Reporting Firms Face Risks as U.S. Cracks Down on Medicare, Medicaid Costs

New Insurance Products Cover Risks Created by New Laws and Regulations

The federal government’s crackdown on fraud and errors in Medicare and Medicaid is raising liability issues for firms that specialize in managing claims and billing for these programs – and has some scampering for ways to avoid potentially big fines and penalties should they err in complying with new regulations.

Sifting through the constantly changing regulations, making sure the proper procedures are being followed and assuring that the paperwork is getting done correctly are costly, time-consuming and, in some cases, risky tasks.

“In light of health care reform, one area our government has targeted is to reduce waste on those expenditures, and with that they have stepped up the audits to find abuses in the system and recoup some money,” says Josh Stein, chief underwriting officer for IronHealth, a division of specialty insurer Ironshore.

The government wants Medicare to go back to its intended purpose of being a secondary payee for a patient, not the primary, so it is looking to be reimbursed for any incidents where that is possible, according to Stein.

“From the government’s perspective, they are trying to rate health care costs and reform the system a bit and Medicare is a huge chunk of those costs,” says Stein. “When they look at the huge amount of billing errors and overpayment on one side and the over-expense on the other side, they want to stop paying back these expenses. This concerns our health care clients. There is a lot of error that can happen in a very complicated system.”

Some of the recent and more complicated Medicare and Medicaid changes include the Medicare, Medicaid and SCHIP Extension Act of 2007 (MMSEA) and the Recovery Audit Contractor (RAC) program.

“As we were out in the market, we began to hear more and more often that there were significant concerns that our clients had about some regulatory activities that were becoming more acute after the Administration changed in 2008,” Stein says.

IronHealth recently created two new products in response to the liability being raised by these new laws and their regulations. The two policies are called the Medicare Reporting & Secondary Payer Act Liability (MRSPAL) policy and the Government Billing E&O policy. They protect the companies handling claims and billing against liabilities that may arise for a failure to comply with these requirements. They also offer insureds assistance with compliance.

Medicare Reporting Policy

IronHealth’s MRSPAL policy covers those responsible for reporting to the government on claim settlements paid to Medicare-eligible recipients, otherwise known as Responsible Reporting Entities (RRE), as required under the MMSEA. The policy addresses the risk and penalties that can be incurred when an RRE fails to file or files negligently under Section 111 of the MMSEA. It also covers Medicare billing errors and certain other expenses that can arise from an insured’s obligation under the MMSEA and Medicare Secondary Payer Act (MSPA).

The penalty for a firm’s failure to report a claims settlement under the MMSEA is $1,000 a day for every day the settlement goes unreported. IronHealth’s program covers these fines and penalties, as well as expenses for defense and investigation.

The product is timely because as of Jan. 1, 2011, RREs must register with the Centers for Medicare and Medicaid Services (CMS) and begin to periodically report any settlement claims made to a Medicare-eligible recipient after Oct. 1, 2010. The required reported-by dates vary by area of the country.

“Our insureds are worried about this new exposure, so we wanted to provide them with coverage for their fines and penalties and their third party liability if they don’t report or if they report inaccurately,” says Stein.

IronHealth has partnered with MGU Specialty Risk Services Inc. to help on the underwriting side. MGU will also provide consulting services for clients to ensure they are following the guidelines on what needs to be reported and when.

The policy covers anyone that is considered to be an RRE, which can also include insurance companies. “We write first-dollar coverage for dozens of nursing homes and health care organizations and we settle dozens of claims in a month,” says Stein. “If we have five claims that fall through the cracks or if we fail to report for a year and a half, that’s a lot of money,” says Stein.

Stein says his company has already been contacted by a couple of insurance companies since the policy was introduced asking if IronHealth would provide coverage for them.

“The fines and penalties can add up, there is no question,” he says. “It’s got people very worried right now because it continues to evolve with how they put the meat on the bones of the legislation.”

Agents acting as an RRE on behalf of an insured need to be especially careful.

“Any agents or brokers out there saying they are going to be an RRE better make sure their E&O covers it,” says Stein. “What some E&O carriers could say is, ‘you are an insurance agent and we cover you as an insurance agent, we didn’t know you are acting as an RRE and we don’t want to cover you for that.'”

Government Billing and E&O

The second product IronHealth launched allows insureds to purchase an option, for a nominal fee, which gives them the right during the next 12 months of the policy to purchase a Government Billing Errors and Omissions (E&O) Insurance policy that will cover them should they have a billing negligence claim or investigation during that 12 month period.

This product applies in instances where a government agency or contracted auditor comes into a hospital or other health care facility and determines that the facility has overbilled Medicare or Medicaid for services. Insureds can then opt to purchase the policy for 60 percent of the policy limit and IronHealth will pay the defense costs as well as reimburse the insured for settlement amounts, fines and penalties. The policy will not cover criminal acts by the insured.

“This policy also covers the insured for liability as the result of self reporting,” says Stein. “If they do a self-audit and find an error, we want them to report that error knowing they can still buy the policy. We want to encourage good behavior. We don’t want to encourage people not to self-report.”

Stein says because IronHealth charges a substantial premium to purchase the policy, the coverage is very broad, covering almost any civil action by the government for medical billing errors. He says that the structure of the product – an option, combined with retroactive coverage for a substantial additional premium – was the best way to avoid adverse selection.

“It is a form of sleep insurance,” says Randy Oates, chief operating officer of IronHealth. “If there is a problem down the road, the insured knows they can buy the policy and have coverage for the problem. They still have to buy the option upfront, but the cost is nominal compared to what the benefit would be.”

Another benefit of the policy, say Oates and Stein, is if the investigation eventually determines there was no wrongdoing on behalf of the insured or they settle the billing dispute for a nominal amount, they can actually get some of the premium they paid for the coverage back by commuting the policy.

“Just because you get audited doesn’t mean you are going to lose,” says Oates. “The defense work and case may be settled and the insured may owe less [than the cost of the policy] and get some of that back from us in return for commuting the policy.”

Underwriting these risks is difficult because there is no realistic way to sort through all of the billing of a health care facility and figure out what an auditor might tag, according to the experts.

“We were trying to figure out a way of providing a backstop or insurance product that would address alleged negligence, not criminal activity, of billing the government,” says Stein. “This is a way for insureds to hedge their bet. They know this policy is sitting out there in case they need it.”

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