Provider Escapes, Contractor Remains in Qui Tam Alleging Noncompliance With Bad Debt Regs

Recently, the Seventh Circuit partially reversed a district court’s dismissal of a qui tam complaint alleging that debt collection agencies and their client hospital are liable under the FCA for the agencies’ knowing failing to comply with Medicare’s “bad debt” collection requirements.  See United States ex rel. Sibley v. University of Chicago Medical Center, No. 21-2610 (7th Cir. Aug. 11, 2022).  In reaching this decision, the court concluded that the relators had adequately pled that reasonable collection efforts are material to the government’s decision to reimburse Medicare bad debts.

CMS reimburses Medicare providers for bad debts if a Medicare patient fails to make required deductible or coinsurance payments as long as Medicare providers have first made reasonable efforts to collect those debts.  See 42 C.F.R. § 413.89.  A provider’s reasonable collection efforts must last at least 120 days after the issuance of the original bill before a debt is written off as uncollected.  If a provider takes the appropriate steps, it may seek reimbursement for debts from CMS when it submits its annual cost report.

The relators alleged that the academic medical center defendant knowingly avoided an obligation to repay the government after it effectively learned that it had been reimbursed for noncompliant debts.  Relators further alleged that two jointly owned companies that deliver medical billing and debt collection services to healthcare providers—Medical Business Office Corp. (“MBO”) and Trustmark Recovery Services, Inc. (“Trustmark”)—caused the submission of false claims to the government by failing to comply with the bad debt collection regulations.

The complaint alleges that through an audit, the academic medical center defendant learned that MBO had only one person working part-time pursuing its Medicare beneficiary debt, from which relators conclude that the academic medical center defendant must have known it was impossible for MBO to have engaged in reasonable collection efforts.  By extension, relators allege that the academic medical center defendant knowingly avoided an obligation to repay the government for bad debt claimed in its cost report.   The complaint also alleged that MBO and Trustmark were liable for causing their hospital clients to submit false claims.

In weighing these allegations the panel first concluded that the district court had properly granted academic medical center defendant’s motion to dismiss, because the relators failed to plead with particularity under Rule 9(b) either that the academic medical center defendant had an obligation to repay the government or that it knowingly failed to do so.  In addition to failing to plead specific examples of patient debts that were incorporated into the academic medical center defendant’s cost reports as reimbursable Medicare bad debts despite not meeting the regulatory requirements, the court concluded that relators failed adequately to plead scienter.  The relators imputed a “knowing” failure to repay the government from the mere fact that the academic medical center defendant was aware that fewer than the expected number of MBO employees were working on its debt collection.  The panel pointed out that to conclude from this fact that the academic medical center defendant knowingly violated the law required “the court to stack inference upon inference”: first that the work of the two MBO employees pursuing the academic medical center defendant’s debt did not constitute “reasonable collection efforts,” second that the academic medical center defendant did not (directly or indirectly) engage in additional collection efforts to supplement MBO’s work, third that this bad debt was submitted in a cost report to the federal government, and fourth that the government actually reimbursed the academic medical center defendant for this bad debt.

The panel also affirmed the dismissal of the claims against MBO but reversed as to Trustmark.  With respect to MBO, the panel concluded that the relators had failed to supply the necessary representative examples and did not plead with particularity “that fewer than nine full-time employees were incapable of meeting the regulation’s requirements.”  However, the complaint included specific examples of patient debts assigned to Trustmark for collection that were written off as Medicare bad debts without being subject to reasonable collection efforts under 42 C.F.R. § 413.89.  The complaint also specifically described the alleged mechanics of this scheme, for example, Trustmark categorized debts as bad debts before the required 120 day time period had passed from the date of service, disregarded the requirement to send beneficiaries multiple statements, and skipped review of many debts entirely.

The court further explained that the relators had adequately pled materiality consistent with Escobar for purposes of surviving a motion to dismiss, because “it is difficult to imagine that the government would knowingly and systematically reimburse Medicare providers for purported ‘bad debts’ that they did not actually attempt, in good faith, to collect.”

Although the claims against the provider hospital were dismissed, the Seventh Circuit’s decision suggests there may be circumstances in which providers have exposure under the FCA for their debt collection agency’s failure to comply with Medicare bad debt regulations. This may be of particular import to providers operating in circuits that, as discussed here, do not require specific representative examples of false claims.

A copy of the panel’s decision can be found here.

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