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Understanding Third Party Payor Audits Affecting Physicians

On Behalf of | Aug 17, 2017 | Articles, Audits & Investigations, Healthcare Law

By Mathew J. Levy, Esq. & Stacey Lipitz Marder, Esq.,Weiss Zarett Brofman Sonnenklar & Levy, P.C.

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SERIES DESCRIPTION: There is perhaps no more frustrating moment in a physician’s career than when a health plan or managed care company notifies him/her that, after the physician has spent countless hours and expended endless efforts to get paid fifty or sixty cents on the dollar for services rendered to his/her patients, the payor is now suddenly demanding that some exorbitant amount of money be “repaid” to the payor, or that the payor is not going to pay the physician for the services rendered and billed until documentation is reviewed. This series will explore the basis for these audits, including retrospective overpayment demands and prepayment audit reviews, as well as the steps involved in responding to these audits to achieve the most favorable results possible.  Furthermore, we will explore how a physician can reduce his/her odds of being subject to a third party payor audit.

Part 1: Understanding Retrospective Audits

There is perhaps no more frustrating moment in a physician’s career than when a health plan or managed care company notifies him/her that, after the physician has spent countless hours and expended endless efforts to get paid for services rendered to his/her patients, the payor is now suddenly demanding that some exorbitant amount of money be “repaid” to the payor. The basis for such a demand? The payor has reviewed as few as six charts, isolated what it interprets as a pattern of inappropriate billing, takes the amount involved and extrapolates that amount to extend over a randomly selected number of past years. The result? A “discrepancy” of several dollars quickly becomes a demand for several hundred thousand or even millions of dollars.  While couched by payors as a “retrospective audit” or a “probe review,” many physicians have simply termed it as legalized extortion.

Understanding how these audits come about is a key first step in avoiding their potential effects.  The triggering event in most cases is a simple computer analysis that identifies those physicians who are billing and/or coding differently than their supposed peers, labels those physicians as “outliers” and refers them for additional scrutiny.  Oftentimes, the health plan or managed care company will then request a sampling of records from the physician which are to be reviewed in order to determine whether the received documentation supports the billing submitted. This is the basis for the calculation of the potential overpayment demand.

Physicians must understand that even the smallest of amounts in dispute can generate extremely large demands for repayment. If a discrepancy is noted by the computer review, that notation triggers “additional scrutiny” of the practice. While this method is neither statistically valid nor based upon a truly random sample, even the smallest of discrepancies provides the reviewer with a simple method to demand exorbitant monies be “repaid” to the payor. The basic “repayment formula” is as follows:

Claimed Overpayment


Rate of Code Usage


Number of Years Enrolled



Using this formula, a billing discrepancy of only $2.00 can bring about an enormous demand. Example:

Claimed Overpayment – $2.00


Rate of Code Usage – 2,000 per year (eight per day, 40 per week)


Number of Years Enrolled – 12


DEMAND – $48,000.00

In the event that a health plan or managed care company determines that there is an overpayment demand, the physician will receive written notification of the same. The health plan or managed care company is obligated to inform the physician how it arrived at its calculation. The correspondence will also outline the physician’s appeal rights. Tomorrow we will review the appeal process in connection with these overpayment demands for both Medicare and private carriers.

Part 2: Responding to a Retrospective Audit-Medicare

As previously discussed, being the subject of a third-party payor retrospective audit can be very daunting for a physician. In the event a physician receives notification informing him/her of the alleged overpayment demand, the physician must submit an appeal showing why the alleged overpayment demand should be reduced or removed.

With respect to a Medicare overpayment demand, the physician has 120 days from receipt of an overpayment demand to file a Redetermination Appeal. However, in order to prevent Medicare from beginning its recoupment efforts, the Redetermination Appeal must be filed within 30 days. It is important to note that interest on the balance allegedly owed continues to accrue even if an offset is delayed.

If the results of the initial Redetermination Appeal are unfavorable, the next level of appeal in connection with a Medicare overpayment demand is a Reconsideration Request, whereby a qualified independent contractor (QIC) reviews the appeal. Such appeal must be filed within 180 days of receipt of the redetermination results.

If all other avenues of recourse are exhausted, the third level of appeal is the Administrative Law Judge (ALJ) Hearing. The ALJ Hearing gives physicians an opportunity to directly present their case to an ALJ; who is independent of Medicare. This is often the first time that a physician can have his/her case presented to an unbiased party. Due to the increasing number of physicians who are subject to Medicare overpayment demands, there is currently a waiting period of over 2 years before a physician can have his/her case heard before an ALJ.

The appeals process with respect to the private carriers is not as exhaustive. There is generally only one level of appeal, which is typically outlined in the provider manual. Upon receipt of the results of the appeal, negotiation discussions are held between the carrier and the attorney. Once a settlement amount is agreed upon, the parties will enter into a settlement agreement, which will outline the terms of the settlement.

During the appeals process, the areas generally targeted are documentation/coding and extrapolation. Specifically, with the assistance of coding and statistical experts, we prove that the documentation supported the code billed, as well as prove that the extrapolation was not statistically valid. These arguments are utilized to decrease, or ideally remove, the alleged overpayment demand.

Tomorrow we will discuss prepay audit reviews, which can also have a huge impact on a physician’s practice. Unlike retrospective overpayment demands, which are post-pay reviews, prepay audit reviews are audits conducted before a physician is paid.

Part 3: Understanding Prepay Audit Reviews

As previously discussed, in today’s healthcare climate, insurance companies are engaging in several tactics in order to make it more difficult for physicians to receive proper reimbursement, including retrospective overpayment demands. In addition to overpayment demands, insurance carriers are delaying and making it more difficult for physicians to get paid through prepayment audits.  Being placed on a prepayment audit review is extremely frustrating for a physician, and can ultimately have a devastating impact on the operation of a practice.

When a physician has been placed on prepayment audit review, each time the physician submits a claim, the claim is denied by the insurance carrier and there is a request that the physician submit a copy of his/her medical records in order to support the claim. The prepayment audit review can involve a specific code billed, or all codes billed.  Once the insurance carrier receives the medical records requested, the records are reviewed in order to determine whether the claim should ultimately be paid or not.

Even if the claim is eventually paid, payment would not be made until approximately 90-120 days after the claim is submitted (as opposed to 30 or 45 days in the event the physician was not on prepayment review). This process can be very costly for a physician, in addition to the physician’s staff spending countless hours preparing the medical records to be submitted to the insurance carrier, the delay in payment can have a significant impact on cash flow, as many physicians rely on reimbursement from insurance carriers in order to pay their employees and the day-to-day expenses of running their practices.

Insurance carriers, including Medicare, are investing heavily in billing software programs.  These sophisticated billing software programs are able to compare a physician’s billing habits with those of his/her peers in the same geographic location.  To the extent that a physician’s billing patterns differ from the insurance carrier’s predetermined norms, the insurance carrier may place the physician on prepayment audit review before the carrier can justify payment based upon a review of the medical records.

In order to be removed from prepayment audit review, the physician must have his or her medical records reviewed and analyzed so that the payor can determine whether the physician’s documentation supports the codes submitted. In the event that a physician’s documentation does not justify the codes submitted, the physician must rectify such billing deficiencies going forward.

Once the medical records have been reviewed, the physician’s healthcare team, including attorneys and coding experts, will contact and negotiate with the insurance carrier. In order to be removed from prepayment audit review, the physician must be in compliance with the insurance carrier’s requirements regarding coding and documentation.  If a physician is placed on prepayment audit review, it is recommended that the physician begin the removal process immediately in order to avoid being placed on prepayment audit review by other carriers as well.  Since the insurance carriers often enter into arrangements with third party contractors (who have relationships with the other carriers) to review records, there is a good chance that the physician will be hit with multiple audits from other carriers if they are already on one carrier’s radar.

Part 4: Responding to a Visit from an Investigator

In addition to written requests for records, as the government and private payors continue to invest resources into combatting fraud and abuse in the healthcare system, many practices are being faced with unexpected visits from investigators from the state and federal government, as well as private payors. These investigators include but not limited to those from Medicare, the Office of the Medicaid Inspector General (OMIG), and private insurance carriers. In the event one of these investigators decides to make a visit to a physician’s office, it is imperative to understand how the physician and his/her staff should respond to these visits in order to ensure that the physician’s interests are protected and that the physician’s exposure is limited.

If a physician, or one of his/her staff members, receive a knock at the door from an investigator, the first thing the physician, or staff member, should do is check the investigator’s identification and credentials, and make and retain a copy of the same.  This information should be kept in a safe place for future reference.

Physicians must remember to live by the golden rule — NEVER speak to, or allow anyone in the office to speak to, any investigator!  Although these investigators are often friendly, their intention is to obtain as much information from the physician and staff members as possible with respect to the practice.  Other tactics often employed by investigators include1intimidation and promises of leniency.  It is especially important to never speak with an investigator without counsel as anything that is said to the investigator can and will be used against the physician. Physicians and their staff are not obligated to speak with anyone without counsel,

In most instances, visiting investigators will make a request to obtain a copy of medical records and other documents kept by the practice.  The staff should be informed that they should not release any records without first speaking with the physician.  It is best to either have the attorney provide the records directly at a later date, or set up a time for the investigator to come back after hours to make the copies. In addition to controlling the information disclosed, this will limit disruptions to the office. Prior to turning over such information; specifically medical records; physicians also need to confirm that such disclosure is compliant with HIPAA and state privacy rules and regulations, and that the appropriate authorizations have been obtained.

A visit from an investigator can be an overwhelming and daunting experience.  As such, even the most informal, cursory contact by an investigator should prompt an immediate and well-coordinated reaction.  It is therefore important to be prepared and to inform the staff ahead of time of the practice’s protocols with respect to a visit from an investigator. There should be a written policy in place outlining the specific steps that the staff should take in such instances, including contacting legal counsel and providing medical records.  These protocols are extremely important, and can often mitigate an agency’s findings.

Part 5: How to Avoid Being Subject to a Third Party Audit

As previously discussed, being subject to a third-party audit can be very daunting and potentially financially crippling for a physician. In order to decrease the chance of being subject to a third-party audit, physicians must recognize that today’s billing and coding systems dictate the need for specialized assistance. As such, physicians must ensure that their current billing practices are in compliance with the carrier’s policies, and that their documentation adequately supports their billing claims.  From simple pre-printed forms, through digital transcription to an electronic medical record, ample resources exist that can document the level of services rendered, confirm the medical necessity for those services and bar preclude reviews by investigating authorities.

An annual review conducted by a certified coder can further provide valuable insight into what areas are currently under scrutiny, what trends are developing with one’s peers and/or what can be done to keep the practice in strict compliance. Advice from any billing resource should be provided verbally (any written reports could be discoverable in any future legal proceedings) and should be provided directly to the physicians involved.  Physicians who are willing to recognize that billing and coding in today’s healthcare environment is very complex, and who obtain ongoing advice from specialists, will have taken an enormous first step in avoiding being subject to review and the potentially devastating impact of being the target of an audit.