A recent federal court decision should serve as an important reminder to providers that the Centers for Medicare and Medicaid Services (“CMS”) and its contractors have substantial authority to audit provider Medicare claims and to broadly apply extrapolation to calculate overpayments. In Palm Valley Health Care, Inc. v. Azar, No. 18-41067, 2020 BL 14097 (5th Cir., Jan. 15, 2020), the United States Court of Appeals for the Fifth Circuit re-affirmed CMS’ application of extrapolation of errors identified in a sample of claims to over 10,000 claims. The resulting demand for the provider, Palm Valley Health Care, Inc. (“Palm Valley”), to refund claims was $12 million rather than the amounts paid on the sample set. Providers need to be aware that when CMS audits their claims, CMS is not required to use the most precise statistical methodology for selecting claims for audit.
Background on CMS Audits and the Application of Extrapolation
As part of its oversight obligations, CMS, through its Medicare Administrative Contractors and other contractors, audits claims submitted for payment to ensure the claims comply with Medicare billing requirements. When CMS determines that it made a payment to a provider for services that were “medically unnecessary or incorrectly billed”, an “actual overpayment” will be deemed to have occurred and CMS will seek a refund of the overpayment from the provider.
Because Medicare cannot conduct a comprehensive review of every claim submitted for payment to ensure it complies with billing requirements, Congress has authorized CMS to use statistical sampling and apply extrapolation when “there is a sustained or high level of payment error.”  Significantly, the Medicare Program Integrity Manual (the “Manual”), which was amended considerably with respect to extrapolation in 2019, provides a broad array of general factors that the contractor “shall” use in order to determine that “a sustained or high level of payment error” has occurred. These factors include but are not limited to:
- High error rate determinations by the contractor or by other medical reviews (i.e., greater than or equal to 50 percent from a previous pre- or post-payment review);
- Provider/supplier history (i.e., prior history of non-compliance for the same or similar billing issues, or historical pattern of non-compliant billing practices);
- CMS approval provided in connection to a payment suspension;
- Information from law enforcement investigations;
- Allegations of wrongdoing by current or former employees of a provider/supplier; and/or
- Audits or evaluations conducted by the Office of Inspector General (“OIG”).
A contractor can also identify reasons beyond those listed above as a basis for using extrapolation (e.g., billing for non-covered services, billing for services not rendered) although those decisions are subject to further review within CMS.
Palm Valley’s Targeted Audit with Extrapolation
In Palm Valley, CMS’s contractor, Palmetto GBA, LLC (“Palmetto”), conducted a targeted audit of Medicare claims submitted by Palm Valley for the period of July 1, 2006 through January 31, 2009. According to CMS, Palm Valley was selected for an audit because it had submitted an unusually high number of claims (10,699) for the period at issue. For the audit, CMS employed a methodology that resulted in 54 claims being selected for review. CMS’ review of those claims determined that 29 claims were not eligible for payment by Medicare because the beneficiaries’ records did not satisfy Medicare’s requirements for eligibility for home health care.
The overpayment for those 29 claims totaled $81,681 but more significantly, the 29 claims represented a 53.7% error rate based on the 54 total claims selected for audit. With this error rate, CMS used extrapolation based on its determination that there had been a “sustained or high level of payment error.” After the administrative appeals process, which overruled the contractor on four claims, by using extrapolation on the remaining 25 claims, Palm Valley was required to repay $12,589,185 to CMS.
CMS Has Substantial Authority to Select Statistical Methods in Extrapolation
Although Palm Valley primarily sought judicial review over whether the denied claims complied with Medicare’s billing requirements for home health care, Palm Valley also challenged CMS’ sample and extrapolation methodology. Palm Valley argued that CMS’ selection of 54 claims out of 10,669—in other words a mere 0.0051% of the total claims Palm Valley submitted during the period at issue was too imprecise of a sample to rely on. After relying upon statutory language to note that the decision that there is a “sustained or high level of payment error” is not reviewable, the court examined the merits of Palm Valley’s argument. The court quickly dismissed it, noting that while the statistical sampling methodology may not be the most precise methodology available, CMS’ selection methodology did represent a valid “complex balance of interests.” Principally, the court noted, quoting the Medicare Appeals Council, that CMS’ methodology was justified by the “real world constraints imposed by conflicting demands on limited public funds” and that Congress clearly envisioned extrapolation being applied to calculate overpayments in instances like this.
While the court suggested it agreed with Palm Valley’s contention that a more precise formula may result in a more precise calculation for extrapolation, the court held that the law merely requires CMS to apply a statistically valid formula—which may not be the most precise formula. Even Palm Valley’s own expert had testified that CMS’ formula was statistically valid. Further, the court held that at a minimum CMS’ methodology provided “substantial evidence” to support CMS’ decision to require Palm Valley to refund claims which did not satisfy Medicare’s billing requirements. The court further noted that, if anything, it believed the extrapolation methodology was “provider friendly” in that CMS’ formula gives the provider substantial benefit of doubt—CMS’ formula assumes that the average overpayment for all claims is equal to a number that there is a 90% chance is smaller than the actual overpayment. Therefore, the court concluded that there was a 90% chance that Palm Valley’s overpayment liability was in fact greater than the $12 million that CMS had determined Palm Valley owed.
Lessons for Providers
While all providers will routinely be required to refund claims that do not satisfy Medicare billing requirements, providers need to be cognizant that sustained billing errors substantially increase their risk for significant audits and refund demands. Providers need to make sure that they not only understand and abide by Medicare’s billing requirements when providing care but also that their documentation supports their claims. This documentation is important not only to make sure the claim is paid upon submission but also to make sure the claim will sustain CMS’ scrutiny if the provider is selected for an audit. Taking relatively small proactive steps during the course of providing care and billing for services can help providers avert potentially financially devastating refunds down the road.
 42 U.S.C. § 1395ddd(f)(3)(A).
 Medicare Program Integrity Manual § 220.127.116.11.