Health Law Daily Fifth Circuit affirms ruling validating overpayment methodology
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Friday, June 23, 2017

Fifth Circuit affirms ruling validating overpayment methodology

By Jessica Y. Washington, J.D.

In an appeal brought by a home health agency against HHS, the Fifth Circuit Court of Appeals affirmed the ruling of the United States District Court for the Western District of Texas, which upheld a Medicare Appeals Council’s (MAC) finding that the company auditing the agency’s records used a valid extrapolation methodology in determining an overpayment calculation of over $773,000 against the agency. The agency’s appeal challenged the integrity of the extrapolation methodology used by the auditing company and asserted due process violations based on the agency’s alleged deprivation of a meaningful opportunity to dispute and contest the overpayment calculation due to the withholding of critical evidence. The Fifth Circuit found no merit in the home health agency’s arguments (Maxmed Healthcare, Incorporated v. Price, June 22, 2017, Jones, E.).

Case history. A 2010 audit of 40 of the home health agency’s Medicare claims resulted in the denial of all but one claim, which amounted to an overpayment to the agency in the amount of $773,967 (see Statistical analysis finding $773K overpayment conducted properly enough for court, January 25, 2016). The agency appealed, but the Medicare Administrative Contractor confirmed the audit findings. The home health agency sought reconsideration, but dissatisfied with the ruling upon reconsideration, requested a hearing before an administrative law judge (ALJ). The ALJ found that one of the 39 remaining Medicare claims was erroneously denied and that the overpayment methodology was invalid. The ALJ agreed with the agency, finding that the statistical sampling methodology did not conform with the requirements of the Medicare Program Integrity Manual (MPIM), in that the auditor failed to record the random numbers used in the sample, did not properly define sampling units, failed to demonstrate the independence of these units, and did not demonstrate that the average overpayment was normally distributed.

More appeals resulted in a MAC finding disputing the ALJ’s ruling that the extrapolation methodology was invalid. The MAC cited CMS Ruling 86-1, which states that sampling for extrapolation purposes "only creates a presumption of validity as to the amount of an overpayment, which may be used as the basis for recoupment." Once an overpayment determination has been made, the burden shifts to the Medicare provider to "attack the statistical validity of the sample" or "challenge the correctness of the determination in specific cases identified by the sample." The MAC determined that the sampling was conducted in accordance with the requirements of the MPIM and, moreover, the home health agency could not overcome the presumption of the validity of the sampling.

The agency sought judicial review of the MAC’s decision and raised claims challenging the validity of the overpayment methodology and asserting due process violations. The district court granted summary judgment to HHS agreeing with the MAC’s finding, and affirming the MAC’s reasoning and final determination. The agency then moved to amend or alter the judgment, presenting four complaints from different lawsuits, as "new evidence" to bolster its claims challenging the extrapolation process. The district court denied the motion because the complaints did not include adequate information pertaining to the parties’ evidence, records, testimony, and statistical sampling, and whether they were exactly the same as those at issue in the present case. The agency appealed the district court’s ruling.

As requested by the agency, the Fifth Circuit applied the standard of review pursuant to the Administrative Procedure Act, which requires the court to consider whether the Secretary’s decision is not founded on substantial evidence or is "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." The agency argued on appeal that substantial evidence does not support the MAC’s decision to approve the auditor’s sampling and extrapolation methodology, and that the MAC’s decision was arbitrary and capricious. The agency focused its arguments on the claims that random numbers should have been recorded, the sampling units were not independent, the Rule of Thumb prohibits extrapolation, the four lawsuit complaints highlighted in its post-judgment motion demonstrate arbitrary extrapolation, and that its due process rights were violated. The appeal court found the agency’s arguments to be without merit.

Random numbers. The agency did not argue that the failure to record the random numbers actually rendered the sampling invalid, and the appeal court found that the agency ignored the MPIM’s stated goal for maintaining the random numbers, particularly as the auditor was able to replicate the sample of 40 claims using information available to the agency. The Fifth Circuit held that the MPIM makes clear that the auditor’s failure to follow one or more of the requirements does not necessarily invalidate the statistical sampling or the projection of the overpayment. Instead, an appeal challenging the validity of the sampling methodology must be predicated on the actual statistical validity of the sample as drawn and conducted. The appellate court found that the agency’s argument was inconsistent with the MPIM, and the Secretary did not arbitrarily reject the agency’s argument.

Sampling unit’s independence. The agency contended that the sampling was fatally dependent because the same Medicare beneficiary could have multiple claims or claim lines in the sample. The Fifth Circuit found that the MPIM expressly permits a sample to include multiple claims or claim lines from the same beneficiary. It also found that the agency’s argument relied solely on the MPIM, and that there is no basis for its MPIM argument, and, therefore, HHS did not act arbitrarily and capriciously in rejecting the challenge to the independence of the sampling units.

Rule of thumb. Under the Rule of Thumb provision, a determination of whether home health services are reasonable and necessary must be based on an assessment of each beneficiary’s individual care needs. The home health agency argued that the use of extrapolation violated the Rule of Thumb, because extrapolation is not based on an assessment of each beneficiary’s individual care needs. The Fifth Circuit agreed with the MAC and the district court’s finding that the agency could point to no authority for such a sweeping proposition. It further noted that the use of extrapolation is appropriate where "there is sustained or high level of payment error," as in the case at hand. Thus, the court found that Congress clearly envisioned extrapolation in overpayment determinations involving home health agencies, and that the Secretary’s reliance on extrapolation was justified.

Similarity. The appellate court disputed the agency’s assertion that the four similar complaints were "newly discovered evidence" and that by due diligence could not have been discovered ahead of the district court’s decision. The court found the assertion factually inconsistent with the filing dates of the four complaints. Further, the court found that the complaints did not contain details of the methodologies and other evidence at issue in those cases. Accordingly, the appellate court held that the district court did not abuse its discretion in denying the agency’s motion to amend or alter the judgment.

Due Process. The Fifth Circuit also found that it was unclear whether the agency requested detailed information earlier in the administrative process, and that the agency alleged in only conclusory terms that it was prejudiced by late disclosure. Thus, the district court properly rejected the claim.

The case is No. 16-50398.

Attorneys: Mark S. Kennedy (Kennedy, Attorneys & Counselors at Law) for Maxmed Healthcare, Inc. Mary F. Kruger, U.S. Attorney's Office, for Thomas Price.

Companies: Maxmed Healthcare, Inc.

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