Insurance Carrier Audits
Responding to a Health Care Insurance Company's Retrospective Claims Audit
Whenever a medical practice agrees to join an insurance company’s health care provider network, the insurance company agrees to promptly pay the provider’s claims. The provider submits claims using Current Procedural Terminology (CPT) codes, and the insurance company processes and pays those claims pursuant to an agreed-upon fee schedule with payment amounts linked to specific CPT codes. This process is largely automated with only larger claims requiring additional documentation.
Insurer-provider contracts also obligate participating medical practices to cooperate in any retrospective claim audits requested by the insurance company. The primary purpose of such audits is to determine whether the insurance company has overpaid the provider for previously processed claims and, if so, how much of a refund the provider owes the insurance company.
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Insurance companies argue that audits are necessary because their standard claims payment process relies heavily on an honor system in which insurers presume that providers conscientiously use correct coding, thereby enabling them to promptly process claims. While this approach works well overall, retrospective audits serve insurers as a significant cost control mechanism.
For example, in a recent federal lawsuit, United Health testified that, in 2011 alone, it recovered approximately $430 million through retroactive audits that uncovered overpayments it had made to providers. Premier Health Center, P.C. v. UnitedHealth Group, 292 F.R.D. 204, 210-11 (C.D. Cal. 2013)
With this sort of money at stake, it’s no wonder that insurance companies take these audits very seriously. It’s also why your medical practice should do likewise – and why it is wise to retain counsel for your practice as soon as you become aware that a retrospective claims audit has been initiated. Experienced counsel will enable you, as the provider, to assert your rights and defend the practice’s treatment and billing decisions if they are challenged by the insurance company.
How do Health Care Insurance Companies Decide Which Medical Providers to Audit?
Typically, audits are triggered by an insurance company’s automated review of a given medical provider’s claim history as compared with those of its peer practices. Insurance companies utilize sophisticated statistical programs to identify practices to be audited.
Insurance companies use claim history data to identify medical practices that are statistical outliers and target those practices for audits. For example, practices that commonly utilize the greatest number of expensive procedures frequently become audit targets. Reported court decisions also suggest that chiropractors tend to be audited more often than other practices.
The American Medical Association has identified certain billing patterns as being most likely to result in retrospective audits. These patterns include consistent use of the same CPT codes for patients with similar health issues without regard to appointment length (i.e., pattern billing); consistent billing that generates the highest reimbursement level for a given procedure or diagnosis, apparent high use of expensive procedures, and use of coding modifiers to justify the use of multiple CPT codes for a single visit when a single code would otherwise suffice. American Medical Association. How to prepare for a health insurer retrospective audit. (2013). Insurance companies view these patterns as red flags which often indicate overbilling – if not outright fraud.
Audits can also be triggered by patient complaints and allegations made by past or current employees regarding a provider’s billing practices. In some cases, audits are completely random, and you may find yourself the unfortunate provider whose practice is being used as a test or control for the insurer’s selection algorithm. Providers previously found to have engaged in overbilling are also likely to be subjected to audits as a means of ensuring that they are now properly billing their claims.
How Does the Retroactive Audit Process for Medical Providers Work?
The insurance company initiates the audit process by generating a letter requesting you to produce a significant volume of your health and billing records, and to do so within a short time frame. Typically, the insurance company selects certain health records as a way to obtain a broad cross-section of the entire practice.
Requested records may include documents that show the services you rendered, patient diagnoses, and your medical evaluation notes. The insurance company may also request your daily appointment calendars and the financial records you used to bill both the insurance company and your patients.
While the insurance company’s use of short deadlines is intended primarily to get your attention, it should also highlight something else: The insurance company is not fooling around!
Insurance company agreements contain specific provisions requiring the provider to produce records that support its diagnoses, treatment plans, and billings upon request. Within the audit context, it is important to remember that refusal to provide such records will cause the insurer to consider the designated claims unsubstantiated and demand repayment. Then, if you fail to repay the requested amounts, the insurer will attempt to collect this amount via setoffs against other amounts due or lawsuit.
What Does the Insurance Company Look for During an Audit?
Once the insurance company receives the requested health records, it looks for deviations from what it considers to be appropriate coding. Auditors may decide that a certain CPT code was not approved for the treatment or diagnosis at issue or that the submitted CPT code was intended for use at a different service level. Once a variance is identified, the insurance company will demand reimbursement for any disallowed codes or cost differences based on downcoding.
The company may also look for instances in which your practice either waived or wrote off patient copayments or coinsurance. Insurance companies base the total cost of treatment on the combined total of its payment and the patient’s obligation. If you demonstrate an ongoing practice of writing off patient copayments, insurers are likely to infer that you never expect to receive that money.
This practice often leads the insurer to believe that you have misrepresented the true cost of the service and overcharged the insurer. Further, insurers look upon improper patient payment forgiveness as undermining the plan’s overall design by steering patients toward providers who are known to engage in such practices.
What Can Happen During an Audit?
Audits are not a walk in the park, even for the most conscientious medical practice. Think of it this way: the absolute best-case scenario is that you will be forced to spend both time and money responding to the audit – time and money that you could have used much more productively – before the insurance company grudgingly admits, at the conclusion of the audit process, that your treatment and billing decisions were entirely proper.
Sadly, however, the more likely scenario is that the insurance company will have nitpicked your treatment decisions, taken issue with some aspects of the practice’s billing practices, concluded that you overbilled them, and demanded repayment. Further, the amount of repayment they demand may be based on a multiplier that assumes your practice consistently misbilled for similar matters involving the same issues as those specifically identified during the audit.
This unfavorable scenario is even more likely to occur if the insurer uses consultants to conduct its audits because such consultants are paid on a partial or full contingency based on the amount recovered. In other words, they are bounty hunters who have a strong economic incentive to find fault with the way you submit your practice’s claims.
Further, in extreme cases where the insurer decides the errors identified were the result of your deliberate attempts to defraud them, it may also terminate its relationship with you – resulting in a potential loss of patients and severe financial and reputational damage to the entire practice.
How Can the Insurance Company Calculate Total Overpayments if it Does Not Review Every Claim?
Once the insurance company believes it has identified specific overpayments, it may extend its repayment demand beyond the sample of audited records. Insurers often use a procedure called extrapolation which assumes errors found in the audit sample recur at the same rates throughout the provider’s billing.
If your contract with any insurer allows for extrapolation, the method to be used should be specified in that contract. One older court decision held that extrapolation must be expressly included in the provider contract if it is to be considered a permissible method of calculating overpayments. Garden City Treatment Center, Inc. v. Coordinated Health Partners, Inc., 852 A.2d 535, 543 (R.I. 2004)
Methods of approximating overpayment can vary widely. For example, the average payment error extrapolation technique sought by the insurer in Garden City Treatment Center is a highly criticized method which is most commonly seen in governmental payor audits.
This method divides the total overpayment by the number of claims contained in the audit sample to arrive at an average error per claim. It then calculates a total overpayment by multiplying the amount of this average error by the total number of claims submitted in the audit period. 852 A.2d at 539.
This method is not often seen in private insurance audits because state laws govern private payor agreements. For example, New York requires use of a statistical basis for extrapolating recoupment and bans extrapolation of overpayments arising from medical necessity disputes. N.Y. Dep’t of Ins., Office of General Counsel op., Use of Extrapolation (Dec. 28, 2004)
In private contracts, extrapolation is more likely to be based on the rate of errors that involve specific codes. That way, they are able to avoid statistical challenges contending that the sample is not representative of the whole.
Does the medical practice being audited need an attorney?
Since your practice may face significant liability based on the outcome of a claims audit, it is wise for you to be represented by experienced counsel. The insurance company is coming into the audit with an eye toward obtaining evidence to support its suspicions that you are guilty of improper billing, so it is imperative that you retain counsel during any such audit – preferably as soon as the audit letter is received.
Despite any Assurances that the Insurance Company May Offer, an Audit is an Adversarial proceeding and must be treated accordingly
Everyone in your medical practice should allow your counsel – and only your counsel – to communicate with representatives of the insurance company. Your entire practice and staff should operate under the belief that anything shared with the insurance company’s auditors can and will be used against the practice.
And it gets worse.
Contractual audit provisions often give the insurer the right to conduct its audit onsite at your practice’s offices if it so chooses. That means, if you do wind up with an uninvited guest, every member of your staff must be clearly instructed to be civil but to avoid participating in any discussion regarding operation of the practice or providing any information to the auditor without prior approval of your counsel.
What are the Advantages of Hiring Counsel During the Audit?
Providers typically have limited, if any, experience in responding to audit requests. In contrast, experienced counsel are repeat players in similar scenarios – as are the insurance company’s auditors.
Counsel will know how an insurance company conducts its audits and be familiar with points of inquiry for your specific type of medical practice. Counsel will also be aware of current trends in resolution of insurance billing disputes and hot topics in overpayment enforcement.
Counsel can also help present any of your recordkeeping deficiencies in the best light. If anything in your practice’s records needs to be explained or clarified for the edification of an insurance company, counsel is best positioned to do so. For example, during an audit, you may realize that certain information is missing from a requested patient file. Counsel can also guide members of your practice in creating addenda to explain treatment decisions if the original information is unavailable or unclear.
If counsel identifies obvious mistakes – such as duplicate claims, data entry coding errors, or claims likely to draw scrutiny – members of your practice can address those issues preemptively within their responses to the insurer’s records request rather than waiting for the auditor to seize upon such items as examples of impropriety.
How Much Potential Liability is Involved During an Audit?
In Horizon Blue Cross Blue Shield of New Jersey v. Transition Recovery Center, 2015 WL 8345537 at *3 (D. N.J. 2015), a health insurer sought to recover more than $14 million as a result of miscoded substance abuse and mental health treatment claims. In the insurance plans at issue, coverage for alcohol dependence treatment claims was more extensive than for other substance abuse and mental illness claims. Since Transitions Recovery Center was one of the top two users of the alcohol dependence diagnosis code, Horizon Blue Cross suspected that Transition might have been miscoding other diagnoses as alcohol treatment claims. After reviewing 56 files selected by an algorithm, the insurer discovered 33 claims that did not support an alcohol dependence diagnosis and sued the facility to obtain a refund.
What Rules Govern the Retrospective Claims Audit Process?
Procedurally, audits are governed by each provider’s specific agreement with the insurance company and any ancillary documents – such as operations manuals, plan summaries, and plan advisories. Typically, your practice’s substantive rights with respect to audits will be defined by both contract and state law, which may limit the amount of time the insurer has to seek recovery of overpayments and whether recoupment may be used to collect past overpayments.
In rare cases, where the parties have no contractual arrangement, they will have to negotiate the rules governing any audits. This may become necessary when insurers attempt to persuade non-network providers to participate in retroactive claim audits. Insurers typically do this when they suspect certain providers of engaging in improper patient fee payment forgiveness which results in submission of inflated claims and encourages insureds to use out-of-network providers.
In this situation, those medical providers have no obligation to participate in audits; however, insurers may then disallow all claims from any provider who does not cooperate with the audit. Connecticut General Life Insurance Company v. Southwest Surgery Center LLC, 2015 WL 6560536 (N.D. Ill. 2015) at *1-2. In such cases, counsel can negotiate a limited audit to assuage the concerns of the insurance company and avoid the burdens of a full retrospective audit.
What Types of Coding Issues Can be Found in an Audit?
Once the insurer completes its audit, it will provide you with a report identifying any coding issues it discovered during the audit, along with its calculation of the amount it is seeking as recoupment.
While coding errors may be as simple as duplicate claim submissions or data entry errors, some may be more substantive. For example, based on a specific diagnosis or treatment, an insurer may agree that some reimbursement was appropriate but disagree with the practice’s coding.
The insurer might also decide that no payment is appropriate in cases where a CPT code was used for an unapproved treatment or when the insurer feels the treatment was medically unnecessary. Insurers may also decide to disallow multiple codes that were used for a single patient encounter.
How can a Provider Challenge an Insurer’s Audit Findings?
Unless your interpretation of a coding decision is contrary to your practice’s own guidance, a successful challenge of an insurer’s disapproval of the coding used will require external evidence. This may include manuals, published articles or publications from medical organizations, or other evidence that shows support for your position. Counsel will be particularly adept at marshalling this kind of evidence and presenting it to the insurance company in the most effective and persuasive manner whenever it becomes necessary to challenge an unfavorable audit result.
One example of a successful challenge achieved by using external support is Blue Cross & Blue Shield of Rhode Island v. Korsen, 945 F.Supp.2d 268, 272 (D. R.I. 2013). That dispute centered on determining whether a certain treatment constituted “mechanical traction” when a chiropractor used certain equipment to render treatment and then billed for it by using a code for mechanical traction.
After a retrospective audit, Blue Cross Blue Shield (BCBSRI) decided this treatment did not constitute true “mechanical traction.” The chiropractors fought their decision, arguing that BCBSRI did not issue its advisory clarifying what actually constituted mechanical traction until after the audit took place. In that case, the equipment in question was marketed for “mechanical traction” services; treatment with those devices was widely considered by chiropractors to be “mechanical traction;” and chiropractic schools taught that use of the devices was “mechanical traction.” The evidence also suggested that medical doctors and chiropractors defined traction differently. The court ultimately found this evidence compelling and ruled that the insurer was not entitled to recoupment.
Your practice can establish the appropriateness of its coding by hiring an independent medical billing specialist to consult and provide its own professional review of the claims at issue. The specialist’s report can then be submitted to the insurance company as part of your request for reconsideration of an unfavorable audit report. Further, you may be able to use the billing specialist as an expert witness if you and the insurer are unable to reach an agreement.
Experienced counsel can locate and retain such experts to assist in defending your billing procedures if an insurance company asserts entitlement to a large overpayment. Similarly, if the insurance company’s extrapolation-based demand is based on statistically unsound methods, counsel can retain an expert to challenge its inflated overpayment claim.
Specific language contained in your contract will be particularly important when medical necessity claims are challenged. Some contracts refer to a “prudent physician” standard which requires deference to the physician’s original decision. Other contracts use language that is more favorable to the insurance company.
If the insurer’s continued demand for repayment of disputed funds results in litigation, additional arguments can be asserted during that process. One particularly complex argument governs application of the Employee Retirement Income Security Act (ERISA) to overpayment disputes.
ERISA prohibits certain attempts to recoup payments; however, case law applicable to ERISA is all over the map. Courts have ruled inconsistently regarding whether certain disputes are covered by ERISA, how medical providers should be characterized under ERISA, and which state law claims are preempted by ERISA. Some decisions suggest that application of ERISA may be determined by fact-specific issues relating to insurance plan design and by prior case law in a provider’s specific location.
While ERISA is not a magic bullet, uncertainties involved in its application and potential risks for setting a bad precedent may enable your counsel to negotiate a more favorable settlement in the very unlikely event an audit appears likely to result in full-fledged litigation.