Are Innocent Downstream Providers Protected From Potential Impact of ACA's Overpayment Provisions

The overpayment language in the Patient Protection and Affordable Care Act of 2010 (“ACA”) [1] has been scrutinized by attorneys and others to wonder about the type of liability that an “innocent” downstream provider might potentially face in light of an overpayment by Medicare. While the Centers for Medicare & Medicaid Services (“CMS”) published a proposed rule in 2012 which discusses the breadth of the possible liability – including potential repayment – the proposed rule leaves providers with a lack of clarity regarding the fate of the innocent downstream provider. Innocent downstream providers need to be aware of this potential danger and protect themselves from potential loses by looking toward contractual indemnification as a potential answer.

ACA Amendments to the FCA and the AKS

Section 6402 of the ACA requires providers and suppliers who have been overpaid by Medicare or Medicaid to report and return overpayments by the later of: (1) “60 days after the date on which the overpayment [i]s identified;” or (2) “the date any corresponding cost report is due, if applicable.” [2] Failure to report and return an overpayment, which is defined as “any funds that a person receives or retains…to which the person, after applicable reconciliation, is not entitled…,” could expose a provider to liability under the False Claims Act (“FCA”) [3]. The exposure under the FCA is critical in that an overpayment might involve an Anti-Kickback Statute (“AKS”) [4] violation. This is because compliance with the AKS is a condition of payment as a participating Medicare provider. [5] Thus, “claims that include items and services resulting from a violation of the AKS are not payable and constitute false or fraudulent claims for purposes of the FCA” and may be considered overpayments requiring repayment to the Government. In either instance, a provider could be facing both an FCA claim and AKS liability in the same instance for an overpayment, especially in arrangements where a provider is unaware of a potential kickback involving third parties or multiple parties to a transaction. Such a provider could submit a claim or claims to Medicare that is itself a “kickback” due to an upstream provider.

A good example of a transaction whereby an innocent downstream provider is involved in a situation might be a surgeon, using a medical device, who is unaware that a specialty hospital has entered into a kickback arrangement with a manufacturer of a specific medical device that was sold by a distributorship owned by a physician who is also part owner of the specialty hospital. Thereafter, the “innocent” surgeon performs a service, using this medical device, and submits a claim to Medicare or Medicaid for reimbursement without any knowledge of the kickback arrangement between the specialty hospital and the medical distributorship. The claim is later paid by Medicare and a question arises regarding whether the payment is an overpayment due to the upstream actions of others.

CMS’s proposed rule reads that an innocent provider who is not a party to the kickback arrangement and is unaware of its existence would have no duty to report or repay the overpayment, because he or she has not yet identified the overpayment. The innocent provider lacks the scienter (knowing about the illicit activity) requirement under the AKS. However, the scienter requirement was removed from the ACA subjecting innocent providers to potential exposure. To the extent that the innocent surgeon identifies such an overpayment, under the current rule, that surgeon must report the overpayment and will likely have to repay CMS all or part of the claim, leaving the surgeon with nothing to show for his or her work. While the government would technically be allowed to seek recoupment of the overpayment, an “innocent” provider would likely be called upon to repay in only the “most extraordinary circumstances.” CMS has provided no further guidance on the topic and only time will tell how the government defines “most extraordinary circumstances.” We will have to see what the final rule dictates as to how the government will handle innocent downstream providers as in the case of the innocent surgeon. However, it is good practice for all providers to add indemnification provisions in their contracts to help protect themselves when entering into transactional deals with other suppliers/providers.

“Innocent” Providers – Indemnification Action?

Since CMS has lacked guidance for the “innocent” providers who are called upon to reimburse an overpayment, despite their lack of involvement in any illicit or prohibited activity, the following question arises: Does an “innocent” provider have any recourse against upstream providers who tainted the claim?

While such providers do not seem to have any means or methods of recovering their payment from the federal government, if forced to reimburse the overpayment, for services they provided or supplies they used while adhering to applicable laws and statutes, they may be able to secure their financial loss from the provider or supplier who actually engaged in the unlawful activity based on a legal claim for contractual indemnity. There is no case on point where Courts have addressed this particular issue; however, there is case law that provides some guidance.

Multiple courts have dealt with whether qui tam defendants were allowed to bring counterclaims against the qui tam relator bringing the action against the qui tam defendant. Under such circumstances, in order to prevail on a claim for contractual indemnification, there are two important considerations. First, the provider must truly be an “innocent” provider. Stated another way, if there is a finding of liability against the provider, he or she will be precluded from seeking indemnification. Obviously, if the provider was found liable under the AKS, he or she should not be able to collect an award against a qui tam relator based on indemnification. Second, the provider’s indemnification claim must not be dependent on first being found liable for an FCA violation. The indemnification claim must be an independent claim meaning a claim that the provider has against the third-party irrespective of the provider being found liable under the FCA. In other words, the claim must be based on state-law claims for breach of contract or breach of warranty, as opposed to being dependent on the provider being first found liable under the FCA.

An “innocent” provider’s claim for indemnification can arise based on a myriad of underlying factual scenarios and legal postures, including instances where a qui tam relator has brought suit, the government has sought recoupment of the overpayment, or the “innocent” provider has self-reported the overpayment. However, an “innocent” provider can seek indemnification at any time against other parties, including a qui tam relator or upstream providers/suppliers to the transaction and does not need to have a lawsuit against him or her to seek indemnification. Regardless of how these factors come together, so long as the “innocent” provider is truly an “innocent” provider and has a contract with an indemnification provision, such an “innocent” provider will likely be allowed to move forward with a claim for contractual indemnification.

It is good to note that contractual indemnification is a limited remedy. An “innocent” provider who gets caught in the web of having to reimburse an overpayment because of an upstream AKS violation likely would seek indemnification, depending on the person/entity involved in the illicit behavior, from one of three people/entities: (1) the employer (i.e., hospital or medical center), (2) a fellow physician, or (3) the supplier. As such, an “innocent” provider should require an indemnity provision in their employment agreement with the institution. Despite the indemnity provision in an agreement, the provider will be working with fellow physicians and suppliers used by fellow physicians that are not likely under contract. Regardless of the limitations on the entities with whom the provider may contract, it is important to make sure that any contracts a provider enters into with any party contain an explicit and broad defense and indemnity provision, as this will provide at least some protection. Of note, the indemnity provision should include “defense” language because such language would require the party committing the wrongdoing to not only indemnify, but also, defend the “innocent” provider from litigation at trial. Specifically, the provider should try to negotiate for: (1) a representation and warranty provision that requires the party contracted with to warrant that it is and will remain compliant with all applicable statutes, laws, and regulations; (2) an indemnity provision that defends and indemnifies the provider for any loss or damage arising out of any breach of that representation and warranty; and (3) an indemnity provision that is not contingent on the liability of the “innocent” provider.

Lessons Learned

Keeping the foregoing in mind (and understanding that overpayment/repayment as it applies to an “innocent” provider essentially means that the provider will not be reimbursed by the federal government for services the provider performed simply because the service was tainted by some upstream third-party provider or supplier), it is imperative that providers remain ever cautious when entering into business relationships/transactions with suppliers, fellow providers, and potential employers. It is important to note that “innocent” providers might be faced with having to repay an overpayment resulting from an AKS/FCA violation. This is evident because the language in CMS’s proposed rule does not foreclose the possibility of such liability. To this end, providers should always try and obtain some contractual defense and indemnity tied to a warranty provision from the entities, other providers, suppliers to limit an “innocent” provider’s overpayment liability. For more information regarding what providers should do to protect themselves, please contact Conrad Meyer in Chehardy’s Healthcare Law Section at cm@chehardy.com or call 504-830-4141.

[1] Pub. L. 111-48, 124 Stat. 119 (2010).

[2] Pub. L. 111-48, 124 Stat. 755 (2010).

[3] 31 U.S.C. § 3729-33.

[4] 42 U.S.C. § 1320a-7b(g).

[5] See Proposed Rules: Medicare Program; Reporting and Returning of Overpayments, 77 Fed. Reg. 9179, 9183 (Feb. 16, 2012).

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