The United States Department of Justice recently announced a $14.5 million settlement with Sound Inpatient Physicians, Inc., (“Sound Inpatient”), a Tacoma, Washington-based hospitalist company. The settlement resulted from the government’s intervention in a qui tam lawsuit filed by a former Sound Inpatient regional manager, which alleged that Sound Inpatient violated the False Claims Act by submitting evaluation and management (“EM”) claims for reimbursement that were not supported by adequate medical documentation.

The allegations and settlement make clear the need for providers to maintain an effective compliance program of coding and billing practices, and when shortcomings are identified—whether involving those billing practices or other aspects of a provider’s operations— providers must take the next step of remedial action to address those shortcomings or risk liability under the False Claims Act.

Hospitalists Billing for Patient Evaluation and Management Services

Hospitalists are physicians, nurse practitioners, and physicians’ assistants who provide care exclusively to hospital inpatients and have no office or outpatient practice. Besides consults and observation encounters, hospitalists and other physicians, nurse practitioners, and physicians’ assistants bill for their professional patient EM services through the use of Current Procedural Terminology (“CPT”) codes. The relevant EM CPT codes for hospitalists fall into three groups: initial hospital care services, subsequent hospital care, and critical care services. Within each group are additional levels for low, moderate, and high complexity encounters. There are similar codes used to bill for professional services for patients seen in a physician’s office.

The Medicare Act’s medical necessity requirement mandates billing EM services at the lowest level necessary. To bill at the highest level, EM services furnished must meet the strict requirements of the relevant CPT code. In its Claims Processing Manual, the Centers for Medicare & Medicaid Services (“CMS”) provides guidance for proper billing and documentation. The CMS manual notes that the documentation prepared by a hospitalist should support the coded level of EM services. Any coding deficiencies, including those for insufficient or improper documentation, lead to a classification of services billed as not medically necessary. And where there is a lack of proper documentation, physician upcoding — the coding of patient encounters at levels higher than those supported by corresponding medical records — for professional services is often suspected. Such a practice can provide the basis for a False Claims Act violation if a provider knowingly or recklessly bills federal payers for services that are not supported by adequate documentation.

Allegations against Sound Inpatient

The billing practices at issue with respect to Sound Inpatient stemmed from allegations that Sound Inpatient turned a blind eye to its corporate auditing, physician coding review, and training systems — all measures intended to detect and prevent systemic upcoding. To increase its revenues and bolster employee incentives, Sound Inpatient was alleged to have knowingly allowed such safeguards to fail. Further, where problems were identified, it was alleged that Sound Inpatient recklessly or deliberately avoided taking any available, proactive steps to prevent future upcoding.

These allegations stemmed from a series of 2008 internal audits of hospitalist billing undertaken by Sound Inpatient at three of Sound Inpatient’s contracted hospitals. The audits identified remarkably high upcoding error rates of 57–¬94 percent. Nearly all the patient encounters were coded as moderate to high complexity without supportive documentation in the patient records, and only a handful of the audited records coded as low or basic. Despite the widespread upcoding revealed by the internal audits, Sound Inpatient allegedly failed: (1) to implement any coding training, (2) to report inflated claims submitted to Medicare, or (3) to seek to reimburse federal healthcare programs for the past overpayments.

The billing errors identified in the 2008 audit were compounded by Sound Inpatient’s lack of a coding department or any trained experts to review physician coding. Rather, Sound Inpatient is alleged to have relied solely on its hospitalists to perform coding. And Sound Inpatient’s coding training for its hospitalists — designated as “SIP Hospitalist Institute” — was alleged to have been markedly inadequate.

Additional alleged deficiencies at Sound Inpatient included the absence of a written compliance program, written compliance standards that addressed coding, and an adequate compliance officer or compliance contact. These allegations led the government to conclude that Sound Inpatient had allegedly violated the False Claims Act in its billing of EM claims, which resulted in the $14.5 million settlement recently announced by the Department of Justice.

Lessons for Providers

The Sound Inpatient settlement is the most recent case to demonstrate the importance of effective compliance efforts. A strong compliance program is essential for any provider billing federally funded healthcare programs. Not only is a compliance program now mandatory for all Medicare and Medicaid providers, a failure to have an effective compliance program can lead to increased exposure for failing to identify and correct billing problems. Where such a program is in place and effectively used, follow-up steps must be taken to address any deficiencies that compliance tools uncover. Comprehensive compliance training and internal audits of billing practices must be mainstays of any provider’s compliance program.

Robust training programs are invaluable in helping create a culture of compliance. When implemented and conducted correctly, these programs have proven effective in combating practices that potentially give rise to exposure stemming from improper billing practices and inadequate documentation in a patient’s medical records. Internal coding audits afford proactive options, but such audits are also a double-edged sword: any actual or perceived failure to address problems that a coding audit may uncover may give rise to the requisite intent for a successful False Claims Act allegation. No matter the tool used, when a problem is identified, it cannot be ignored. Providers must correct billing issues and immediately refund any overpayments that are identified by internal audits.