PRRB Rules In Favor of Hospital on Bad Debt Issue

In a decision dated April 19, 2007, the Provider Reimbursement Review Board ("the Board") soundly rejected the "extrapolation policy" that had been applied to the bad debts of St. Francis Hospital of Greenville, South Carolina, in fiscal year 2000, stating:

"The Intermediary's extrapolation policy has no foundation in law, regulations, or established audit standards, and its use as a final determination of allowable costs is improper."

St. Francis Hospital v. Palmetto Government Benefits Administrators/BlueCross BlueShield Association, PRRB Case No. 04-1774 (April 19, 2007). Crowell & Moring partner Bob Roth was lead counsel at the hearing for the Hospital.

This issue arose after the Intermediary sampled the Hospital's bad debt claims and found error rates in the range of 40 to 60 percent. Under the Intermediary's "extrapolation policy," where the error rate of a sample exceeds 15%, the Intermediary will not (1) extrapolate the results to the rest of the universe of such claims or (2) review another sample of the claims. As a result, the Intermediary only allowed the claims found to be acceptable in the sample.

This resulted in a significant underpayment to the Hospital because, instead of receiving payment for 40 to 60 percent of total claims, the Hospital received payment for only 40 to 60 percent of the claims in the sample. As a practical matter, the application of this policy resulted in the Hospital receiving less than 10% of what it would have received if the results of the sample were properly extrapolated to the universe.

Although the Intermediary's position papers did not defend this bad debt disallowance, the Intermediary did not correct the payment to the Hospital. In an effort to avoid a Board decision on this issue, the Intermediary agreed to correct the payment on the eve of the hearing. This resulted in briefing on whether this action divested the Board’s jurisdiction because there was no longer a case or controversy for the Board to adjudicate. The Hospital argued that the Board should retain jurisdiction and issue a decision because the Intermediary had indicated that it would apply its unlawful extrapolation policy to other FYs. It also noted that if the Board found that such a concession divested the Board of jurisdiction on the grounds of mootness, every time an Intermediary felt in danger of losing an issue, it would simply concede it and, thereby, deprive a provider of the opportunity to get a ruling.

The Board rejected the Intermediary's efforts, accepted jurisdiction, and issued its ruling. In addition to the findings above, it noted that the leading agency guidance on sampling, HCFA Ruling 86-1, "anticipated that the results of a statistically valid sample would be extrapolated to the universe of claims from which the sample was derived." The Board further noted:

"Nothing in the Ruling, the regulations or the program guidance supports the Intermediary's policy of a 15% threshold. Further, the threshold has no foundation in established audit standards and was applied with no notice to the provider community regarding its application."

In light of this decision, to the extent that the Intermediary, or any other Medicare contractor, continues to apply similar "extrapolation policies," such application could be subject to legal challenge.