Medicaid Fraud Temporary Suspensions – Bringing a Thermonuclear Weapon to a Knife Fight

Turns out I missed this story when I was busy the last week or two.  Yes, this is a Colorado-based health law blog, and this story is from Texas, but (1) as someone who was born and raised and educated in Texas through college, I retain some interest in happenings in the state, and (2) I’m particularly interested in the goings-on at the Attorney General’s office there because my wildly more successful law school classmate is the Texas solicitor general.  So cut me some slack.

This brings up a topic that is central to a case I’ve been working on, and one that has really piqued my interest – the power of state Medicaid agencies to withhold pending claims and to “temporarily” suspend a provider’s participation in the Medicaid program in cases where they suspect fraud.  I should note that Knicole Emanuel has written a lot about this, particularly from a North Carolina perspective.

Here’s the scoop.  In 1987, the Department of Health and Human Services promulgated 42 CFR § 455.23, which permitted – but did not require – state Medicaid agencies to withhold payments “upon receipt of reliable evidence that the circumstances giving rise to the need for a withholding of payments involve fraud or willful misrepresentation under the Medicaid program.”  Every state has subsequently enacted laws or regulations adopting this fraud withholding power.  Colorado’s, for example, is here (click through to Section 8.076.4).

Furthermore, DHHS’s withholding authority was not just limited to the funds that could be associated with the suspected fraud.  To the contrary, commentary to the initial regulation expressly contemplated that if state Medicaid fraud investigators had reliable evidence that any of the funds owed to a provider were tainted by fraud, then all owed funds could be withheld.  (The federal printing office only makes the Federal Register available online through 1994, but for those with Westlaw or Lexis access, the cite is 52 Fed. Reg. 48814.)  The theory behind that decision is that it’s frequently difficult to determine which claims are fraudulent and which aren’t until after an investigation is complete, so states should have the ability to withhold all (or substantially all) funds until they can figure out what’s what.

That sounds onerous enough, right?  It gets worse.  In 2011, Section 455.23 was amended to drastically expand state Medicaid agencies’ withholding and suspension powers.  This isn’t just my characterization of the effects of the amendment; the official commentary makes clear that DHHS believes that the new burden of certainty or proof is significantly relaxed under the new language.  The amended regulation now requires (and not just permits) states to withhold payments to providers and suspend their Medicaid participation “after the agency determines there is a credible allegation of fraud for which an investigation is pending under the Medicaid program against an individual or entity unless the agency has good cause to not suspend payments or to suspend payment only in part.”  Subsection (f)(3)(i) goes on to say that good cause to partially withhold funds will only exist if the state determines that the suspected fraud is limited to a certain type of claim or certain business unit, meaning the overwhelming presumption is that if a “credible allegation of fraud” is asserted against a provider, that provider is essentially completely barred from receiving any Medicaid funds or participating in the Medicaid program until that allegation is resolved.

That’s not all.  Making this Medicaid withholding power potentially even more onerous, 42 CFR § 455.2 defines a “credible allegation of fraud” to be any allegations with an “indicia of reliability.”.  This includes allegations from seemingly unreliable sources like fraud hotline complaints or claims data mining.  To be sure, the Medicaid fraud suspension regulations caution that state Medicaid agencies should reviewed all allegations, facts, and evidence carefully and act judiciously on a case-by-case basis.  But this puts a lot of trust in those agencies to exercise their discretion appropriately.

That’s my main concern.  In theory, withholding is supposed to be a temporary action to avoid paying fraudulent claims while the provider in question is being investigated.  In practice, giving state Medicaid agencies the power to essentially withhold all of a provider’s claims for a year or two can often be a death knell for that provider.  That’s probably why withholding has been called “an aggressive and controversial penalty.”  (Note:  I’m not saying that the agency intends to use temporary suspension or withholding as a weapon to close down providers, just that it’s the way it works out sometimes.  I’m also not saying that it would be a bad thing to give state agencies the ability to come in and shut down providers altogether when there is sufficient evidence of fraud, just that it’s not or shouldn’t be the purpose of temporary suspension.)  This is especially true when the state is investigating a particularly problematic industry, where it can be tough to distinguish between legitimate providers and fraudsters.  The temptation to just shut everyone down can be hard to resist.

So that takes us to Texas.  Apparently, there has been a lot of fuss over the past several years about orthodontic and dental Medicaid fraud in that state. For example, Texas spent more Medicaid dollars on orthodontic services between 2008 and 2010 than all other 49 states combined.  State investigators ultimately determined that Texas had been bilked out of $550 million.  They initiated withholding actions against more than 40 providers.

Some of the providers didn’t think they did anything wrong, and they appealed the withholding.  Two of those cases made it up to an administrative law judge.  Guess what?  The state lost.  According to the article, both ALJs essentially held that although the claims at issue may have been technically deficient (for example, there seems to be substantial disagreement in at least one case between the state’s medical expert and the dentist who owned the provider in question about medical necessity), there was no evidence of intentional fraud or dishonesty.  Even after these decisions, Texas refused to release the money, and one of the cases went up to the courts.  The state lost again and it promises to appeal.  They’re really fighting these cases tooth-and-nail, which is par for the course, in my experience.

So what’s the takeaway from all of this?  I think there are two important lessons to be learned.  It can seem hopeless for a lot of providers caught up in a withholding action.  You lose time and time again – at the informal decision stage, at the informal reconsideration stage, and on and on.  But if you really are a legitimate Medicaid provider who just got lumped in with the fraudsters, and if you keep fighting for your reputation (and your withheld/suspended claims, though that’s usually a secondary concern for providers on the up-and-up), you have a good shot at ultimately prevailing, even if it requires going to the courts.

That said – and this is the second important point – it’s not going to be quick or easy.  Medicaid agencies tend to get their hackles up when providers fight back.  Positions harden, and the precautionary withholding becomes (in their eyes) a life or death fight to prevent crooks from operating in the state.  So if you can avoid contentious litigation (whether that’s at the administrative level or the judicial level) and negotiate a more amicable resolution with regulators, you should try to do so (says the lawyer who has fought this fight on both sides of the aisle).

Image courtesy of Flickr by Aaron Yendall