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Hospitals and Physicians need to Worry about Bounty Hunters Recovering both Federal Taxes and Overpayments under the Medicare Program

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Gary J. McRay
Foster Swift Health Care Law Report: Special Edition
February 1, 2008

Federal Tax Whistleblowers. Under Section 7623(b) (the "Act") of the Internal Revenue Code of 1986, as amended ("Code"), the IRS may award whistleblowers, who are the source of the information brought to the government’s attention, from 15% to 30% of taxes, penalties and interest recovered. The recovery is up to 10% for whistleblowers relying on publicly available information. To encourage whistleblowers, the IRS has established the new Whistleblower Office and now has issued a Notice 2008 4 describing how a claimant files a tax whistleblower claim. The Notice of 2008 4, effective January 14, 2008. Steven Whitlock, the Director of the Whistleblower Office, has stated: "Since Congress enacted new procedures increasing award amounts last year, informants have come forward with information on alleged tax noncompliance amounting to tens of millions of dollars and, in some cases, hundreds of millions of dollars."

Since the Whistleblower Office was created in December 2006, the IRS has reported that it has received about 80 claims, half of which were submitted in just the last two and a half months of 2007. To make a claim, an informant must file a new Form 211, an Application for Award for Original Information, which asks informants to provide an estimate of the tax owed, the pertinent facts in the case, and an explanation of how the informant obtained the information. The IRS’s Whistleblower Office then makes the final determination about whether an award will be paid and the amount of the award for claims that it processes. The Act only covers large claims. To be eligible for an award, the tax, penalties, interest and amounts in dispute must exceed $2 Million for any taxable year, and if the targeted taxpayer is an individual, the person’s gross income must exceed $200,000 for the taxable year in question. Although the IRS indicates that it will protect the identity of the claimant to the fullest extent permitted by law, there are some circumstances where the claimant may be needed as a witness, and therefore to pursue the investigation or examination the claimant’s identity will be revealed.

Because of the expanded detail found on IRS Form 990, and increased disclosure to other federal and state agencies, potential whistleblowers have more information to draw upon in formulating potential claims. Plus, there is now an IRS office that is willing to entertain their applications for a share of the recovery.

Medicare Whistleblowers. Medicare has also created a Medicare bounty hunter program called the Recovery Audit Contractor ("RAC") Program. The Medicare Prescription Drug, Improvement and Modernization Act of 2003, authorized the RAC Program on a 3 year demonstration basis. The demonstration basis, at first, included three states: New York, California and Florida. Under the RAC Program, RACs are paid on a contingency fee basis, receiving a percentage of the purportedly improper overpayments they collect from Medicare Part A and Part B providers, such as hospitals and physicians. The RACs use automated software programs to identify potential errors, and RACs may also request medical charts to review medical necessity documentation.

To expand RACs throughout the country, CMS now intends to contract with four regional companies. CMS has issued a request for proposals, and desires to implement hospital coding reviews in all 50 states in a staggered expansion schedule by 2010. Michigan is being scheduled to come under review by its regional RAC in March of 2008. RACs will review duplicate payments, fiscal intermediary errors, medical necessity and coding errors. In fiscal year 2006, RACs identified improper payments in the amount of $303 Million and actually collected approximately $60.6 Million in overpayments. According to the American Hospital Association, approximately 89% came from hospitals.

Under the demonstration project, RACs were able to review past claims back four years. CMS reduced the look back period to a total of three years. In addition, no claims for the dates of service prior to October 1, 2007 will be reviewed, regardless of the actual start date for the RAC Program in any particular state. As a practical matter, this means that RACs will only look at fiscal year 2008 claims, forward from October 1, 2007. The RAC Program is not intended to replace other audit and review efforts by Medicare or its contractors. Rather, it simply creates a new level of audit and review. RACs receive their claims data directly from Medicare providers or from the regional fiscal intermediary ("FI"). Providers must respond to a RAC request for records within 45 days, although they may request an extension of time prior to the 45th day. A failure to timely respond to the requested medical records may result in the disallowance of the reviewed claim.

There are two types of review: Automated Review and Complex Review. An Automated Review is where a RAC makes a claim determination at the system level without a person actually reviewing the medical record. A Complex Review occurs where a RAC makes a claims determination using a human review of the medical record. Complex medical reviews are used in situations where there is a high probability that the service is not covered or where no Medicare policy or Medicare sanction coding guideline exists.

The standard CMS appeal process applies to any RAC determination of overpayment with two exceptions. Providers are given 15 days to rebut the RAC’s determination, although this process is not a prerequisite to filing an appeal. Plus, a provider for inpatient claims must appeal to the fiscal intermediary for the RAC’s determination within 30 days of receiving the notice of the overpayment. All appeals of non inpatient services are handled through the standard CMS appeal process.

Although the contingency fees of each RAC are considered to be proprietary by CMS and not disclosed, in a report by the American Hospital Association approximately $14.5 Million was associated with the RAC Program, and this was approximately 21% of the overpayments that were collected, so the RAC program is not inexpensive. The American Hospital Association has serious concerns with the existing RAC Program, and CMS’s desire to expand it. The American Hospital Association is encouraging hospitals to contact their legislators to adopt HR 4105, which would delay the RAC implementation for one year. Unfortunately, the RAC Program will (i) increase audits for both hospitals and physicians, and (ii) increase the cost of delivering health care since this will be a program potentially subject to abuse as private contractors try to profit from the billing complexity created by Medicare.