Payor Audits, Recoupment, and Appeals

An audit letter asks for twenty charts. Several months later a demand arrives for $780,000, based on errors found in nine of them, extrapolated across three years of claims. The practice's actual overpayment, if the auditor is right about all nine, is a few thousand dollars. The rest is statistics.

This is the mechanism that closes medical practices in New York, and it is defensible, but only within deadlines that are short and unforgiving. The Law Offices of Albert Goodwin represents providers in audits, overpayment demands, and payor disputes in New York City.

Who Is Auditing You, and Under What Rules

The first thing to establish is the source of the audit, because the procedure and the deadlines differ entirely.

• Medicare contractors, including the Medicare Administrative Contractor performing routine review, Recovery Audit Contractors, Unified Program Integrity Contractors, and the Supplemental Medical Review Contractor. These follow the federal administrative appeal process described below.
• New York Medicaid, primarily through the Office of the Medicaid Inspector General, which conducts audits, imposes overpayment determinations, and can withhold payments pending review. OMIG matters have their own administrative hearing process and their own self-disclosure protocol.
• Medicaid managed care and Medicare Advantage plans, which audit under their provider agreements and plan rules rather than the government process, though they operate against a federal regulatory backdrop.
• Commercial insurers, which audit under the provider participation agreement. The contract governs, subject to New York statutory limits described below.
• Special investigations units, which sit inside commercial payors and pursue matters they characterize as fraud rather than error. An SIU letter should be treated more seriously than a routine audit request from the first day.

The Federal Appeal Ladder and Its Deadlines

Medicare overpayment determinations move through five levels: redetermination by the contractor, reconsideration by a Qualified Independent Contractor, a hearing before an Administrative Law Judge at the Office of Medicare Hearings and Appeals, review by the Medicare Appeals Council, and judicial review in federal court.

Two points matter more than the rest. First, each level has a filing deadline, generally measured in days from receipt of the prior decision, and missing one can end the appeal regardless of the merits. Second, filing at the first two levels within the specified periods can stop recoupment from beginning while the appeal proceeds, which is often the difference between a practice that survives the process and one that does not. Recoupment by offset against current claims payments is what actually causes providers to fail, because it removes operating cash while the appeal is pending. Interest accrues on amounts ultimately upheld, which is a real consideration in deciding how far to appeal.

The ALJ level is where most successful appeals are won, because it is the first stage at which the provider appears before an adjudicator who is not the entity that made the determination, and it permits live testimony including from a treating physician and a coding expert. Backlogs at that level have historically been long, which cuts both ways.

Extrapolation

Statistical extrapolation converts a small sample into a large demand, and challenging it is frequently the highest-value work in an audit defense. Federal rules constrain when extrapolation may be used, generally requiring a determination of a sustained or high level of payment error or that documented educational intervention has failed. Where it is used, the sampling methodology must be statistically valid, and it frequently is not.

Grounds we examine: whether the universe of claims was correctly defined; whether the sample was truly random and adequately sized; whether the sample frame included claims that should have been excluded, such as claims already adjusted or outside the audit period; whether stratification was appropriate; whether the point estimate rather than the lower bound of the confidence interval was used; and whether the error rate finding that justified extrapolation was itself supported. A successful methodological challenge can eliminate the extrapolated portion entirely, reducing a seven figure demand to the actual sampled overpayment.

Commercial Payor Audits and New York's Limits

Commercial audits are governed primarily by the provider agreement, but New York's Insurance Law places limits that providers frequently do not invoke.

New York restricts how far back an insurer may reach to recover an overpayment, generally barring a request for reimbursement of an overpayment made more than twenty-four months after the original payment, subject to exceptions including cases involving fraud or abusive billing and coordination of benefits situations. Insurers must also provide written notice stating the basis for the recovery before offsetting. Separately, New York's prompt payment law requires insurers to pay or deny clean claims within stated periods and provides for interest on late payments, which is a counterweight worth asserting where the payor is both auditing and paying slowly.

Provider agreements themselves are worth reading closely for the audit provision: the notice required, the response period, the internal appeal process and its deadlines, whether offset is permitted during an appeal, and any arbitration clause. Many agreements impose a short window to dispute an audit finding, after which the provider is deemed to accept it.

Prepayment Review and Payment Suspension

Prepayment review requires the provider to submit documentation with every claim before payment, which delays cash flow severely even where claims are ultimately paid. Payment suspension, available in program integrity matters on a credible allegation of fraud, stops payment entirely. Both are operationally existential for a practice, and both have procedures for challenge and for demonstrating that the underlying concern has been addressed. Responding with a documented corrective action plan, rather than only disputing the findings, is often what shortens the period.

The Sixty-Day Overpayment Rule

Federal law requires a provider that has identified an overpayment from Medicare or Medicaid to report and return it within sixty days of identification. An overpayment retained beyond that period can be treated as an obligation under the False Claims Act, which carries treble damages and per-claim penalties. This transforms what would be a billing correction into potential fraud exposure.

The practical implication is important and frequently mishandled: when an internal review or an audit reveals a genuine billing error, the practice has an affirmative obligation, and the clock runs from identification, which includes the point at which the provider should have determined the overpayment through reasonable diligence. Self-disclosure protocols exist at the federal level and through OMIG in New York, and a voluntary disclosure handled properly generally produces a far better outcome than the same issue discovered later by an auditor. That decision should be made with counsel, because a disclosure is an admission and its scope needs to be defined carefully.

Network Termination and Deselection

Payors sometimes respond to an audit by terminating the provider agreement, often without cause under a notice provision. For a practice with substantial volume from one plan, that is a larger event than the overpayment itself. Where the payor participates in Medicare Advantage or state programs, procedural protections and appeal rights may apply, and provider agreements frequently contain their own notice and hearing provisions. Where the termination is with cause based on the audit findings, defending the findings and the termination are the same project. Reporting consequences also follow, including disclosure obligations on credentialing applications to other payors and hospitals.

How We Defend an Audit

1. Control the record production. What is produced in response to the initial request defines the case. Charts should be reviewed and organized before submission, with missing documentation identified and, where legitimately available, supplied.
2. Get a coding review done independently, before responding. Knowing your actual error rate is necessary to decide whether to fight, settle, or disclose.
3. Preserve every deadline, and file at the levels that stay recoupment.
4. Attack the methodology where extrapolation is used, with a statistician where the amount justifies it.
5. Address the substance claim by claim: medical necessity supported by the record, correct code selection, documentation that exists elsewhere in the chart, and signature and attestation issues that are often curable.
6. Fix the underlying process, because a documented corrective action plan improves both the appeal posture and the practice's position if audited again.

Related Pages

See Stark and anti-kickback compliance, HIPAA and records, and collecting unpaid receivables.

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