Landmark Health Care Reform Legislation Significantly Expands Government's Ability to Fight Fraud, Waste, and Abuse

31 March 2010 Publication
Author(s): Maria E. Gonzalez Knavel Robert D. Sevell Anil Shankar Lawrence W. Vernaglia Judith A. Waltz

Legal News Alert: Health Care

On March 30, 2010, President Obama signed into law a package of reconciliation amendments to the PPACA, which was enacted on March 23, 2010. The signing of the amendments completes the passage of the sweeping health care reform legislation that has dominated political and health care news for the past 14 months. As expected, PPACA contains additional tools to aid the government in identifying and pursuing recovery for allegedly fraudulent, wasteful, or abusive practices.

Because the cost of implementing PPACA (estimated by the Congressional Budget Office to total $940 million during the first 10 years) will be paid for, in part, by eliminating these fraudulent, wasteful, or abusive practices, health providers can expect the government to aggressively use these new tools in the years to come to prevent and recover improper payments and, where determined appropriate, extract substantial financial penalties. Therefore, it is imperative that providers and suppliers understand the obligations imposed and the risks presented by PPACA and take action to limit their legal and financial exposure. This Legal News Alert highlights some of the key provisions of the law in this area.

Mandatory Compliance Programs
PPACA requires providers and suppliers to develop and implement, as a condition of enrollment in Medicare, Medicaid, and/or CHIP, a compliance program, the standards and timing of which will be determined by regulations issued by the HHS Secretary. The specific requirements and implementation dates are likely to vary by industry categories of providers and suppliers. The application of this requirement to currently enrolled providers and suppliers is an issue that also will need to be determined by regulation.

Enhanced Enrollment Protections

  • Enrollment Screening: Within 180 days of PPACA’s enactment, the Secretary, in consultation with the OIG, will establish procedures for screening providers and suppliers participating in Medicare, Medicaid, and CHIP. The level of screening will vary among categories of providers or suppliers based on the risk of fraud and abuse. At a minimum, however, screening at all levels will include licensure checks. The Secretary also is authorized to require fingerprinting, criminal background checks, multi-state database inquiries, random or unannounced site visits, or other appropriate screening. The screening will apply to new enrollees on a date at least one year after PPACA’s enactment, and to currently enrolled providers on a date at least two years after PPACA’s enactment. However, the screening shall apply to revalidations of enrollment 180 days after PPACA’s enactment. For 2010, institutional providers or suppliers will be charged a $500 fee at the time of enrollment or reenrollment to cover the costs of this screening. For 2011 and thereafter, the fee is subject to a consumer price index adjustment.
  • Enhanced Oversight of Certain Providers and Suppliers: PPACA directs the Secretary to establish procedures for a provisional period (not more than one year and not less than 30 days) during which new providers and suppliers under Medicare, Medicaid, and CHIP may be subject to enhanced oversight (such as prepayment review and payment caps) as the Secretary deems appropriate. Current limitations on the use of prepayment review (which allow prepayment review for the sole purpose of developing Medicare claims payment error rates or where there is a strong suspicion of improper billing activity) are expressly repealed.
  • Enrollment Moratoria: PPACA grants the Secretary express authority to impose a temporary moratorium on the enrollment of new providers or suppliers (including categories of providers or suppliers) under Medicare, Medicaid, and CHIP if necessary to prevent or combat fraud, waste, or abuse. The Secretary’s decisions in this regard are not subject to judicial review.
  • Disclosures of Affiliation: Beginning one year from the date of PPACA’s enactment, applications for enrollment or revalidation in Medicare, Medicaid, or CHIP will require disclosures of any current or previous affiliation, whether direct or indirect, with a provider that has uncollected debt, has been suspended or excluded from participation from a federal health care program, or has had its billing privileges denied or revoked. The language of the statute does not clarify the scope of “uncollected debt,” and is another detail that should be clarified by regulation. Enrollment may be denied on the basis of these affiliations.
  • Civil Monetary Penalties: In addition, PPACA authorizes the Secretary to exclude individuals from participation in Medicare, Medicaid, or CHIP or to impose civil monetary penalties (up to $50,000 per false record or statement) for false statements, omissions, or misrepresentations in any application, bid, or contract to participate or enroll in a federal health care program.

Enhanced Enforcement

  • Enhanced Funding: The final legislation substantially increases funding for fraud and abuse enforcement activities by an additional $250 million during the next six years, including $95 million for fiscal year 2011. This amount represents an increase made by the package of amendments to the health care reform legislation, which had initially provided for an additional $10 million per year for fiscal years 2011 through 2020. It is a decrease from the bill that originally passed in the House, which would have provided an additional $100 million per year.
  • Expansion of RAC Program: PPACA expands the Recovery Audit Contractor (RAC) program from Medicare Parts A and B to also cover Medicare Parts C and D and Medicaid. The expansion shall take place not later than December 31, 2010. The Secretary and the OIG will review activities of the RACs and other Medicare and Medicaid Integrity Program contractors, including review of their performance statistics.

Anti-Kickback Statute
In an effort to facilitate the criminal prosecutions of providers and suppliers under the anti-kickback statute (Social Security Act § 1128B(b); 42 U.S.C. § 1320a-7b(b)), PPACA amends the anti-kickback statute to provide that a person “need not have actual knowledge of this section or specific intent to commit a violation of this section.” This amendment is likely to eliminate the Hanlester defense, which interpreted the anti-kickback statute to require proof the defendant (1) had specific knowledge of the law and (2) engaged in prohibited conduct with the specific intent do disobey the law. (Hanlester Network v. Shalala, 51 F.3d 1390 (9th Circ. 1995)). In addition, language is added stating that claims that include items or services resulting from a violation of the anti-kickback statute constitute false claims for the purposes of the False Claims Act.


  • Physician-Owned Hospitals: The final legislation resolves the inconsistency in the prior House and Senate bills over the Stark law’s rural provider and whole hospital exception by prohibiting physicians from having an ownership or investment interest in any hospital (including a hospital that currently qualifies as a rural provider) that does not have a Medicare provider agreement in place on December 31, 2010. (The rural provider exception remains unchanged for providers other than hospitals.) While hospitals with existing physician ownership as of that date will be grandfathered, they will not be able to expand their capacity (except in limited cases where the hospital treats the highest percentage of Medicaid patients in its county, or where the hospital is located in a high-growth, underserved area and has an above-average Medicaid population) or increase the aggregate percentage of physician ownership or investment beyond the level that existed on the date of enactment. (The legislation is inconsistent with regard to how to treat hospitals utilizing the exception that did not have a license on the date of enactment, but which will have one by December 31, 2010.) Moreover, all such hospitals will be required to submit to HHS an annual report containing detailed descriptions of the identity of each owner and investor and the nature and extent of all ownership and investment interests in the hospital. The information will be published on an HHS Web site. New tests as to whether the physician ownership or investment is “bona fide” are included in the statute. Regulations implementing the provision are required to be published by January 1, 2012.
  • In-office Ancillary Services: PPACA also amends Stark’s in-office ancillary services exception (Social Security Act § 1877(b)(2); 42 U.S.C. § 1395nn(b)(2)), which permits physicians and group practices to furnish ancillary-designated health services in the office without violating the prohibition on self-referrals. PPACA adds an additional requirement to the exception that obligates referring physicians to inform the patient in writing that the individual may obtain the specified designated health service from a person other than the referring physician or from a person outside the referring physician’s group practice. The referring physician must supply the individual with a written list of suppliers who furnish the service in the area in which the individual resides.
  • Stark Self-Disclosure Protocol: In 2009, the OIG announced that it would no longer accept self-disclosures unless a “colorable” anti-kickback statute violation exists in addition to the Stark violation. This action eliminated any clear path for disclosure of pure Stark violations, thereby creating significant confusion and consternation among providers and their counsel. PPACA attempts to resolve this situation by instructing the Secretary, in cooperation with the OIG, to develop, within six months of enactment, a Stark disclosure protocol for reporting Stark violations. The Secretary may lower the repayment due as a result of a violation of Stark if the violation has been disclosed according to the protocol.

Civil Monetary Penalties

  • Additional Penalties: PPACA amends the Civil Monetary Penalties Law (Social Security Act § 1128A(a); 42 U.S.C. § 1320a-7a(a)) to authorize civil monetary penalties for a number of activities, including: (1) knowingly making false statements in an application, bid, or contract to participate or enroll in a federal health care program (up to $50,000 for each false record or statement); (2) knowingly making or using a false record or statement material to a false or fraudulent claim for payment under a federal health care program (up to $50,000 for each false record); (3) failing to grant the OIG timely access for the purpose of audits, investigations, evaluations, or other statutory functions, upon reasonable request (up to $15,000 per day); (4) ordering or prescribing items or services during a period when the person ordering or prescribing was excluded from a federal health care program, where the person knows or should know that a claim will be made under that program; and (5) failing to report and return a known overpayment within statutory time limits. While the U.S. government sought to recover penalties for some of these activities prior to PPACA, these amendments provide prosecutors with tools that are specific to health care programs, and in some cases greatly increase potential penalties.
  • Charitable Activities: PPACA also amends the definition of remuneration in the Civil Monetary Penalties Law to clarify that it does not prohibit certain charitable activities. The definition of remuneration under the amended statute expressly excludes: (1) remuneration that promotes access to care and poses low risk of harm to patients and federal health care programs; (2) the offer or transfer of coupons, rebates, or rewards from a retailer for free or less than fair market value if the coupons, rebates, or rewards are offered on equal terms and available to the general public regardless of health care status, and are not tied to the provision of items or services reimbursable by a governmental health care program; (3) the offer or transfer of items or services for free or less than fair market value to individuals determined to be in financial need if there is a reasonable connection with the medical care of the individual and the items or services are not tied to the provision of any health care service and are not offered as part of any advertisement or solicitation; and (4) the waiver of co-payments for the first fill of a covered Part D drug that is a generic drug for individuals by a prescription drug plan under Medicare Part C or D (to be effective on a date specified by the Secretary).

Gift Reports

  • Physician Payments: In a nod to provisions of legislation first introduced by Senator Charles Grassley (R-Iowa) several years ago, the new legislation requires drug, device, biological, and medical supply manufacturers, beginning March 31, 2013, to file annual reports of payments or other transfers of value to a physician and/or a teaching hospital. The reports must include the name, business address, and National Provider Identifier (NPI) of the recipient, the value and form of payment, and a description of the transfer and its purpose. The reports are to be submitted in an electronic form as required by the Secretary, and the information will be made publicly available. Failure to report can lead to significant penalties.
  • Drug Samples: Existing law allows drug manufacturers to dispense drugs to practitioners licensed to prescribe such drugs or to a hospital or pharmacy if a practitioner licensed to prescribe drugs makes a written request. The new legislation would require prescription drug manufacturers and authorized distributors to submit the identity and quantity of drug samples requested and distributed, aggregated by the name, address, professional designation, and signature of the practitioner making the request (or an individual making or signing for the request on behalf of the practitioner) to the Secretary.

Payment Changes

  • Time Period for Submitting Claims: Effective for services furnished on or after January 1, 2010, claims must be submitted to Medicare Parts A and B within one calendar year after the date of service, except as may be specified by the Secretary. Previously, claims could be submitted within three calendar years from the year in which services are furnished. For services furnished before January 1, 2010, claims must be filed not later than December 31, 2010.
  • Overpayments: Medicare and Medicaid overpayments must be reported and returned by the later of 60 days after the date on which the overpayment was identified, or the date any corresponding cost report is due. Providers reporting overpayments also must provide in writing the reason for the overpayment. Failure to report and return an overpayment is expressly made an “obligation” for the purpose of the False Claims Act, and therefore potentially subject to penalties as the retention of an obligation. See 31 U.S.C. § 3729.
  • Suspension of Payment: The Secretary is authorized to suspend Medicare or Medicaid payments to a provider or supplier pending an investigation of a credible allegation of fraud lodged against the provider or supplier. The Secretary is required to consult with the OIG to determine whether there is a credible allegation of fraud and to promulgate regulations implementing this provision.
  • Cross-Provider Recoveries: PPACA grants the Secretary authority to recover payments from providers and suppliers that share the same taxpayer identification number as an individual or entity with a past-due obligation to Medicare.

High Risk Programs
PPACA identifies durable medical equipment (DME) and home health services as items or services that pose a high risk of waste and abuse. PPACA authorizes the Secretary to revoke Medicare enrollment for physicians or suppliers who fail to maintain and, upon request, provide access to documentation related to written orders or claims for DME or certifications for home health services. This authority extends to other high-risk items or services as well, as may be designated by the Secretary. PPACA also requires as a condition of payment documentation that the physician had a face-to-face encounter with a patient prior to a certification for home health services or an order for DME. In addition, physicians who order DME or certify for home health services are now required to be enrolled in Medicare.

Taken together, these provisions clearly signal the government’s intention to aggressively pursue and prevent fraudulent, wasteful, and abusive activities and to maximize recovery when identified. While many important details need to be worked out during the next several years through regulations or by the courts, health care providers and suppliers should understand the obligations and risks the new legislation imposes and take prompt steps to mitigate their potential impact.

Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our health care clients and colleagues. If you have any questions about this alert or would like to discuss this topic further, please contact your Foley attorney or any of the following individuals:

Robert D. Sevell
Los Angeles, California

Anil Shankar
Los Angeles, California

Lawrence C. Conn
Los Angeles, California

Maria E. Gonzalez Knavel
Milwaukee, Wisconsin

Lawrence W. Vernaglia
Boston, Massachusetts

Judith A. Waltz
San Francisco, California

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