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Andrew Wachler Esq.

CMS Issues Demand Letters to Providers and Suppliers Regarding Claims for Services Provided to Allegedly Incarcerated Beneficiaries

Recently, the Centers for Medicare & Medicaid Services (CMS) announced that it would begin to issue demand letters seeking recoupment of reimbursement from medical providers and suppliers for Medicare beneficiaries that, according to data from the U.S. Social Security Administration (SSA), were allegedly incarcerated at the time services were provided.

According to the Code of Federal Regulations (42 CFR 411.4) and Section 1862(a)(2) of the Social Security Act, with limited exceptions, Medicare does not make payments under Medicare Part A or Part B for incarcerated beneficiaries’ medical services.

On July 23, Medicare Administrative Contractors (MACs), acting at the direction of CMS, issued an update on this new effort. The update indicates that in some cases, information CMS received from the SSA was incomplete. CMS actively is reviewing the data and has indicated that it will take action to improve the processes in place to identify periods of incarceration. Specifically, CMS is working to “quickly identify claims” that resulted in recovery actions and taking steps to correct any inappropriate overpayment recoveries.

Although it is a promising development that CMS is reviewing its processes, the agency’s recent steps to recover alleged overpayments from services provided to incarcerated beneficiaries brings to light an issue that many providers may not have monitored previously.

The SSA utilizes its Prisoner Update Processing System (PUPS) to maintain information about incarcerated beneficiaries and to notify CMS contractors to stop Medicare payment for patients in custody. To identify incarcerated beneficiaries and to access dates of incarceration on its own, CMS also has an enrollment database that interfaces with SSA’s systems. CMS also has applications, such as its Common Working File (CWF), that allow Medicare contractors to process Medicare Part A and Medicare Part B claims from Medicare providers.

CMS’s actions to recoup these payments likely come in response to a U.S. Department of Health and Human Services (HHS) Office of Inspector General (OIG) performance audit and published report titled “Medicare Improperly Paid Providers Millions of Dollars for Incarcerated Beneficiaries who Received Services During 2009 through 2011.” Publically released in January, this report sought to determine “whether CMS had adequate controls to prevent and detect improper payments for Medicare services rendered to incarcerated beneficiaries.” The OIG uncovered a total of $44,517,431 in improper payments for incarcerated beneficiaries from 2009 through 2011. The OIG provided five recommendations for CMS, one of which was to recoup improper payments made on behalf of beneficiaries in custody.

In this report, the OIG also advised CMS to identify relevant improper payments and to implement policies and procedures to detect future improper payments. In the recent release of demand letters and automatic recoupment of previously paid claims, CMS attempted to identify such claims with dates of service that encompassed a full time period, or those that merely partially overlapped a time period when a beneficiary was incarcerated.

CMS considers a beneficiary to be “incarcerated” or “in custody of penal authorities” in circumstances beyond situations involving physical confinement. Commentary on 42 CFR 411.4 indicates that this definition of “custody” is consistent with federal courts’ definition of custody for the purpose of habeas corpus protections of the U.S. Constitution. According to commentary on 42 CFR 411.4, as well as the related CMS bulletin, individuals in “custody” include those who are:

  • Under arrest
  • Incarcerated
  • Imprisoned
  • Escaped from confinement
  • Under supervised release
  • On medical furlough
  • Required to reside in a mental health facility
  • Required to reside in a halfway house
  • Required to live under home detention
  • Confined completely or partially in any way under a penal statute or rule

In comments regarding the proposed rule in question, providers initially expressed valid concerns about the implementation of this definition of “custody.” Commentators pointed out the lack of incentives for patients to disclose their criminal status, the practical problem for hospitals to identify individuals in “custody,” and the burden on healthcare providers to seek payments from the proper sources.

As some commentators clearly anticipated, the issuance of demand letters and recoupment of funds are burdensome for Medicare providers partially as a result of this broad definition of “custody.”. Specifically, this Medicare payment prohibition is problematic because if a patient is not under physical confinement, providers may not know – or be able to find out – whether he or she is barred from being eligible for covered services. It may be unlikely that an individual would identify him or herself as such. Without taking precautionary steps, as listed below, hospitals may be unable to discern whether a patient is on parole, on probation, out on bail, or under supervised release.

Interestingly, under 42 CFR 411.4, and as listed on the CMS notice, there are three regulatory conditions under which Medicare payments may be made for incarcerated individuals. First, “state or local law must require the prisoner (or the patient under a government agency’s custody) to repay the cost of medical services they receive while in custody,” official guidance states. “This must apply to all individuals and not be limited to those individuals with Medicare.”

Second, “the state or local government entity must enforce the requirement to pay by billing all prisoners (or all patients under the government agency’s custody), whether covered by Medicare or any other health insurance.”

Lastly, “the state or local entity must have documentary evidence to support their billing and collection efforts.” Under this exception, healthcare providers use an “exception code” on claims that may be submitted for Medicare payment.

If none three of these requirements are met and Medicare denies payment, then Medicare providers are instructed to seek payment from the state or local government. CMS’s Medicare Claims Processing Manual provides further guidance in Chapter 1, Section 10.4:

“CMS presumes that a state or local government that has custody of a Medicare beneficiary under a penal statute has a financial obligation to pay for the cost of healthcare items and services. Therefore, Medicare’s policy is to deny payment for items and services furnished to beneficiaries in state or local government custody.”


What Should Providers Do?

Again, CMS has identified alleged overpayments, issued demand letters to providers for recoupment of overpayments, and in some cases, made automatic recoupments. With its original notice, CMS instructed providers to wait to file appeal requests on these claims. CMS also advised providers to research their own internal records and to contact beneficiaries to gather as much information as possible to determine whether a beneficiary actually was “incarcerated” at the time services were provided. In addition, CMS advised providers to contact their local CMS regional office if they believe that a certain patient was not incarcerated at the time services were provided.

With the most recent update, CMS instructed providers not to take the steps described above, however. Rather, CMS directed providers to wait for more updates from the agency as it improves the process of accurately identifying periods of incarceration. It is important for Medicare providers to monitor CMS’s updates on this issue closely. Specifically, if providers have received demand letters or have been subject to automatic recoupment, it is important to track the dates the claims were denied in order to monitor potential appeal deadlines. Providers have the right to appeal these denials and potentially could rely upon a provider-without-fault defense.

In addition, providers should review internal policies and protocols for identifying possibly ineligible claims. Identifying periods of incarceration for the purposes of securing Medicare payments before services are provided puts hospitals in a difficult position. According to the January 2013 OIG report, in advance of filing a claim for payment, Medicare providers and suppliers may access the information database for incarcerated beneficiaries that CMS uses to prevent improper payments. Providers also may make beneficiary eligibility inquiries through the Health Insurance Portability and Accountability Act (HIPAA) Eligibility Transaction System (HETS). HETS will not give providers a specific reason for a beneficiary’s ineligibility, but this system offers a way for providers to determine a beneficiary’s eligibility prior to submitting claims to Medicare. Providers also have access to beginning and end dates for any given beneficiary’s ineligibility period. Medicare providers may make beneficiary eligibility inquiries through their Medicare contractors as well. However, despite access to HETS, providers still run the risk of failing to identify whether a beneficiary is considered eligible for Medicare before services are provided.

About the Authors

Andrew B. Wachler is the principal of Wachler & Associates, P.C. He graduated Cum Laude from the University of Michigan in 1974 and was the recipient of the William J. Branstom Award. He graduated Cum Laude from Wayne State University Law School in 1978. Mr. Wachler has been practicing healthcare and business law for over 25 years and has been defending Medicare and other third party payor audits since 1980. Mr. Wachler counsels healthcare providers and organizations nationwide in a variety of legal matters. He writes and speaks nationally to professional organizations and other entities on a variety of healthcare legal topics.

Jessica C. Forster is an associate at Wachler & Associates, P.C.  Ms. Lange dedicates a considerable portion of her practice to defending healthcare providers and suppliers in the defense of RAC, Medicare, Medicaid and third party payer audits.  Her practice also includes the representation of clients in Stark, anti-kickback, and fraud and abuse matters.

Contact the Authors



To comment on this article please go to editor@racmonitor.com

IMPORTANT: The following are only for RACmonitor’s reference to include in the article as links.

Demand letters seeking recoupment: http://www.cms.gov/Medicare/Medicare-Contracting/FFSProvCustSvcGen/Downloads/DemandLetters.pdf

Code of Federal Regulations (42 CFR 411.4): http://cfr.vlex.com/vid/411-neither-beneficiary-nor-legally-obligated-19806040

“Medicare Improperly Paid Providers Millions of Dollars for Incarcerated Beneficiaries who Received Services During 2009 through 2011”: https://oig.hhs.gov/oas/reports/region7/71201113.pdf

Updates from CMS: http://www.cms.gov/Center/Provider-Type/All-Fee-For-Service-Providers-Center.html


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