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Rio Home Care, LLC v. Azar

United States District Court, S.D. Texas, McAllen Division

March 11, 2019

RIO HOME CARE, LLC, Plaintiff,
ALEX M. AZAR, II, [1] et al, Defendants.


          Peter E. Ormsby United States Magistrate Judge

         Plaintiff Rio Home Care, LLC ("Rio") seeks judicial review of a decision by Defendant Secretary of Health and Human Services ("HHS") finding that Rio was overpaid $4, 079, 073 on Medicare claims it submitted for home health care services. An HHS program integrity contractor audited a sample of 41 claims that Rio submitted during a two-year period and found that 35 of them did not qualify for Medicare coverage-an error rate of 85 percent. The total overpayment amount was determined by a statistical extrapolation from the 41 audited sample claims to the 2, 197 similar claims that Rio submitted during the two-year period.

         After receiving notice of the overpayment, Rio invoked the multi-level Medicare administrative review process. In addition to challenging the determination that the 35 claims were not covered by Medicare, Rio contested the statistical validity of the sampling-method and the extrapolation. Rio later also claimed that its due process rights were violated by the HHS contractor's excessive delay in providing some of the statistical data needed to test the overpayment determination.

         After adverse rulings at the initial levels of administrative review, an Administrative Law Judge ("ALJ") issued a decision that was partially favorable to Rio. Although the ALJ affirmed the determination that Medicare coverage was properly denied for the 35 individual claims that were audited, he also found that the statistical sample was invalid, that the extrapolated amount was not properly determined, and that Rio's due process rights were violated. However, the ALJ's decision regarding the statistical validity of the sampling and extrapolation was reviewed by the Medicare Appeals Council ("Council"), which reversed the portions of the ALJ's decision that were favorable to Rio. The Council found that the sampling and extrapolation were statistically valid and that Rio's due process rights had not been violated. Rio did not challenge the ALJ's adverse rulings on the individual claims, and the Council did not address that issue.

         In seeking judicial review of the Secretary's final administrative decision, Rio asserts three principal claims: 1) that the selection of the sample deviated from applicable statistical standards; 2) that an impermissible extrapolation method was used; and 3) that Rio's due process rights were violated as a result of the HHS contractor's lengthy delay in providing Rio with statistical data. Rio also challenges the ALJ's rulings on the individual claims. The parties have fully briefed the issues in cross-motions for summary judgment. (Docket Nos. 34, 39, 42.) In addition to responding to the claims asserted by Rio, the Secretary contends that Rio failed to exhaust its administrative remedies regarding the individual coverage determinations.

         After carefully considering the parties' briefing, the record, and the applicable law, the undersigned concludes that Rio's request to set aside the Council's decision should be denied. When considered in light of the deferential standard of review that applies, Rio has failed to show that the Council's decision upholding the overpayment determination lacks substantial evidence, that it is arbitrary and capricious, or that it is otherwise contrary to law. Although Rio relies on opinion evidence from its well-qualified expert statistician in challenging the sampling and extrapolation methodology, the Council's decision is supported by substantial evidence, including evidence from several qualified statisticians. And while the HHS contractor's delay in providing some of the relevant statistical data is troubling and should not be condoned, Rio has failed to show that this conduct violated its constitutional right to due process. At the end of the day, Rio received the needed data and used it in arguments before the ALJ and the Council, and both the ALJ and the Council conducted a de novo review of Rio's claims. Because Rio did not request Council review of the ALJ's decision denying the individual claims, those claims are unexhausted and not properly before the Court. Accordingly, for the reasons explained further below, it is recommended that Rio's summary judgment motion be denied and that the Secretary's motion be granted.

         I. BACKGROUND [2]

         Plaintiff Rio provides home health care services to patients in south Texas. "The Medicare program reimburses health care providers who render services to Medicare beneficiaries." Maxmed Healthcare, Inc. v. Price, 860 F.3d 335, 337 (5th Cir. 2017). This case is about whether and how much Rio was overpaid on claims for services to Medicare beneficiaries.

         A. Medicare Reimbursement to Health Care Providers

         "Medicare is a federally funded health insurance program for the elderly and disabled." Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 506 (1994); see 42 U.S.C. § 1395 et seq. (the "Medicare Act"). The Medicare program is administered by HHS. The Centers for Medicare and Medicaid Services ("CMS") is a division of HHS and is responsible for overseeing the Medicare program. CMS, in turn, contracts with private government contractors, called Medicare Administrative Contractors, to process and make payments on Medicare claims.[3] See 42 U.S.C. § 1395kk-1; 42 C.F.R. §§ 405.904(a)(2), 421.401.

         The Medicare Act provides that "no payment may be made ... for any expenses incurred for items or services ... which... are not reasonable and necessary for the diagnosis or treatment of illness or injury. ..." 42 U.S.C. § 1395y(a)(1)(A); 42 C.F.R. § 411.15(k)(1). Medicare providers bear the burden of maintaining and producing information to support their payment claims. See 42 C.F.R. § 424.5(a)(6).

         Enormous numbers of Medicare claims are submitted each year.[4] To expedite claims processing, Medicare contractors generally reimburse providers for services before reviewing the medical records relating to the claims and verifying that the claims are valid. See John Balko & Assocs., Inc. v. Sec'y U.S. Dep't of Health & Human Servs., 555 Fed.Appx. 188, 190 (3d Cir. 2014); see also 42 C.F.R. § 405.922 (time frame for processing initial determinations).

         While this process provides faster payments to providers, it also results in huge amounts of Medicare overpayments.[5] "Congress created the Medicare Integrity Program through which the Secretary contracts with private entities 'for the purpose of identifying underpayments and overpayments and recouping overpayments[.]'" Maxmed Healthcare, Inc., 860 F.3d at 337 (quoting 42 U.S.C. § 1395ddd(a), (h)(1)). The Medicare Integrity Program established a procedure to review payments made to providers to "increase the effectiveness of the [Medicare Program] through cost avoidance, savings, and recoupments of fraudulent, wasteful, or abusive expenditures." 42 U.S.C. § 1395ddd(g)(1)(A)(iii). Payments initially made by Medicare contractors "may then be audited by Zone Program Integrity Contractors ('ZPICs'). When a ZPIC identifies an overpayment, it notifies the relevant [Medicare Administrative Contractor], which then issues a demand letter to the provider." Family Rehab., Inc. v. Azar, 886 F.3d 496, 499 (5th Cir. 2018) (footnote omitted); see 42 U.S.C. § 1395ddd(g), (h).

         In a 1986 administrative ruling, CMS approved the use of statistical sampling and extrapolation in determining whether there has been an overpayment and in calculating the total amount of any overpayment. See Ruling 86-1 at 10.[6] It is now well-settled that "[extrapolation is one permissible method of calculating overpayments. In particular, Congress authorized Medicare contractors to 'use extrapolation to determine overpayment amounts' if the Secretary determines that 'there is a sustained or high level of payment error.'" Maxmed Healthcare, Inc., 860 F.3d at 337 (citing 42 U.S.C. § l395ddd(f)(3)(A)). CMS has developed guidelines for the use of statistical sampling and extrapolation in estimating overpayments, which are found in its Medicare Program Integrity Manual ("MPIM").[7]

         Health care providers can challenge a ZPIC's overpayment determination through an elaborate five-step appeal process:

Providers who dispute an overpayment determination may challenge it in a lengthy appeal process. At the outset, a Medicare Administrative Contractor makes an "initial determination" regarding the overpayment amount. See 42 C.F.R. § 405.920. A provider who is displeased with the Medicare Administrative Contractor's initial determination may then seek a "redetermination"-the first step in a five-step appeal process. Id. §§ 405.940-.958. The redetermination is conducted by employees of the Medicare Administrative Contractor who were not involved in the initial determination. Id. § 405.948. Second, if the provider remains . dissatisfied, the provider may request a "reconsideration." Id.. § 405.960. A Qualified Independent Contractor [QIC], another private contractor, conducts the "independent" reconsideration. Id. § 405.968. Third, if the provider still remains dissatisfied, the provider may request a hearing before an administrative law judge (ALJ). Id. § 405.1000(a). The ALJ reviews the case de novo. Id. § 405.1000(d). Fourth, either the provider or CMS, through its contractors, may request that the Medicare Appeals Council (Council) review the ALJ's decision. Id. § 405.1100(a). The Council, like the ALJ, reviews the case de novo, and its decision constitutes the Secretary's final decision. Id. § 405.1000(c). Fifth, if all else fails, the provider is entitled to "judicial review of the Secretary's final decision ... as is provided in section 405(g) of this title." 42 U.S.C. § l395ff(b)(1)(A).

Maxmed Healthcare, Inc., 86OF.3dat338.

         B. CMS Audit of Medicare Payments Made to Rio

         During the two-year period from June 1, 2007, to May 31, 2009, Rio submitted over two thousand claims for Medicare coverage of home health care services it rendered to Medicare beneficiaries.[8] Palmetto GBA, L.L.C. ("Palmetto") was the Medicare Administrative Contractor responsible for paying the home health care claims submitted by Rio.[9]

         CMS also contracted with Health Integrity, LLC ("Health Integrity") to conduct fraud and overpayment investigations as the Zone Program Integrity Contractor (ZPIC) in Texas. Based on an analysis of billing data, Health Integrity conducted an audit of Rio's claims for Medicare coverage. The Council summarized Health Integrity's review as follows:

By letter dated August 19, 2009, Health Integrity, a Zone Program Integrity Contractor (ZPIC), notified the appellate [Rio] that it was conducting a review of the appellant's claims for Medicare coverage of home health services. The ZPIC [Health Integrity] requested records for services furnished from January 1, 2007 to August 19, 2009. See ALJ Master Claim File (MCF), Exh. 10 at 20-21. On November 2, 2009, the ZPIC issued a "Provider Summary of Medical Review Findings." See Id. at 27-33. There, the ZPIC indicated that it had reviewed forty-one claims for the period June 9, 2007 through May 12, 2009, denying coverage for thirty-five claims, an 85% error rate. See Id. at 27. The remainder of the Summary presented claim-specific examples of the coverage issues encountered. See Id. at 28-33.
By letter dated February 18, 2011, the ZPIC notified the appellant of its preliminary audit results. See MCF, Exh. 10 at 27-33. The ZPIC explained that its audit had resulted in an extrapolated overpayment totaling $4, 079, 073 for claims with payment dates spanning June 1, 2007 through May 31, 2009. The ZPIC indicated that it had relied upon a "statistically valid random sample" of forty-one claims drawn from a 2, 179 claim universe . The ZPIC added that it had "enclosed [an] encrypted CD" setting out the sampling methodology in greater detail. See Id. at 34-35. The appellant's Medicare contractor [Palmetto] provided formal notice of the disallowance by letter dated February 28, 2011. See Id. at 49-52.
By letter dated April 19, 2011, and in reliance upon the coverage determinations emanating from its audit, the ZPIC notified the appellant that its Medicare payments had been suspended. See MCF, Exh. 10 at 38-41.

(R. 5-6.)

         Rio was paid $5, 609, 692.22 for the 2, 179 claims under review. (R. 434, 1220.) In auditing the 41 claims in the sample, Health Integrity personnel reviewed the medical records provided by Rio and interviewed many of the patients (sometimes with a family member also present).[10] In determining that 35 of the 41 claims reviewed should not have been paid, Health Integrity found that 30 of these claims did not meet Medicare home health care coverage requirements both because the patient was not homebound and because the services were not medically reasonable or necessary. (See Docket No. 34, at 2.) Of the remaining five denied claims, three patients were found to be not homebound, and for the other two, the services were found to be not medically reasonable or necessary.

         C. Rio's Request for Additional Information

         Along with the February 18, 2011, letter informing Rio of the "extrapolated overpayment" amount and explaining how it was determined, Health Integrity provided Rio with a CD that contained information about the sampling methodology that was used. (R. 1304-08.) On March 21, 2011, Rio's counsel sent a letter to Health Integrity, Palmetto, and CMS's Freedom of Information Division, informing them that "the CD does not include the entire universe of claims and requesting "an Excel spreadsheet on a CD itemizing the 2, 179 claims that comprise the 'universe' of claims."[11] (R. 235-36.) Rio's counsel provided specific instructions on how the spreadsheet should be formatted and what should be included (specifying 13 items). (R. 236.)

         The requested additional information was not forthcoming, and Rio's counsel periodically renewed the request with follow-up letters. Rio describes this effort and its unsatisfactory results as follows:

Following up on its March 21, 2011 correspondence, Plaintiffs counsel sent 8 subsequent letters requesting the relevant audit files, including all document[s] relating to statistical sampling, to CMS, ZPIC, and Palmetto on April 25, 2011, June 6, 2011, June 23, 2011, July 22, 2011, November 8, 2011, March 28, 2013, April 23, 2013 and November 12, 2013. See A.R. 0235-0236, A.R. 0247-0248, A.R. 0259-260, A.R. 0265-0268, A.R. 0309-0310, A.R. 0324-0326, and A.R. 0343-0345, and A.R. 0859-861.
In response, Plaintiff received multiple correspondences from the Defendant over a 2-year period stating that the requested documentation was either "being reviewed," "taking longer than expected due to the voluminous amount of information requested," and - due to the length of time the request was taking - inquiring as to whether Plaintiff still wanted the requested information. See A.R. 0261, A.R. 366, A.R. 368-372, A.R. 375, A.R. 379, and A.R. 0858. Finally, in November 2013, Defendant provided a disc purporting to contain the universe of claim data. However, the information produced was incomplete and unusable.

(Docket No. 34, at 5.) The failure of CMS and its contractors to provide the information requested by Rio was to become a prominent issue as Rio proceeded through the administrative appeal process.

         D. Rio's Administrative Appeal

         1. Request for Redetermination

         After receiving notice of Health Integrity's overpayment determination, Rio promptly invoked the administrative appeal process to challenge it. At the first step of that process, Rio sought a redetermination by Palmetto employees who were not involved in Health Integrity's determination. Between May 24, 2011, and June 8, 2011, Palmetto issued a series of redetermination decisions upholding the overpayment finding as to each beneficiary. Palmetto's unfavorable redetermination decisions did not address the statistical sampling methodology used by Health Integrity to project the total overpayment from the actual overpayment found in the sample. (See R. 6.)

         2. Qualified Independent Contractor Reconsideration

         Rio then invoked the second step of the appeal process by requesting reconsideration by a Qualified Independent Contractor (QIC). Maximus Federal Services, Inc. ("Maximus"), located in Pennsylvania, was the QIC that decided Rio's request for reconsideration. The Maximus employees and contractors who participated in the reconsideration signed conflict-of-interest statements attesting that they had no connection to or relationship with Health Integrity or Palmetto. (R. 1215-16 (health care professionals), 1225 (statistician).) Rio's request for reconsideration argued both that Health Integrity and Palmetto were wrong in rejecting the 35 individual claims and that the sampling methodology used to determine the overpayment amount was "significantly flawed." (R. 1228-34.) In support of the latter argument, Rio submitted a preliminary report by a statistician, Dr. Bruce Kardon. (R. 1232, 1251-71.) Rio noted that the report was incomplete due to the failure of Health Integrity and Palmetto to provide it with "the universe of claims." (R. 1232.)

         After conducting its review, Maximus sent Rio a 78-page written decision on October 21, 2011, denying Rio's various claims. (R. 1075-1152.) As to each of the challenged individual claims, Maximus found that Rio was not entitled to payment because the claims did not meet Medicare's criteria for home health services. Maximus's decision included a detailed explanation as to why each claim was overpaid, with a specific discussion of each patient's medical records and the information that had been obtained from patient interviews.[12] (R. 1082-1147.) The decision regarding the individual claims was supported by a lengthy (52-page) and detailed assessment performed by two licensed health care professionals, who reviewed each patient's medical records and interview responses. (R. 1155-1207.) Ultimately, both of the medical reviewers concluded that none of the services at issue were "medically reasonable and necessary." (R. 1210-14.) Both reviewers attested that, in addition to being free from any conflict of interest, they possessed the appropriate expertise to perform the medical review. (R. 1215-16.)

         As to the validity of the sampling methodology and statistical extrapolation, Maximus explained the steps taken in a review performed by a qualified statistician. (R. 1148-51.) Based on that review, Maximus "determined that the methods used by Health Integrity LLC were consistent with both the Medicare guidelines and generally accepted statistical practice." (R. 1151.) The statistical review was performed by Daniel Teitelbaum, Ph.D. (R. 1218-25.) Dr. Teitelbaum "was able to fully replicate the statistical findings made by Health Integrity," and he explained the specific steps he took to do this. (R. 1223-24.) Dr. Teitelbaum opined that there were no errors or deviations from the relevant statistical extrapolation procedures. (R. 1222.)

         3. Evidentiary Hearing before the ALJ

         Disappointed with the unfavorable decision by the QIC, Rio took the next step in the administrative appeal process by requesting a hearing before an Administrative Law Judge (ALJ). Rio sought de novo review by the ALJ of both the adverse individual coverage determinations and the statistical sampling and extrapolation methodology. A pre-hearing conference was held, and the ALJ set an evidentiary hearing for May 19, 2015. A few days prior to the hearing, Rio's counsel submitted a 17-page brief, together with over 200 pages of exhibits, in support of Rio's arguments. (R. 194-212 (brief); R. 213-424 (exhibits).) Among other things, Rio's counsel described-and provided copies of-the numerous letters sent to Health Integrity, Palmetto, and CMS attempting to obtain additional information related to the statistical sampling. (R. 198-99.) As stated by Rio's counsel, on the "eve of trial," May 14, 2015, Rio finally received from Health Integrity the additional statistical information that it had been requesting for so long.[13] (R. 199.)

         In challenging Health Integrity's statistical sampling methodology, Rio relied on the report of its expert, Dr. Harold S. Haller, who obtained a Ph.D. from Case Western Reserve University. (R. 206, 825, 1543.) Rio's initial pre-hearing submission included the initial "Declaration of Harold S. Haller, PhD." (R. 383-86 (declaration); R. 387-424 (attachments to declaration).) Dr. Haller opined that there were multiple errors in the statistical sampling, all of which related to the failure of Health Integrity to provide complete information. (R. 384-85.) Dr. Haller's initial report was prepared on May 11, 2015, which was before Health Integrity provided additional statistical information (on May 14, 2015). (R. 386.)

         After receiving the additional information from Health Integrity, Dr. Haller prepared an "Addendum" to his initial report in which he provides a detailed statistical analysis of Health Integrity's audit and extrapolation. (R. 818-48.) Including attached exhibits, Dr. Haller's addendum is a 30-page document. The Addendum is dated May 18, 2015, which was the day before the evidentiary hearing, and it was submitted to the ALJ just prior to the hearing. (R. 824, 1546.) Based on his analysis, Dr. Haller opined that the 41-claim sample was "non-representative and non-random." (R. 823.) Dr. Haller further concluded that, because "the distribution of sample average overpayments was not normal," the extrapolation was "invalid" and "meaningless." (R. 823-24.)

         The ALJ conducted a telephonic evidentiary hearing on May 19, 2015. Counsel for Rio appeared, along with two witnesses for Rio, Dr. Haller and Christina Pantoja, R.N. (R. 1540-41.) Neither CMS nor any of its contractors participated in the telephonic hearing. The ALJ noted that the additional materials submitted on behalf of Rio would become part of the record. (R. 1541-42.) The ALJ also stated that he considered Dr. Haller to be an expert witness. (R. 1542.)

         Dr. Haller began his testimony by explaining that Health Integrity was required by the Medicare Program Integrity Manual (MPIM) to maintain and produce information relating to its statistical extrapolation and that it had failed to do so in a timely fashion. (R. 1543-45.) In preparation for the hearing, Dr. Haller reviewed the additional statistical information submitted by Health Integrity, although it was produced just a few days before. (R. 1545-48, 1551.) Based on that review, Dr. Haller testified that Health Integrity's statistical extrapolation was "invalid for a number of reasons." (R. 1551.) To begin with, Dr. Haller found that "the universe [of claims] was not correctly defined" and was "contaminated." (R. 1552.) He reached this conclusion because when he looked at the universe, he found that "it contained 2, 185 claims, not 2, 179" as determined by Health Integrity. (R. 1552-53.)

         Another flaw identified by Dr. Haller was that Health Integrity did not provide the random numbers used to select the sample so that he was unable to test whether they had obtained a random sample. (R. 1555.) In comparing the distribution of the dollar amounts in the sample claims to the universe of claims in the frame, Dr. Haller found that "the sample was shifted to the right, with higher proportions of higher amounts paid in the claims in the sample than in the frame." (R. 1556.) From this, Dr. Haller concluded that "there was some judgment used that was not random in selecting the samples for the audit, namely, those samples that corresponded to the higher dollar values." (R. 1556.) In other words, Dr. Haller believed that there was "some human intervention" in "cherry picking[ing]" the "higher paid claims rather than a random sample." (R. 1558.) Dr. Haller agreed with Rio's counsel that "someone manipulated the information in the so-called random sample in order to come up with a higher extrapolated amount," although he did not "know how they did it." (R. 1562-63.)

         Dr. Haller also criticized the sampling methodology because Health Integrity did not provide the curriculum vitae (CV) for the person who apparently performed the analysis, Alan Moskowitz. (R. 1565.) This omission was contrary to the MPIM and prevented Dr. Haller from determining whether the person who performed the sampling and extrapolation was qualified to do so. (R. 1565-66.)

         Dr. Haller's other principal point was that the extrapolation was invalid. The statement by Health Integrity that they are 90 percent confident that the actual overpayment was at least $4, 079, 073 "is an absolutely meaningless statement." (R. 1573.) According to Dr. Haller, the statement is meaningless "because the distribution of the averages [of overpayments] are not normally distributed." (R. 1573, 1575-76.)

         The second part of the hearing was devoted to the testimony of Ms. Pantoja. She is a longtime registered nurse with experience in assessing whether a patient meets the Medicare criteria for home health care. (R. 1582.) Ms. Pantoja testified at length about each of the 35 patients whose Medicare claims were found to be in error, highlighting evidence about their medical condition that supported the conclusion that they were homebound and that the medical services provided to them were medically necessary. (R. 1584-1646.) As to each of these 35 claims, Ms. Pantoja expressed her opinion that the patient was homebound and that the medical services provided by Rio were medically necessary. (Id.)

         Following the hearing, the ALJ "left the record open for sixty (60) days to allow Appellant [Rio] the opportunity to submit a post hearing position paper and additional documents." (R. 40.) On June 1, 2015, Health Integrity submitted a "Statistical Position Paper" regarding its audit of Rio. (R. 426-444.) The paper was authored by Aimee Mason, M.S., who was then Health Integrity's chief statistician. (R. 444.) Ms. Mason verified and repeated each step of the statistical sampling procedure used by Health Integrity in calculating the overpayment. "The sample was randomly selected using a SAS [statistical software] program that allowed each sample of 45 claims to have an equal chance of being drawn." (R. 428.) Ms. Mason was able to re-create and verify the original random numbers that were generated. (R. 433-38.) She confirmed that "the SAS sample selection program ran correctly selecting a simple random sample from the universe of claims." (R. 437.)

         Ms. Mason also discussed in detail the extrapolation procedure that was used and verified the extrapolation amount that was calculated ($4, 079, 073) was correct-again relying on agency-approved statistical software, called "RAT-STATS."[14] (R. 439-43.) She found that the extrapolation was "in full compliance" with the MPIM, including "the conservative approach taken by Health Integrity in estimating the overpayment amount." (R. 443.) In summarizing her review, Ms. Mason opined that the sampling and extrapolation used to determine Rio's overpayment amount were "statistically valid" and consistent with the guidelines in the MPIM. (R. 443.)

         Health Integrity also submitted a post-hearing position paper regarding the medical review of the 35 individual claims that were denied. (R. 445-97.) This paper discussed the standard for Medicare coverage of home health care services and addressed in detail the medical evidence relating to each of the 35 patients. In addition, Health Integrity provided copies of the interview notes for each patient, which totaled over 300 pages. (R. 507-815.)

         In a submission dated June 25, 2015, Rio filed a post-hearing paper in response to the papers filed by Health Integrity. (R. 178-86.) Rio presented arguments addressing both Health Integrity's statistical paper and its paper addressing the individual medical claims review. In support of its post-hearing paper, Rio also submitted a "Rebuttal" by Dr. Haller to Health Integrity's statistical paper.[15] (R. 187-92.)

         4. The ALJ's Decision

         On September 7, 2016, the ALJ entered his written decision. The ALJ summarized the findings of Health Integrity, as the ZPIC:

The Zone Program Integrity Contactor (ZPIC) found Appellant [Rio] received an overpayment oh 35 out of 41 claims for home health services billed for 40 beneficiaries during the examination period of June 1, 2007, through May 31, 2009. The ZPIC found an 85 percent error rate on the claims and used statistical sampling methodology to calculate an extrapolated overpayment of $4, 079, 073.00 for all claims filed by Appellant during the examination period.

(R. 40.)

         The ALJ conducted "a de novo review of the record." (R. 62.) After thoroughly describing the applicable legal framework (R. 41-45), the ALJ listed six issues to be decided, two of which are particularly important here: 1) "Are the remaining home health services provided by [Rio] covered by Medicare?"; and 2) "[W]as valid stistical sampling performed to extrapolate the overpayment amount?" (R. 45-46.) As to the first issue, the ALJ's ruling was unfavorable to Rio, but he ruled in Rio's favor on the second issue.

         In addressing the first issue, the ALJ made detailed findings of fact on the medical evidence in the record relating to each of the 35 patients whose claims were rejected. (R. 46-57.) As to one claim, identified as "Beneficiary-32," the ALJ noted that the Medicare carrier (Palmetto) had "denied" this claim in its redetermination decision because no documentation was provided for the dates of service covered by the claim. (R. 56.) Based on Palmetto's decision, the QIC (Maximus) dismissed this claim in its independent reconsideration decision. (R. 56; see also supra n.12.) Because there was no redetermination decision for Beneficiary-32 and because Rio "has not provided evidence or documentation demonstrating the carrier issued a redetermination decision" on this claim, the ALJ found "no error in the QIC's dismissal of [Rio's] reconsideration request on its claim for the services provided to Beneficiary-32." (R. 58-59.) The ALJ thus ruled that "QIC's dismissal is upheld and remains in effect."[16] (R. 59.)

         In considering whether the remaining claims for home health services were covered by Medicare, the ALJ summarized the testimony of Ms. Pantoja on behalf of Rio at the evidentiary hearing. (R. 58.) The ALJ concluded as follows:

Beneficiary 1-31 and 33-35: I am not persuaded by the [Rio's] argument. To qualify for Medicare coverage of home health services a beneficiary must be homebound. The record shows the beneficiaries are up as tolerated and able to complete ADLs [activities of daily living] with supervision to minimal assistance. The record does not demonstrate the beneficiaries are homebound. In addition, skilled nursing services must be needed when there are significant changes in a patient's condition, medication, or treatment plan and for services that require the skills of a nurse. During the dates of service (DOS) at issue, a nurse assessed the beneficiaries' safety, provided education, monitored compliance with medication regiments, and supervised a home health aide. The record shows the beneficiaries received general nursing, education and medical monitoring services, and there were no significant changes in their conditions, medications, or plans of care (POC). The record does not demonstrate the beneficiaries needed skilled nursing services required to qualify for Medicare home health services. Furthermore, the record shows the beneficiaries did not receive skilled nursing services on an intermittent basis but received the services for periods far exceeding the expected 2-3 week period and for chronic, ongoing conditions (FOF 2-94, 97-105). I therefore find the home health services provided to Beneficiary 1-31 and 33-35 are not covered by Medicare and enter unfavorable (UNFAV) decisions for [Rio] on these claims.

(R. 58.) The ALJ further found that, as "a Medicare provider, Appellant [Rio] knew or should have known the services are not covered." (R. 62.)

         In addressing whether valid statistical sampling was used to extrapolate the overpayment amount, the ALJ summarized the testimony and other evidence from Rio's expert, Dr. Haller. (R. 60.) The ALJ specifically referenced the following reasons given by Dr. Haller to show that the statistical sampling was invalid:

• the ZPIC (Health Integrity) used "incorrect formulas" for estimation and extrapolation;
• the "universe is corrupt because the frame of claims could not be recreated from the universe of claims";
• Health Integrity "used a biased sample and did not provide the random numbers used to draw the sample from the frame of claims"; and
• Health Integrity "did not provide the curriculum vitae (CV) of the statistician who designed the sampling plan."


         The ALJ was persuaded by two of these points. First, the ALJ found that Health Integrity used an impermissible confidence interval in extrapolating the overpayment amount:

Confidence Level: The lower limit of a one-sided 90 percent confidence level shall be used as the amount of overpayment to be demanded for recovery from the provider or supplier (MPIM, Ch. 3, §3.1 0.5.1). Both the ZPIC's report to the carrier and the carrier's notice of overpayment lists an overpayment amount of $4, 079, 073 (MCF, Exhibit 1, Pages 211; MCF, Exhibit 9, Page 17). The record indicates the ZPIC used an 80 percent two-sided confidence level to determine the extrapolated overpayment amount in this case (MCF, Exhibit 9, Pages 13-18). Although the ZPIC's use of an 80 percent two-sided confidence level results in a lower overpayment amount to the benefit of [Rio], use of this type or confidence level was not allowed under the version of the applicable policy (i.e. version of the MPIM, Chapter 3) in effect on the date of the ZPIC's decision.

(R. 60.)

         The ALJ also concluded that the sampling and extrapolation was invalid because Health Integrity failed to keep the random numbers used to create the sample:

Sample: A record shall be kept of the random numbers actually used in the sample and how they were selected (MPIM, Ch. 3, § The size of the sample will have a direct bearing on the precision of the estimated overpayment, but it is not the only factor (MPIM, Ch. 3, §3.1 0.4.3). In its position paper, the ZPIC [Health Integrity] indicates the random numbers are not available because its statistical analysis software generates different random numbers with each sample re-run (Exhibit 9, Page 4).
The ZPIC's failure to maintain the random numbers actually used in the sample and its inability to reproduce those numbers prevents Appellant from recreating the sample and independently verifying the extrapolation. The ZPIC's failure significantly limits Appellant's ability to both analyze and defend against the extrapolation.

(R. 60-61.)

         For both of those reasons, the ALJ found that "the extrapolated amount is invalid." (R. 61.) The ALJ also found that Health Integrity had violated Rio's due process rights, noting the "repeated requests" by Rio "for a copy of the statistical data" used by Health Integrity in conducting the audit. (Id.) The ALJ explained:

It is well established that due process affords an appellant the right to mount a proper challenge during the appeals process. By not timely producing the data, the ZPIC deprived Appellant of the ability to thoroughly review the extrapolation prior to the hearing. The ZPIC also deprived Appellant of the ability to challenge the extrapolation at the lower appeal levels. I therefore also find the extrapolated amount is invalid based on the willful and deliberate actions of the ZPIC that denied Appellant due process during the appeals process.


         Due to Health Integrity's "willful" delay in failing to provide documentation to Rio, the ALJ determined that CMS should not be allowed to correct the statistical sampling errors. (R. 61.) This ruling meant that Rio would be required to pay back only the actual overpayment for the 35 sample claims that did not meet Medicare coverage criteria.[17] (R. 62.)

         5. Council Review[18]

         Rio was apparently satisfied with the ALJ's decision-and understandably so. Rio did not request the Medicare Appeals Council to review the ALJ's adverse rulings on the 35 individual coverage claims. CMS, however, urged the Council to review the ALJ's decision regarding the sampling and extrapolation issues, as well as the ALJ's due process ruling. (R. 4, 98-109.)

         Rio filed exceptions to the referral for Council review in which it contested the statistical 7 arguments raised by CMS. (R. 32-34.) As part of that response, Rio submitted a "Second Addendum" to Dr. Haller's declaration. (R. 78-97.) Dr. Haller noted that he had performed "additional enhanced analyses of the documents produced by [Health Integrity]." (R. 78.) Dr. Haller asserted that the ALJ was correct and that Health Integrity used "incorrect formulas" for the extrapolation, but his reasoning for this conclusion was again that "one cannot be 90% confident that the total overpayment to the frame exceeds this calculated value if the distribution of the average overpayments is not normally distributed." (Id.; emphasis in original.) Dr. Haller also offered additional analysis in support of his opinion that the 41 claims drawn from the frame (or universe) of claims was not a statistically valid random sample.[19] (R. 81-85.)

         The Council decided "on its own motion" to review the ALJ's decision. (R. 4.) Like the ALJ, the Council conducted a de novo review, except that its review was limited to the statistical and due process issues raised by CMS. (R. 4-5, 27.) After considering the parties' arguments in light of the evidence in the record, "the Council reverse[d] the ALJ's decision as it pertains to the validity of the statistical sampling." (R. 5.)

         The Council provided a detailed summary of the case, including a description of Health Integrity's audit and a discussion of what occurred at each prior step of the appeals process.[20] (R. 5-10.) In discussing the applicable law, the Council emphasized CMS's long-standing "policy on the use of statistical sampling to project overpayments to Medicare providers and suppliers," which had been justified and explained in CMS's 1986 administrative ruling, Ruling 86-1. (R. 12-13.) The Council explained the CMS policy in effect when Health Integrity audited Rio:

CMS' guidelines in effect at the time of this audit were found in Chapter 3 of the Medicare Program Integrity Manual (MPIM) (CMS Pub. 100-08). See MPIM, Ch. 3, § 3.10 (eff. 5-10-4; now at MPIM, Ch. 8, eff. 6-28-11). Those guidelines reflect the perspective that the time and expense of drawing and reviewing the claims from large sample sizes and finding point estimates which accurately reflect the estimated overpayment with relative precision may not be administratively or economically feasible for contractors performing audits. Instead, the guidelines allow for smaller sample sizes and less precise point estimates, but offset such lack of precision with direction to the contractors to assess the overpayment at the lower level of a confidence interval - generally, the lower level of a ninety percent, one-sided confidence interval. This results in the assumption, in statistical terms, that there is a ninety percent chance that the actual overpayment is higher than the overpayment which is being assessed, thus giving the benefit of the doubt resulting from any imprecision in the estimation of the overpayment to the appellant, not the agency. As a result of the above policy decision, the question becomes whether the sample size and design were sufficiently adequate to provide a meaningful measure of the overpayment, and whether the provider/supplier is treated fairly despite any imprecision in the estimation.

(R. 13.) Ultimately, the guidance provided to contractors in the MPIM is "intended to ensure that a statistically valid sample is drawn and that statistically valid methods are used to project overpayments where review of claims indicates that overpayments have been made." (R 14.) The Council provided a detailed discussion of the MPIM's guidance to contractors in creating a "probability sample" and in extrapolating from the sample to estimate the total overpayment. (R. 14-19.)

         In its analysis of the issues, the Council first addressed the ALJ's conclusion that Health Integrity's extrapolated overpayment amount was invalid because it used an 80 percent two-sided confidence interval that was "not allowed" under the MPIM. (R. 19-22.) The Council disagreed with the ALJ's conclusion that the MPIM prohibited the confidence interval applied by Health Integrity:

The ALJ's reference point for this finding was MPIM, Chapter 3, Section - The Point Estimate, which is set out in its entirety above. Since the audit, section has been moved, verbatim, to Chapter 8, Section of the MPIM. As set out above, CMS manual guidance is not binding on an ALJ or the Council. Moreover, the reference to the use of "the lower limit of a one-sided 90 percent confidence interval" in section is qualified by the phrase "[i]n most instances." Thus, the MPIM does not establish an absolute requirement that only the lower limit of a one-sided 90 percent confidence interval is to be used in sampling. In fact, in instances where precision is obtained, the MPIM contemplates use of the point estimate for recovery rather than the lower confidence level. For reasons discussed in that section, as well as elsewhere in Chapter 3, the lower limit of a one-sided 90 percent confidence interval is the optimal confidence interval chosen by CMS to balance both the interests of CMS and suppliers and providers.

(R. 19.)

         The Council also considered and found persuasive CMS's argument that in this case the lower limit of a two-sided 80 percent confidence interval was the same as the lower limit of a onesided 90 percent confidence interval. (R. 20.) As the Council further noted, "Dr. [Haller] does not appear to dispute the basic principle that the lower limit of a one-sided 90% confidence interval is equivalent to a two-sided 80% confidence interval and frames his analysis of the ZPIC's sampling methodology around a one-sided 90% confidence interval." (R. 21.)

         In addressing Dr. Haller's argument that the confidence interval analysis was meaningless because "the distribution of the average overpayments is not normally distributed," the Council concluded:

There is no support in CMS Ruling 86-1 or in the MPIM for the proposition that the non-normality of the sampling unit overpayment distribution within a sample of adequate size demonstrates that the sample is statistically invalid. In fact, in most overpayment cases involving statistical sampling and extrapolation that come before the Council, the individual sampled overpayment results are not normally distributed, yet sampling in Medicare overpayment cases has been widely upheld by the courts. The sample overpayments are extrapolated to the frame using confidence interval estimation in most all of the statistical sampling cases done by CMS contractors and reviewed by the Council.
The Council, like the MPIM guidelines, recognizes that real world constraints impose conflicting demands on limited public funds, constraints which CMS chose to incorporate into the statistical sampling guidelines. The Council must give substantial deference to CMS guidelines including where, as here, CMS has chosen a reasonable, feasible, and well-articulated approach for collecting overpayments which, by design, offsets precision in favor of lower recovery amounts. ...

(R. 21-22.)

         In summarizing its ruling on this issue, ...

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