Kusserow’s Corner: CMS Improperly Paid Millions of Dollars for Prescription Drugs Provided to Prisoners

The HHS Office of Inspector General (OIG) issued an audit (A-07-12-06035) to CMS, reporting that CMS inappropriately accepted prescription drug event (PDE) records submitted by Part D sponsors for prescription drugs provided to incarcerated beneficiaries and used those records to make final payment determinations. The report found that CMS accepted PDE records submitted by sponsors for prescription drugs provided to approximately half of incarcerated beneficiaries. The OIG was unable to verify the remaining half as being incarcerated on the dates in the CMS database. On the basis of its sample results, the OIG estimated the total gross drug costs were about $11.7 million for period (2006-2010) covered in the audit. The OIG explained that an individual is eligible for Medicare Part D benefits if he or she is entitled to Medicare benefits under Part A or enrolled in Part B and lives in the service area of a Part D plan. Federal regulations specify that facilities in which individuals are incarcerated are not to be regarded as being within service areas for purposes of Part D coverage. The OIG noted that during the period of the audit, the final PDE records to CMS with gross drug costs totaled $256 billion.

The OIG found that CMS had inadequate internal controls during the period of the review; and did not provide sufficient and timely information to sponsors to permit them to readily and accurately verify a beneficiary’s incarceration status and dates of incarceration. It recommended that CMS:

  1. Resolve improper Part D payments made for prescription drugs provided to incarcerated beneficiaries;
  2. Strengthen internal controls to ensure that Medicare does not pay for prescription drugs for incarcerated beneficiaries; and
  3. Identify and resolve improper payments found by the OIG auditors for prescription drugs provided to incarcerated beneficiaries, by reopening and revising final payment determination for all periods before implementation of the enhanced policies and procedures that would contribute to the strengthened internal controls.

CMS concurred with the first two recommendations but did not concur with the third recommendation. The OIG acknowledged that CMS is developing and implementing policies that would address enrollment of incarcerated beneficiaries. It agreed with the CMS approach would address the problems identified.

Richard P. Kusserow served as DHHS Inspector General for 11 years. He currently is CEO of Strategic Management Services, LLC (SM), a firm that has assisted more than 3,000 organizations and entities with compliance related matters. The SM sister company, CRC, provides a wide range of compliance tools including sanction-screening.

Connect with Richard Kusserow on Google+ or LinkedIn.

Copyright © 2014 Strategic Management Services, LLC. Published with permission.

AHA Lawsuits Challenge Two-Midnight Rule, 0.2 Percent Cut, Other IPPS Changes

The American Hospital Association (AHA), together with several hospitals and hospital organizations, has filed two lawsuits in the United States District Court for the District of Columbia asking that four components of the August 19, 2013, Inpatient Prospective Payment System (IPPS) Final rule be declared invalid. One complaint challenges: (1) the two-midnight rule; (2) the requirement that claims for outpatient services filed after the denial of a claim for inpatient services be submitted within one year of the date that services ended; and (3) the requirement that a physician order use the words “inpatient services” as a condition of payment for a stay. The second complaint claims that the 0.2 percent cut in the rate for inpatient services is invalid.


The AHA is joined in both lawsuits by Banner Health, based in Phoenix, Arizona; Mt. Sinai Medical Center in New York City; Einstein Healthcare Network in Philadelphia, Pennsylvania, Wake Forest Baptist Medical Center in Winston-Salem, North Carolina, and hospital organizations in New York, New Jersey, and Pennsylvania. Each of the hospitals claims to have lost thousands of dollars as a result of the 0.2 percent rate cut and even larger sums due to the two-midnight rule.

The Rate Reduction

The complaint alleges that the reduction is invalid for several reasons. First, CMS did not include the reduction in an actual regulation, but only described it in the preamble to the Final rule. Second, the factual premises on which the rule was based are based on assumptions that are demonstrably wrong. Allegedly, CMS stated that it expected that the two-midnight rule, if applied to the fiscal year (FY) 2011 discharges, would result in 400,000 cases switching from outpatient to inpatient and 360,000 from inpatient to outpatient. But the Final rule stated that CMS considered only surgical discharges, excluding diagnosis related groups (DRGs) involving medical services only. The AHA notes that length of stay is easier to predict in surgical cases, and the exclusion of medical discharges distorts CMS’ analysis. Third, the Proposed rule did not describe the changes in policy with enough clarity or specificity to allow effective notice and comment.

The Two-Midnight Rule

The AHA and its co-plaintiffs contend that the two-midnight rule departs abruptly from long-standing policy defining inpatient services and describing the physicians’ role in determining whether a patient should be admitted. Under the prior policy, the AHA alleges, a physician could admit a patient if his or her condition and the anticipated services were likely to result in a stay of at least 24 hours. If a stay must cross two midnights to qualify for inpatient status, a patient admitted early in the morning might not qualify as an inpatient until nearly 48 hours had passed. The complaint alleges that the rule replaces the many medical factors the physician might consider with a single requirement based on time, so that even services provided in an intensive care unit might not qualify for inpatient reimbursement.

One-Year Limit

The AHA contends that the post-discharge review and denial of payment for inpatient services by recovery audit contractors (RACs), combined with the requirement that claims for outpatient services be submitted within one year of service deprives hospitals of the outpatient reimbursement because RAC reviews generally do not even begin until one year after services were furnished. The complaint notes that the agency has exercised its authority to make exceptions to the one-year deadline in other situations but refuses to do so here and that it could simply direct its administrative contractors to reprocess the rejected inpatient claims as outpatient services.

Finally, the hospitals claim that the physician order requirement is inconsistent with Soc. Sec. Act sec. 1814(a)(3) because the statute requires certification for hospital services to be provided over an extended period, not for all inpatient services.

Vermont’s Single Payer System Slow Down

On May 28, 2011, Gov. Peter Shumlin signed Act 48 into law, which calls for a three-stage implementation of a publicly-financed universal health care system by 2017. The goal of Act 48 is an eventual state-funded and operated single-payer system. It’s three years later, however, and what momentum the Act had is starting to slow down, especially as the Governor is expected to release the finance plan for the project.

Single Payer System Design.

Vermont’s move to a single payer system was designed to meet the federal requirements the Patient Protection and Affordable Care Act (P.L. 111-148) (ACA). In doing so, it may take advantage of federal monies targeted for Vermont’s Health Insurance Exchange and to petition for federal waivers that would streamline Vermont’s reform. The system should extend coverage to each of Vermont’s 620,000 residents while containing soaring health care costs.

Vermont’s plan establishes a state Health Insurance Exchange, as mandated by new federal health care laws, that will offer coverage from private insurers, state-sponsored and multi-state plans. It also will include tax credits to make premiums affordable for uninsured Vermonters. The exchange will be managed by a five-member board which sets reimbursement rates for health care providers and streamlines administration into a single, unified system. On the Exchange, Vermont residents and small employers will be able to compare rates from a variety of plans and enroll in the plan of their choice. Among the criteria are adoption of a financing plan by 2014; ensuring the new system costs less than the current fee-for-service one; and obtaining federal permission via a waiver to allow Vermont to proceed with the single-payer option, in around 2017.


There are many benefits to a single payer system. When the government owns and operates one health insurance plan for all residents, it sets a single price for each medical procedure. These prices tend to be lower because the government is negotiating one rate for all citizens. Administrative costs are also lower because there is no insurance company. Physicians send their bill to the federal government.


Of course, it’s not quite that easy – single payer system also has several problems. First, the government is the one to make difficult decisions about what benefits will and will not be covered. It could theoretically be up to the government to determine whether or not a patient will receive things like prescription drugs or dentist visits. Some single payer systems are associated with longer wait times for medical care, however a recent study by the Commonwealth Fund found that while some single payer systems have longer wait times, others see patients quicker than here in the United States.

Pause in the Process.

Under Act 48, Governor Shumlin was required last year to outline some financing options for lawmakers to consider but that has yet to be done.  The legislation required that the state provide an outline on how it plans to raise the estimated $1.7 billion to $2.2 billion to finance the future single payer system. At the beginning of the current legislative session, the governor said a menu of financing options would be released in April for legislators to discuss. Now, Governor Shumlin says he will wait until 2015 for the release. Despite the delay in developing the financing plan for the state’s single payer system, Shumlin said in a recent interview that he still thinks there’s enough time to meet his target date of 2017 for Vermont to become the first state in the country to implement a single payer health care system.

“I believe that we will collectively come to the same conclusion, that moving to a system where you spend less money for better quality and better outcomes,” said Shumlin. “Combined with a payment system where we all, based on our ability to pay, (will) lead to prosperity and an affordable quality health care system for all.”

He offered a slightly different reason for the stall in another interview last February, when he said the decision to delay unveiling the finance options was made over the past several weeks. “We have a very good business advisory group … that’s helping us to put together a package that will work for Vermonters as well as for businesses,” he said. “As we’ve gotten into the weeds of the various details that need to be ready to lay out a menu of options, there’s pretty broad agreement that we’re just not there yet.” Either way, it’s clear Vermont needs more time.

Fresh Faces to Figure Things Out.

Governor Shumlin has made some new hires to help him with figuring out details for the Exchange. Agency of Commerce and Community Development (ACCD) Secretary Lawrence Miller will become Senior Advisor to the Governor and Chief of Health Care Reform, where he will be tasked with overseeing the state’s health care reform efforts and transition to Green Mountain Care. He will report directly to the governor. Patricia Moulton will replace Vermont Administration Secretary Lawrence Miller when he moves up to advise the Governor.

In a recent interview, Miller commented, ““We know that concern about health benefits holds people back from striking out on their own and starting new businesses, and it keeps people locked in jobs for the wrong reasons…Health insurance is also a huge cost factor for all enterprises, including our schools.  We obviously have to do something different. I am encouraged that Vermont’s efforts at cost containment are beginning to bear fruit, and I am ready to help move us forward.”

Global Budget Payment.

Recent reports indicate that at least one hospital in the state will begin testing a “global budget payment” system. Global budgets are set payments determined by state regulators to care for the population a hospital serves, as opposed to the hospital billing for each individual service it provides. With this program, if the hospital exceeds its budget it loses money. The budget is based on the hospital’s historic revenue with adjustments for inflation and changes within the population it serves.

For more information on health reform in Vermont, please see Michelle Oxman’s post, “Highlight on Vermont: Implementing the ACA on the Road to a Single Payer System,” from February, 2014. She reviews the struggles Vermont is having with its Health Insurance Exchange and the state’s struggle to provide coverage for its uninsured population, which is the highest in the country.

CMS Data on Medicare Providers Released and Explained

On April 9, 2014, CMS publicly released data regarding utilization and payments to physicians and other suppliers from 2012. The data set, the Medicare Provider Utilization and Payment Data: Physician and Other Supplier Public Use File (PUF), contains this information organized by National Provider Identification (NPI) number, Healthcare Common Procedure Coding System (HCPCS), and place of service. Along with the data release, CMS provided answers to frequently asked questions (FAQs) as well as comments in a press conference call regarding the reasons behind the release. Further, the New York Times has released a search tool for the data, which covers information for over 800,000 providers.

Data Released

Specifically, according to CMS, the PUF contains “100 [percent] final-action physician/supplier Part B non-institutional line items for the Medicare fee-for-service population,” for calendar year 2012. A previous report covered the CMS announcement of this release and stated that the data to be made public contained information from approximately 880,000 providers covering 6,000 types of services and representing $77 billion in payments. That report also noted that CMS made the determination to release this information after balancing patient privacy rights and the public interest in releasing the information and noted that certain information regarding services that were provided to less than 11 total beneficiaries were redacted.

CMS Comments

In the press conference call, CMS representatives Jonathan Blum, CMS principal deputy administrator, and Niall Brennan, acting director of the CMS Offices of Enterprise Management, confirmed the previously reported findings on the release of the information. Moreover, Blum stated in his opening comments that “for far too long this information was not made public,” and claimed that the decision to finally release the information was a function of the following considerations: (1) that the public has a fundamental right of access to this data because Medicare is funded with taxpayers dollars; (2) that Medicare spending varies throughout the country and the release of this information may help to identify and understand this variation more; and (3) that the release will similarly help to identify and investigate fraud and waste within the Medicare system. In a follow-up to the issue of fraud, Brennan admitted that some of the data may represent the inappropriate practice of more than one provider submitting claims through a single provider’s NPI number, which is not always an approved practice by CMS and is another reason to broadcast this data.

FAQs and Other Resources

The FAQs webpage related to the PUF release covers an array of topics and allows users to submit questions online regarding the release. The general PUF release page also contains the data in two different formats: in a tab delimited file format and in a series of Microsoft Excel files organized by the provider’s last name. CMS also included summary tables and information on data methodology for the PUF on its website. The New York Times search function allows a user to search for 2012 Medicare Part B information that is part of this release by provider name, specialty, city, or zip code.