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EDITOR’S NOTE: This is the first in a two part series dealing with audit finding for implantable medical device credit errors.

“Oh, absolutely, when we step in and dig a little, we nearly always find what we’re trying to uncover.” 

Who said that, and why? Just a hint: it wasn’t a private investigator reconnecting long-lost relatives; it wasn’t the lost-and-found desk paging the owner of a misplaced key ring; it wasn’t an office hunting party scouring a colleague’s workstation for a misplaced group lottery ticket. It was an Office of Inspector General (OIG) auditor!

“In every facility we step into, we’re finding extensive problems with this issue,” the auditor continued. ”Literally nobody is getting this right – at least not yet.”

The issue is the tracking, management and reporting of implantable medical device credits. Though simple in concept, the design and application of a monitoring system for credit memos received from device manufacturers, vendors and suppliers (hereafter simply termed “vendors”) is not so easily accomplished. There are many questions to consider: Which devices are subject to the credit reporting? What are the correct steps to reporting these credits appropriately? And what, exactly, is the OIG finding in their targeted treasure hunts? 

This top 10 list of federal audit findings regarding device credits aims to guide personnel in clinic and health systems, particularly the “C-suite” hierarchy, A/P staff, materials management analysts, compliance officers, and clinical personnel at points of service such as operating rooms, outpatient surgical suites, catheterization labs, and ambulatory surgery centers (ASCs). Whether in the outpatient or inpatient setting, implantable medical device credits must be reported in specific situations, for specific devices, and in specific ways. Let’s take a walk through the fed’s poorly camouflaged minefield to learn from those who have been through the audit process. Embedded in each OIG finding numbered below is a “fix-challenge” for provider entities to consider as a tool for remediation.

1. Non-pursuit of available device credit(s). One of the most prevalent issues found in audits is the simple fact that a provider entity did not pursue (and therefore did not obtain) the available vendor credit(s) for the associated explant/re-implant device. Typically, for device credits not otherwise provided to the facility at no cost, this process is fairly straightforward: the provider sends back the explanted device and a vendor tests that device and issues a credit (CR) memo to the provider for some percentage of the “actual” cost, to be applied toward the replacement device. However, quite often the vendor adopts a passive stance in this process, assuming that the provider entity knows the parameters of the device warranty, and awaits a query from the provider before issuing the CR memo. No query, no credit memo. This occurs so often that the OIG has stated in numerous investigatory reports that the hospital or clinic must be the aggressor in this scenario, actively pursuing all available vendor credits for implantable medical devices. Furthermore, even in the event of non-receipt of such pursued-yet-available credits, the provider still must report the credit amount as if it received the CR memo. The OIG quickly has discovered that most providers have not developed an internal work group and/or have not devoted the manpower resources or designated necessary internal communication tools to stay on top of these CR memo situations. 

Fix-Challenge: Provider entities must design, invest in and adopt internal processes for their clinics, facilities and health systems to pursue all available vendor credits. In this instance, the “it takes a village” idiom is an understatement. If CR memos are sent in block invoices with an aggregation of a sundry of credits for both devices and other purchases, discounts and rebates, then the specific implantable devices subject to Centers for Medicare & Medicaid (CMS) credit reporting must be identified, processed and then applied. This means that everyone – from the original clinical point-of-service staff where/when the explant/re-implant procedure(s) was performed to A/P, materials management, health information management (HIM), revenue cycle, and compliance – must be a part of a working group that actively pursues available credits, identifies aggregated or otherwise incoming credits, and handles them accordingly. Application of the credits down to the patient account level with a correct original or adjusted claim, submitted within the timely filing limit, is the ultimate goal.

2. Unidentified or misidentified implantable devices for reporting. Which device credits get reported? Where are your device lists? Are all devices applicable in all settings (IP, OP, and ASC)? These are just a few questions to consider in this area. The OIG has found that many provider entities are simply unaware that common pacemaker, hip implant or breast implant procedures can fall into a special category of “device-dependent” or “device-intensive” procedures that require germane device credits to be reported on claims. Because the device credit-related procedures’ reimbursement is comprised in large part of repayment for device procurement, when and if a vendor credit is issued to the reporting (claiming) provider entity, CMS expects that credit to be passed on – thereby lessening the federal liability as well. 


Fix-Challenge: The devices involved in “device-dependent” and “device-intensive” procedures performed by the various provider types (IP, OP and ASC) typically are published in the notices of proposed rulemaking (proposed rules) and notices of final rulemaking (final rules) annually found in the Federal Register. In many cases, embedded within the CMS website are current and prior years’ archived documents, most of which can be accessed for download. These lists identify which devices are eligible for credit reporting with resulting “offset device” reimbursement. For instance, the hospital outpatient PPS Web pages contain various downloadable documents, including the “procedure-to-device edits” and the “device-to-procedure edits” tables. Many of these lists also map the device CPT and HCPCS Level II codes to their respective APCs. The inpatient listing, posted via the annual final rules as well as IPPS Transmittal 922 (Change Request 7457), last updated via a MLN Matters Article in January 2012, contains the germane MS-DRGs that are “device-dependent.” Every provider entity performing any of these procedures should compile and continually update lists of pertinent procedures, devices and related codes (MS-DRGs, APCs, CPT and HCPCS-II codes, as well as revenue codes) to ensure that all personnel responsible for flagging patient accounts and managing device procurement processes are fully aware of the relevant device credit (CR) memo responsibilities.

3. Miscalculation of the device credit threshold. Consider the following scenario: a device credit (CR) memo has been received, and the device appears on the CMS “device-dependent” procedures list. What credit amounts must be reported, and what credit amounts can we ignore? OIG auditors have reported that provider entities are often confused about this. The answer is straightforward, although it might not always be so readily apparent, considering the disparate cost amounts annotated within purchase orders, original vendor invoices and vendor-issued CR memos, which all are generated or received by the provider’s internal departments and staff at various times. Contradictory cost amounts can emerge depending on how each provider entity tracks vendor-listed costs versus purchase agreement costs. A useful factor to take note of is that the upfront discounts an entity receives for bulk purchasing or vendor-to-client contractual purchase agreements are deducted from device list prices to determine the “actual” cost to the facility. It is that final, adjusted price that becomes the “actual” cost, and this should be retained by the vendor for their responses to OIG vendor liaisons. Likewise, that final adjusted price should be retained by that facility’s work groups for use in CR memo calculations. 

The threshold at which the applicable devices must have credits reported is 50 percent. Of note (as alluded to above) is the fact that the OIG works with internal liaisons that connect reported fiscal information from vendors to the individual CR memos received by the provider entities to ascertain if this  threshold has been reached for any particular device. So the OIG works with vendor “insiders,” and provider entities must learn to take advantage of the data they have to offer.

Fix-Challenge: Each provider entity must identify someone in the device credit management “food chain” who will perform preliminary calculations. The calculations must establish that the CR memo amount is 50 percent -or more than the cost of the device. In some facilities, the person tapped to perform this preliminary step is among the clinical point-of-service staff; however, depending on how the provider operates, he or she could be a designated staff member working under the patient financial services (PFS) umbrella – or even someone with a wealth of pricing knowledge in materials management. Once a device CR memo has been identified as a reportable credit, the account should be vetted at a second tier to double-check the calculation. If the initial calculation was correct, the device credit management protocols should be engaged, eliciting appropriate actions from all staff designated for CR memo processing, again with the ultimate goal of adjusting the patient account as well as dropping any correct or corrected claim.

4. Mistaken assumption that a “50 percent or greater” credit for a component of an implanted device (system) is assessed against the entire system cost, not the cost of the component. Many implantable devices are obtained from vendors, surgically implanted, and replaced in component fashion (i.e., the entire functioning device actually is considered a system of separate components, purchased at separate costs and often discounted separately by the vendors, when replaced). For example, pacemaker generators and their parts are considered components of the “pacemaker system,” and as is widely known, they are billed as separate line items on the UB-04 claim forms, representing the generator and the individual part or parts. The OIG has found that many provider entities, upon receipt of a credit (CR) memo, mistakenly use the entire system’s cost as the baseline to determine if the aforementioned50-percent threshold has been reached (instead of only considering the component’s cost). To wit, often only a lead is discounted via a CR memo, even in the face of an entire system being explanted and replaced. This exposes a dark side of CMS’s approach and methodology, which is supported and enforced by the OIG: if reimbursement of a procedure will be offset by a relatively inexpensive component of the entire system, then the provider is in the red.  This is evident when analyzing outpatient reimbursement via ambulatory payment classifications (APCs) under the outpatient prospective payment system (OPPS), in which the anchoring procedure encompasses all packaged aspects of the surgical session, including the implantable medical device components. When the lead is discounted and must be reported as such, the entire anchoring procedure’s APC reimbursement is offset by the threshold protocols, making for an unfair payment methodology, to say the least. CMS has stated as late as November 2012 in the Federal Register that “because averaging is inherent in a prospective payment system, we do not believe this is inappropriate.”


Fix-Challenge: Apprise all appropriate staff (especially those involved in the preliminary and final calculations to determine whether the thresholds have been reached) of this CMS “quirk” when reviewing reportable device credit limits. Internal facility costs and reimbursements specific to these germane procedures/devices also should be tracked for long-term strategic planning. Additionally, hard examples should be sent with commentary to CMS during every annual proposed rule cycle for OPPS to establish the “epic fail” aspect of this component-applicable credit assessment. It is unfair, no question, and upon interview even select OIG auditors cannot answer why this methodology persists. (Note: at one time, many of the implantable devices, components and all, were pass-through items that were reimbursed separately under APCs; however, that time has long passed and this methodology is no longer credible within the current device-packaged, payment-bundled, OPPS reimbursement standards.)

5. Misinterpretation of the federal terminology regarding “replacement” versus “replaced” devices. Too many healthcare providers, including compliance officers and risk staff with the best of intentions, have misinterpreted and broadly misapplied the most recent clarification for implantable medical device credit reporting as it relates to the inpatient prospective payment system (IPPS) or MS-DRGs. The clarification, contained in the IPPS proposed and final rules for 2012, centered on implantable medical device credits of 100 percent as well as credits of 50 percent or greater; it was promulgated to align the IPPS policy with the OPPS policy. In doing so, these documents emphasized “replacement” devices as being reportable with credit. In fact, providers inserting the term “replacement” represented the reason the clarification was needed. Unfortunately, these federal documents did not sketch out all probable scenarios, leaving room for the erroneous interpretation that credits of 100 percent or 50 percent or greater only were reportable for replacement devices. 

However, both CMS and the OIG take the view that when a credit is received, whether or not the vendor applies it to the original replaced device or the newer replacement device, the credit may need to be reported if it meets the threshold criteria.  For example, if CMS already has paid the original claim, and if by all accounts this is a predominant case at the time of device replacement, then the issued credit must be reported against the replacement device. 

For OPPS situations, this has been in codified in writing all along as it relates to 100 percent credit scenarios; the MCPM, 100-04, Chapter 4, Section 61.3.2, “Reporting and Charging Requirements When the Hospital Receives Full Credit for the Replaced Device against the Cost of a More Expensive Replacement Device” states in the subsection header “… for the replaced device (which denotes the original device) against the cost of a more expensive replacement device (which refers to the new or replacement device).” In fact, during a recent federal audit of a major healthcare system, an OIG auditor valued, assessed and applied all device credits received – not only 100 percent credits but also 50 percent or greater credits. The OIG auditor did not distinguish between “replaced” or “replacement” devices, but instead considered and assessed each vendor credit received against the replacement device cost. If that assessment was for full cost or for a cost 50 percent or greater than that of the replacement device, it was expected to be reported with the replacement device claim, even if the vendor attributed it as a credit against the replaced (original) device. There was no disparity in the credit value. The formula followed by the OIG auditor was basic and straightforward: “original (replaced) device taken out, replacement device put in, credit received, credit reported if credit limit thresholds met.” There were no gray areas regarding “replaced” versus “replacement” designation. 

Fix-Challenge: Whether or not the implantable medical device credit received is attributed to the replaced device or the replacement device, if it meets the credit threshold of 100 percent of either device (or if it’s a lesser credit, but still meets 50 percent or more value of the replacement device), it should be reported appropriately. 

(To come full circle with the MCPM citation above, that section of the guidelines provides instructions on how to report scenarios when the credit for the replaced device is 100 percent and the replacement device is more expensive. In those cases, there is a balance to be reported as the line item charge, while the device is reported with the -FB modifier to signify a 100 percent credit. See factor No. 10 in next month’s article for more information.) 

About the Author:

Michael G. Calahan, PA, MBA, is the vice president of hospital and physician compliance for HealthCare Consulting Solutions (HCS). Michael lives and works in the Washington, D.C. metropolitan area, specializing in compliance, revenue cycle management, CDI, and coding/billing in the facility inpatient/outpatient and physician arenas.

EDITOR’S NOTE: Part II will appear in RACMonitorEnews on July 25, 2013.

Contact the Author

mcalahan@hcsglobal.net or mikiecal@hotmail.com

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


Michael Calahan, PA, MBA, AHIMA-Approved ICD-10 CM/PCS Trainer

As Vice President of Hospital and Physician Compliance at HealthCare Consulting Solutions (HCS), Michael G. Calahan, PA, MBA, provides subject matter expertise and consulting services. He has been a speaker for MedLearn for nearly 10 years and has provided webinars on device credit reporting since 2013.

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