The Florida Legislature

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1 The Florida Legislature OFFICE OF PROGRAM POLICY ANALYSIS AND GOVERNMENT ACCOUNTABILITY Summary RESEARCH MEMORANDUM Potential to Establish Contingency Fee Contracts to Identify and Recover As required by Ch , Laws of Florida, OPPAGA researched the option for the state to contract with a vendor on a contingency fee basis to conduct post-audit claims analyses to identify and recover Medicaid overpayments. Several companies offer these services and provide similar services to health insurance companies. 1 We determined that although the federal government has used contingency fee contracts to conduct post-claims analyses and recover Medicare overpayments, only one state, New York, currently has an active contingency fee contract with a vendor; while this contract has operated for two years, New York has not yet authorized the vendor to recover any of the identified potential overpayments. While several vendors offer Medicaid overpayment recovery services, the services they offer vary and estimated contingency fees range from 12% to 25% of recoveries. The amount of estimated recoveries may not be as large as anticipated due to Medicaid s complex payment structure, which would likely limit vendors ability to easily transfer to Medicaid the analytic processes vendors use to analyze other health insurance programs. Also, actual Medicaid recoveries are generally lower than initial estimates due to repaying providers that were previously underpaid and reducing identified overpayments after providers supply additional documentation. In addition, the state would retain only a portion of the actual recoveries since it would need to share recoveries with the federal government and pay vendors a portion of the recovered funds. The Agency for Health Care Administration (AHCA) has recently agreed to allow one vendor the opportunity to analyze paid claims data to identify the potential to increase recoveries of misspent Medicaid dollars. While the vendor will conduct this analysis at no direct cost to the state, any decision to enter into a contingency fee contract should be carefully considered to ensure that the state s interests are well protected. At a minimum, AHCA would need to preapprove and closely monitor the vendor s analytical techniques, provider communications, and record review processes. A contract for such services should clearly describe how the vendor 1 To research this option, we interviewed officials and reviewed information from several companies that offer these services as well as officials in states that currently contract for post-audit reviews. We also reviewed literature on contingency fee contracting and an evaluation of a federal demonstration that used contingency fee contracts to recover Medicare overpayments. In addition, we consulted with legislative, Agency for Health Care Administration, the Attorney General s Medicaid Fraud Control Unit, and federal staff. Gary R. VanLandingham, Ph.D., Director 111 West Madison Street Room 312 Claude Pepper Building Tallahassee, Florida / FAX 850/

2 Page 2 would interact with various responsible parties, specify the activities for which payments would be made in cases in which AHCA staff assists in investigations, and provide that AHCA would pay the vendor only for actual recoveries. Medicare and some state Medicaid programs use contingency fee contracts to identify and recover overpayments The federal Medicare program recently conducted a three-year demonstration project using contingency contracts to hire vendors to detect and correct overpayments and underpayments from Medicare providers. 2 In addition, several state Medicaid programs, including Florida s, have used contingency fee contracts to recover overpayments that can be identified through automated data matching techniques. Florida currently contracts with a vendor on a contingency fee basis to identify and recover funds paid by Medicaid for claims for which a third party was liable; these third parties can include casualty insurers, beneficiary estates and/or trusts, and Medicare or other health insurers. In , AHCA s third-party liability vendor recovered over $75 million from these sources. 3 At this time, New York appears to be the only state that has an active contingency fee contract to identify and recover Medicaid provider overpayments that requires more than automated data matching. In July 2007, New York contracted with Maximus to conduct post-claims audits and recover Medicaid overpayments. Maximus agreed to be paid a contingency fee based on a percentage of actual recoveries. As part of this contract, Maximus reviewed New York s Medicaid program integrity functions to identify ways to improve operations, and then analyzed approximately three years of paid claims data for certain services, including dental and pharmacy, to identify Medicaid overpayments. However, New York officials reported that as of February 2009, the state had not yet authorized Maximus to recover any of the identified potential overpayments. Thus, the success of the contract in recovering overpayments cannot yet be determined. Vendors that provide contingency fee services vary in what they offer and the fees they charge Several vendors have expressed interest in offering Medicaid overpayment recovery services to Florida. These companies generally use analytic techniques similar to those they use to provide comparable services for clients such as commercial health insurers, managed care organizations, and Medicare. These techniques include analyzing inpatient hospital claims and performing compliance reviews to determine whether providers follow specified procedures when authorizing services such as physician-administered injections and durable medical equipment. Some vendors also review medical records and other supporting documentation in addition to analyzing electronic claims. 2 The demonstration covered fiscal years 2006 through 2008 and initially included analyses of claims from California, Florida, New York, and was expanded to include Arizona, Massachusetts, and South Carolina in Correcting payments included recovering overpayments from providers and refunding monies to providers that had been underpaid. The demonstration project identified $1.03 billion in overpayments which represents 0.3 percent of the Medicare claims payments available for review. 3 AHCA also paid this vendor contingency fees to conduct other analyses that involve straight forward data matching, such as to identify claims paid after a person s death, duplicate payments to managed care providers for a newborn and mother, and outpatient hospital payments made during an inpatient stay. In , this vendor collected at least an additional $12.8 million based on these types of data matches on behalf of Medicaid and Medicaid Program Integrity.

3 Page 3 The level of contingency fees proposed by these vendors depends on the types of analyses and resources they would provide. Vendor representatives that we spoke with indicated that fees would likely range from approximately 12% to 25% of recoveries and would depend on factors such as the size of a state s Medicaid program, the number of different types of claims audits or analyses to be performed, and the complexity of activities that would be performed to identify potential overpayment cases. One vendor also indicated that it would likely require a fixed fee component along with a contingency fee to support basic ongoing operations. Vendor recoveries and returns to the state may not be as large as anticipated The level of Medicaid overpayments that could be recovered through contingency fee contracts with vendors may not be as large as vendors estimates. Medicaid has a complex payment structure that differs from other health programs, and the analytical models that vendors use to analyze Medicare, commercial health insurance, and managed care claims may not easily transfer to Medicaid claims. Also, the vendors typically specialize in certain types of analyses and thus may not be equipped to review all types of Medicaid claims. For example, most (91%) of the $1.03 billion in overpayments identified by the Medicare demonstration project were for payments to institutional providers based on beneficiaries Diagnosis Related Groups. 4 One of the vendors with whom we spoke estimated that 38% of the potential overpayments it identified for another state s Medicaid program was based on this method. However, Florida does not use Diagnosis Related Groups to pay institutional providers but instead pays per diem rates; as a result, this analytic technique is not useful for Florida s Medicaid program. In addition, actual recoveries of overpayments generally are substantially smaller than the level initially estimated because potential overpayments are reduced to account for monies that must be paid to providers who were initially underpaid for services as well as for adjustments based on AHCA s required due process procedures. Over the past six years, AHCA reduced its initial estimates of Medicaid overpayments by between 35% and 60% each year after providers supplied supporting information to substantiate their claims and/or after completing the appeals process. In the Medicare demonstration project, the initially identified overpayments were reduced by approximately 33% after making refunds to providers who were underpaid and reducing initial overpayments after appeals. Further, because Medicaid is funded through a cost-share arrangement with the federal government, Florida must share these recoveries with the federal government. As discussed below, we received conflicting information on whether the federal government would agree to share in the cost of the contingency fees to be paid to the vendors. If the federal government does not agree to pay a portion of these fees, Florida would be obligated to return $55.40 to the federal government for every $100 it recovers based on vendor analyses, as the federal share for Florida s Medicaid program is 55.4%. 5 Florida would then need to pay the vendor s contingency fee from the remaining state share ($44.60). Thus, the state would retain $32.60 for every $100 recovered if a vendor charged a 12% contingency fee, and it would retain only $19.60 for every $100 recovered if a vendor charged a 25% contingency fee. 6 4 The federal government introduced Diagnosis Related Groups in 1983 to change the Medicare hospital payment structure. Physicians classify each patient based on clinical information and payers using this system reimburse hospitals a flat rate for all provided services based on this classification. 5 The federal share can change on an annual basis. 6 We used the range of 12% to 25% as these were fees suggested by the vendor representatives who we interviewed.

4 Page 4 AHCA has agreed to allow Viant to conduct an opportunity assessment at no cost AHCA has agreed to allow one vendor, Viant, conduct post-claims audit analyses to identify potential Medicaid overpayment recoveries. Viant will conduct this assessment at no direct cost to the state and will base its analyses on AHCA claims data from four service areas: hospital inpatient and outpatient, Medicare crossover, hospice and long term care, and physician services. If Viant identifies areas where it can recover overpayments, it will prepare a proposal for AHCA to consider. This proposal should include the types of analyses Viant plans to use to identify overpayments, estimated gross recoveries, the extent to which Viant will incorporate Medicaid policies and payment structures into these analyses, how Viant will work with AHCA to recover overpayments, and what the ultimate returns to the state are likely to be once provider due processes have been exhausted and the federal share and vendor fees are taken into account. AHCA must also consider the effort needed by AHCA staff to oversee vendor activities, manage provider appeals, and any potential impact on providers. Before entering into a contingency contract for post-claims audits, AHCA needs to address several concerns If Florida decides to pursue contracting with vendors to identify and recover Medicaid overpayments, several important issues would need to be addressed. Specifically, it is unclear whether the federal government will allow Florida to use this type of contract, whether it would cap the level of contingency fees to be paid, and whether it would share in the cost of the contingency fee. It would also be critical for AHCA to exercise care in negotiating the contingency fee for these services. We received conflicting information from the federal government and other states regarding whether the federal government will allow states to enter into contingency fee contracts for postclaims audit analyses, and if so, whether the federal government would treat these contracts similarly to third-party liability contracts. States have reported receiving different answers from their regional federal Medicaid offices regarding whether they can contract for post-claims audits using contingency fees. Iowa reported that it was denied permission to enter into these contracts, although New York was authorized to do so by a different regional office. In addition, it is unclear whether the federal government would apply its guidelines for thirdparty liability contingency fee contracts to Medicaid post-claims contingency contracts. The federal guidelines for third-party contingency fee contracts limit fees to a maximum of 15% of recoveries; these guidelines also consider contingency fees to be an administrative cost and the federal government pays 50% of the third-party liability contingency fee. However, the federal government requires New York to pay the total contingency fee for its post-claims audit contract with Maximus. Thus, it is unclear whether AHCA could pay the higher contingency fee levels proposed by some vendors that are seeking these contracts and whether the federal government would share the cost of the contingency fee with the state. AHCA would also need to exercise caution in negotiating contracts for these services to avoid unintended consequences. Several federal and state officials expressed concern that vendors paid via contingency fees could be overly aggressive in recovering overpayments and disrupt relationships with health care providers. For example, federal Medicaid officials indicated that the federal government chose to use fee-based contracts to conduct Medicaid Program Integrity Group audits because it wanted states and providers to perceive these reviews as helpful and not

5 Page 5 contentious. 7 To guard against this problem, AHCA should ensure that, at a minimum, it preapproves and closely monitors its vendor s analytical techniques, provider communications, and record review processes. To avoid disruptions of ongoing operations and to ensure that contingency contracts for post-claims audits will add value to the state, AHCA would need to assess vendor capacity to complete medical records reviews and apply appropriate clinical judgment, if warranted, and ensure that vendors incorporate Florida s Medicaid policies into their standard methodologies. 8 It would also be important for AHCA to consider the net returns to the state. 9 Because certain contingency fee arrangements could result in a low net return, AHCA may wish to explore other options that give the state the opportunity to retain a greater proportion of recovered funds. In addition, before entering into contingency fee contracts, AHCA would need to clearly delineate the duties that would be performed by the vendor, AHCA, the Medicaid Fiscal Agent, the Attorney General s Medicaid Fraud Control Unit, and providers. It would also be critical for AHCA to clearly delineate the points at which it would review vendor efforts, how recoveries would be calculated, and under what conditions the vendor would be entitled to payment. In particular, because providers often submit additional documentation and request administrative hearings which can reduce the initial overpayment and some providers do not repay the overpayments owed, AHCA would need to ensure that it pay vendors based on recoveries actually collected not those it expects to recover. OPPAGA will study other options to increase Medicaid recoveries and improve Florida s Medicaid program integrity functions Chapter , Laws of Florida, requires OPPAGA to biennially review AHCA s efforts to prevent, detect, deter, and recover funds lost to fraud and abuse in the Medicaid program. Our next review, due to the Legislature in January 2010, will assess AHCA s progress in establishing contingency fee contracts for identifying and recovering provider overpayments if the Legislature approves such contracts, determine whether AHCA has addressed issues raised in prior OPPAGA reports and assess additional options for improving its Medicaid program integrity functions These audits are as a result of the Deficit Reduction Act of 2005 which created the CMS Medicaid Integrity Program. In addition to providing training for state program integrity staff, CMS is contracting with vendors to work collaboratively with states while completing targeted audits, recovering overpayments, and educating providers. Beginning in 2009, CMS expects that its auditors will conduct about 126 audits per year in Florida or 11 or 12 audits per month. 8 It would also be important for AHCA to estimate the costs it would incur to assist vendors in incorporating Florida s Medicaid policies and billing requirements into their audit procedures. 9 Net returns would be the state share less the contingency fee percentage which is the amount the state would retain. 10 AHCA Making Progress But Stronger Detection, Sanctions, and Managed Care Oversight Needed, Report No , February 2008; Enhanced Detection and Stronger Use of Sanctions Could Improve AHCA s Ability to Detect and Deter Overpayments to Providers, Report No , March 2006; AHCA Takes Steps to Improve Medicaid Program Integrity, But Further Actions Are Needed, Report No , November 2004; and Medicaid Program Integrity Efforts Recover Minimal Dollars, Sanctions Rarely Imposed, Stronger Accountability Needed, Report No , September 2001.