Understanding Hospital Fraud: Types & Abuses

Inpatient Upcoding

The American Medical Association assigns a billing code to each test or procedure that may be performed by a caretaker, including all of the services that are performed in hospitals. These are the codes that are then sent to the payer (in this example, Medicare or Medicaid) for reimbursements to be assessed.

Upcoding occurs when the hospital supplies a code for a service that is more expensive than the one that was provided for the patient.

For example, a routine X-ray performed by a medical tech or nurse is not reimbursed at a high level, but a complex X-ray performed by a Doctor can often be billed for more. When a hospital billing department charges for the complex X-ray after performing a simple one, upcoding can be said to have occurred.

Upcoding is particularly expensive to Medicare when it involves surgical procedures. As new efficient technology has replaced more complex and invasive procedures, hospitals sometimes choose to keep using the old billing codes for the longer, original procedure. This practice has been successfully prosecuted as fraud on several occasions now and should be avoided by hospitals.

2-Midnight Rule Abuses

The 2-Midnight rule is a clarification of Medicare billing procedures that was released by CMS in 2013. Under this rule, Inpatient admissions can be paid under Part A if the patient’s stay is expected to last through at least two midnights.

It can be considered an abuse or a violation if this rule if hospitals attempt to provide services that will require a patient to stay past the time limit, even though those treatments are not strictly necessary.

This rule was originally implemented in response to what the CMS perceived as a rising trend of hospitals holding patients for “observation” without a medically compelling reason. Unnecessary observation or superfluous testing remains a good example of how this rule can be abused.

Inpatient Claims Following A Canceled Elective Surgery

Medicare mandates that certain elective surgeries must be performed in an inpatient hospital setting. However, a surgery can be cancelled for many reasons, including because the patient was not ready for the procedure, or because the hospital did not have the rooms or staff ready to complete the procedure.

What happens with the patient in these cases was not always clear. Before 2013, many hospitals were choosing to hold patients for a short stay before discharge, and billing Medicare for those stays.

These rules were clarified following an Office of the Inspector General (OIG) report (A-01-12-00509) that determined that there was not a compelling medical reason for keeping these patients for a short stay in the majority of cases.

Following these findings, the published rules were clarified and many payments that had already been made to hospitals were adjusted. Short-stay claims that involve cancelled elective surgeries, but no other reasonable or necessary treatments, may be considered hospital fraud.

Improper Diagnosis Related Group (DRG) Claims

Improper DRG claims may take one of several forms.

First, it is considered a violation of the False Claims Act if patients are transferred to post-acute care settings without the proper code being applied. Hospitals are only entitled to a per diem payment for the transfer, and not the full DRG payment that will be submitted by that group.

It is considered a violation of the act if patients are inappropriately transferred between the host hospital and another division that is considered a hospital-within-a-hospital with the intent to maximize billing. The same is true when hospital-affiliated agencies and clinics are falsely coded as “provider-based”.

Unbundling of Services

Unbundling fraud also involves AMA billing codes. Medicare and Medicaid typically reimburse more for individual services than they will for a series of services that were performed as a single operation.

For example, a single outpatient blood draw can be used to test for dozens of conditions simultaneously. However, if each test is billed as if it involves a fresh blood draw, the hospital can claim a larger reimbursement.

Doing this is, of course, considered to be fraud, and can expose hospitals to both criminal and civil liabilities.

Improper Documentation leading to Duplicate Billings

A hospital’s obligations under the OPPS can be further complicated by the strict deadlines for submission requirements. In most cases, hospitals must submit all claims for OPPs services provided at the same hospital, to the same patient, on the same day. Submitting multiple claims for services delivered to a single patient can be considered another violation of the False Claims Act.

Inpatient Claims Following A Canceled Elective Surgery

Inflating the units of drugs distributed to patients is a form of hospital fraud is starting to receive more attention from the CMS. CMS guidelines are clear that the quantity of drugs billed must be consistent with the quantity of drugs that was used in the care of the patient.

Not every hospital that records incorrect units of drugs distributed is doing so with the intention of defrauding Medicare or Medicaid. These mistakes are unfortunately quite common when it comes to the complex charge master and electronic health record systems. However, any hospital that maintains an error-prone systems even after those errors have been revealed may be opening itself to civil and criminal penalties.

Falsely Inflating Costs Reported in Patient Care

Costs can be falsely inflated for any procedure or at any level of the billing process. This type of fraud is not as common as it once was, as costs for certain procedures under Medicare Part A have been standardized so that billing is always the same. However, there are still some procedures that are billed at-cost, and these charges are closely monitored for fraud.

Falsely Calculating Costs Relating to Graduate Medical Education and Indirect Graduate Medical Education

Teaching hospitals get direct graduate medical education (DGME) and indirect medical education (IME) payments to cover their costs. When the payments for either of these costs are being calculated, no intern or resident may be counted by Medicare as more than a single full-time equivalent employee.

As a protection against duplicate counting of learning employees, Medicare and Medicaid have instituted the Intern and Resident Information System (IRIS). Previous OIG reviews discovered that hospitals received duplicate reimbursement for DGME costs on multiple occasions.

Provider data from IRIS is used to determine whether hospitals received duplicate or excessive DGME payments. When duplicate payments are claimed, IRIS is used to determine which payment was appropriate.

Seeking Reimbursement for non-Covered Services

Medicare and Medicaid reimburse for specific services and procedures. This can be frustrating to hospitals who still need to use resources that are not reimbursed to provide the necessary care for their patients. However, re-classifying and charging non-care related costs as if they were for covered procedures is a practice that can expose hospitals to massive amounts of liability.

Seeking Reimbursement for Costs not Related to Patient Care

While hospitals must absorb many different expenses to operate, not all of these costs are the responsibility of Medicare or Medicaid to reimburse. When cost records are falsely manipulated to make costs not related to care appear as if they were, it is considered to be fraud. If the true source of these costs is revealed during an audit or investigation.

Manipulating Hospital Statistics to Maximize Disbursements

Certain payments made by Medicare, Medicaid and Tricare are dependent upon the needs and statistics of the hospital rather than the needs of one patient. For example, statistics like the numbers in the patient census, cost center allocations or square footage can determine what rates of reimbursement that a hospital qualifies for. Manipulating these statistics to maximize returns is a form of fraud.

Hospital Capital Improvement Cost Fraud

This certain type of cost report fraud was the subject of multiple indictments in the late 90s. Multiple hospital executives were charged after it was found that they were representing expenses as if those expenses were part of the hospital’s capital improvements, when in fact the costs were being created by spending on administration.

Capital improvements, such as new medical equipment and upgrades to patient care, is incentivized by Medicare and Medicaid. For that reason, capital expenses are reimbursed at a much higher rate than administration costs. When these costs are misrepresented, a hospital can dramatically increase the federal compensation that it receives.

This misrepresentation is considered to be defrauding the government.