2011 Uncertainty Brings Worry and Change

2010 brought significant changes in the law for the healthcare industry with the passage of the Patient Protection and Affordable Care Act (“PPACA”), the Provena decision regarding real estate tax exemption, and the Lebron case invalidating Illinois’ cap on noneconomic damages in medical malpractice cases. 2011 brought more changes in the law, new PPACA regulations, worry and uncertainty to the healthcare industry.

Real Estate Tax Exemption

Over the summer, the Illinois Department of Revenue denied real estate tax exemptions to three Illinois hospitals stating that the hospitals did not provide sufficient charity to qualify for real estate tax exemption. Other not-for-profit hospitals were also scheduled to potentially lose their exempt status. In September, Governor Quinn announced that the state will study the qualifications for real estate tax exemption based on not-for-profit charitable status and postpone any decision to strip additional hospitals of their exempt status. The Governor’s staff, in collaboration with the Department of Revenue, the Illinois Hospital Association, legislators, and the Attorney General’s Office are charged with working together to address ways in which hospitals can relieve the burden of government, improve access to affordable care, and assure that any tax benefit is well deserved and advances an important societal interest by March 1, 2012.

Hospital/Physician Relationships

Changes related to PPACA have made all healthcare providers edgy. Almost, without exception, hospitals and physicians are exploring various options to work together more closely through employment, co-management agreements, joint ventures, clinical integration and accountable care organizations, etc. Business objectives are colliding with legal and regulatory restrictions. Physicians and hospitals, who are both co-dependent and competitors, are being forced into uncomfortable and unfamiliar relationships.

Fraud Investigations

In January of 2011, the U.S. Department of Health and Human Services (HHS) announced new rules authorized by the PPACA to fight alleged health care fraud. The rules include new provider screening and enforcement measures for Medicare and Medicaid providers and subject certain types of providers and suppliers, identified by HHS as posing a higher risk of fraud, to a more thorough screening process. The rules permit the suspension of Medicare and Medicaid payments to a provider, during a government investigation when a credible allegation of fraud is suspected. According to HHS, these new rules are designed to enable the government to stop fraud before it takes place.

In Fiscal Year (FY) 2010, the government reported recovering more than $4 billion “stolen” from taxpayers by healthcare providers. That number is expected to be even larger in FY 2011.

RAC Audits

2011 also brought increased Recovery Audit Contractor (RAC) audit activity, due to the introduction of medical necessity reviews which allow the RACs to apply subjective standards of review to various services.

Under PPACA, states were required to submit a Medicaid State Plan amendment in 2011 and establish Medicaid Recovery Audit programs. The final rule detailing implementation of the Medicaid RAC program was released by the Centers for Medicare and Medicaid (CMS) on September 14, 2011 and requires states to implement Medicaid RACs by January 1, 2012. On a positive note, the final regulation prohibits audits of Medicaid claims that are more than 3 years old; requires RAC auditors to hire a licensed physician as medical director; prohibits multiple audits of the same claim; calls on states to limit the number of medical records the RAC can review and the frequency with which the RAC can request records; and requires RACS to return their fee if the RACs overpayment determination is reversed.

ZPIC Audits

Zone Program Integrity Audits (ZPIC) continue with ZPIC auditors interviewing patients, conducting surprise on-site visits, conducting targeted data analysis and random audits, imposing pre-payment holds, and responding to whistleblower allegations. ZPIC audits are similar to RAC audits, but different in the sense that they are initiated based on a suspicion of fraud.

False Claims Liability

PPACA also created new risks for false-claim liability when a provider identifies overpayments. PPACA requires a health care provider to return any overpayment no more than 60 days after the date that the overpayment is identified and notify the appropriate entity of the reason for the overpayment. Failure to repay an overpayment can lead to penalties and exclusion from governmental programs.


2011 has been a busy and difficult year for healthcare providers. Unfortunately, the uncertainty and angst is not expected to improve in 2012. Real estate tax exemption issues may or may not be resolved. Hospital/physician relationships will continue to evolve. Fraud investigations will continue to ramp up as government agencies to view recoveries as revenue. Mistakes will be made in the rush to adapt to the changing environment and lessons will be learned. As Bruce Barton, an American author, is quoted as having said, “Action and reaction, ebb and flow, trial and error, change – this is the rhythm of living. Out of our over-confidence, fear; out of our fear, clearer vision, fresh hope. And out of hope, progress.

© 2009- Duane Morris LLP. Duane Morris is a registered service mark of Duane Morris LLP.

The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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