attorney for references who can discuss the quality and cost effectiveness of the attorney’s work.

(3)   Has the attorney handled multiple hearings before ALJs hearings and / or appeals before the Medicare Appeals Council (MAC)? At the end of the day, there are few substitutes for experience.  Make sure you are comfortable with your attorney.

(4)   Inquire into who will be used as a statistical expert.  Experienced legal counsel will have likely developed solid relationships with statisticians who can be engaged to review the Medicare contractor’s statistical methodology. 

(5)   The issue of “cost” should be addressed before any final decision is made to retain an attorney to represent your practice or business.  Attorneys may be willing to handle your case on an hourly basis, as a flat rate, or on some other basis.  It is essential that you conduct an honest review of your financial condition and engage competent counsel at a cost you can afford.   

VI.           Conclusion.

Medicare appeals cases involving extrapolated damages can be quite complicated.  If you intend to challenge an extrapolation, it is essential that you work with experienced legal counsel and experts.  Not yet facing an audit?  Avoid this issue in the first place — develop, implement and adhere to an effective Compliance Plan.  Work with your staff to ensure that each of your claims fully meets applicable documentation, coverage and payment requirements before billing.

Robert W. Liles and other health lawyers in Liles Parker have extensive experience representing Part A and Part B providers in Medicare appeals cases, both with and without an extrapolation of projected damages.  Our attorneys are also experienced in setting up effective Compliance Plans and Programs for Medicare and Medicaid providers.  Should you have any questions, please give Robert a call for a free consultation.  He can be reached at: 1 (800) 475-1906.