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Proposed Rule Puts Labs at Greater Risk of FCA Liability

by | Mar 10, 2023 | CMS-nir, Essential, National Lab Reporter

CMS recently proposed a rule that would make the False Claims Act rule the standard for overpayments under the Affordable Care Act regulations.

Failure of labs and other providers to report and return overpayments from Medicare is a violation of not only the False Claims Act (FCA) but also Centers for Medicare & Medicaid Services (CMS) regulations implementing the Affordable Care Act (ACA). Although the laws overlap, there’s also a big difference in terms of what the provider knows or should know about the overpayment to trigger the duty to report and return it. However, on December 27, 2022, CMS issued a proposed rule that would end this discrepancy and make the FCA rule the standard for overpayments under the ACA regulations.1 While this might sound like the kind of legal arcana that only an attorney would care about, it could have a practical and significant impact on your lab’s risk of liability for failing to return Medicare overpayments. Here’s a briefing of what compliance managers need to know about the proposed rule.

The Medicare Overpayment Rules

Under the current regulations, providers and suppliers that become aware that a potential overpayment may have occurred are required to investigate whether there has, in fact, been an overpayment and, if so, determine the amount. They then have 60 days to notify the government and return the overpayment amount. The key language (in 42 C.F.R. § 401.305(a)(2)):

“A person has identified an overpayment when the person has, or should have through the exercise of reasonable diligence, determined that the person has received an overpayment and quantified the amount of the overpayment. A person should have determined that the person received an overpayment and quantified the amount of the overpayment if the person fails to exercise reasonable diligence and the person in fact received an overpayment.” [Emphasis added].

42 C.F.R. § 401.305(a)(2)

In other words, the regulation gives providers a period of time to look into possible overpayments and determine their amount. Liability becomes a possibility only when providers fail to exercise the expected “reasonable diligence.” In essence, providers must exhibit negligence regarding the overpayment to run afoul of the ACA regulatory rule.

The FCA Overpayment Rules

Failure to report and repay a Medicare overpayment may also be what’s called a “reverse false claim” resulting in liability under the FCA. The difference is that the FCA doesn’t provide for the exercise of reasonable diligence the way the ACA regulation does. For liability under the FCA to kick in, the provider need only receive the overpayment “knowingly,” which the statute (31 U.S.C. 3729(b)(1)(A)) defines as meaning “that a person, with respect to information—(i) has actual knowledge of the information; (ii) acts in deliberate ignorance of the truth or falsity of the information; or (iii) acts in reckless disregard of the truth or falsity of the information.”

The UnitedHealthcare v. Azar Case

The practical impact of this difference in ACA and FCA standards became clear in an FCA lawsuit by CMS against an insurer for failing to report and refund Medicare Part C and D overpayments. The federal court ruled that using the FCA as an enforcement tool for failure to report and return overpayments was inconsistent with the regulations to the extent that the latter imposes a more lenient negligence standard for liability. Accordingly, CMS exceeded its authority by seeking to hold the insurer to the more stringent FCA standard rather than the one provided for in the regulation, the court concluded [UnitedHealthcare Ins. Co. v. Azar, 330 F. Supp. 3d 173, 191 (D.D.C. 2018), rev’d in part on other grounds sub nom. UnitedHealthcare Ins. Co. v. Becerra, 16 F.4th 867 (D.C. Cir. 2021), cert. denied, 142 S. Ct. 2851 (U.S. June 21, 2022) (No. 21-1140))].

The New CMS Proposed Rule

Apparently, the UnitedHealthcare case left an impression on CMS. To ensure that it doesn’t happen again, the agency is proposing to replace the negligence provision of the ACA regulation with new language specifying that a “person has identified an overpayment when the person knowingly receives or retains an overpayment” [emphasis added]. To be clear, the proposed rule states that the term “knowingly” will have the same meaning as that set forth in the FCA.

CMS made no attempt to conceal its intentions. The preamble to the final rule expressly mentions the UnitedHealthcare case as its reason for amending the regulation. We want to amend the Parts A and B and Parts C and D Overpayment Rules “to remove the reference to ‘reasonable diligence’ and replace it with language…that gives the terms ‘knowing’ and ‘knowingly’ the same meaning given those terms in the [FCA],” the agency states.

Impact on Labs

The proposed rule puts labs and other providers in a more precarious position regarding liability for failing to report and repay Medicare overpayments. The real kicker is that the new “knowingly” requirement eliminates the current regulatory “reasonable diligence” buffer for providers to not only determine the existence of overpayments but also quantify their amount within 60 days. Result: Labs could be held liable for submitting reverse false claims under the FCA in connection with overpayments they know exist but are unable to quantify within 60 days. Regrettably, nothing in the proposed rule explains exactly how labs are supposed to repay overpayments of unknown size within 60 days.

Public comments on the proposed rule ended on February 13, 2023. There’s always the possibility that CMS will clarify quantification of overpayments—and perhaps even leave the reasonable diligence rule for quantifying overpayments in place. But that seems highly unlikely.

At the end of the day, labs will have to ensure they have robust compliance systems for Medicare billings and detecting potential overpayments. Otherwise, they’ll be at risk of liability under not only the ACA regulations but also the FCA.


  1. https://www.federalregister.gov/documents/2022/12/27/2022-26956/medicare-program-contract-year-2024-policy-and-technical-changes-to-the-medicare-advantage-program

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