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MEDICAID OVERPAYMENTS: PROVIDERS BEWARE
THE BURDEN IS ALWAYS ON YOU
TO SHOW ENTITLEMENT TO PUBLIC MONIES
Larry Heyeck, Esq.
Deputy Director for Legal Services
New Mexico Human Services Department
I. INTRODUCTION
Title XIX of the Social Security Act, 42 U.S.C. §§ 1396 through 1396s (the “Medicaid
Act”), is a federal-state cooperative program designed to provide medical assistance to persons
whose income and resources are insufficient to meet the costs of medical care.1 Although a state
is not required to participate in the Medicaid program, once it chooses to do so it must develop a
state plan that complies with the Medicaid Act and regulations promulgated by the Secretary of
the United States Department of Health and Human Services (“DHHS”).2 In exchange, the
federal government pays at least half of the state’s Medicaid costs, otherwise known as the
federal share or “federal financial participation (‘FFP’).”3
The Medicaid Act requires the state to have a sufficient number of providers of
healthcare services so that Medicaid recipients have “equal access” to care.4 In order to meet
1 Douglas v. Independent Living Center, 132 S.Ct. 1204, 1207, 182 L.Ed.2d 101 (2012).
2 Id.
3 Harris v. McRae, 448 U.S. 297, 309, 100 S.Ct. 2671, 65 L.Ed.2d 784 (1980); 75 Fed.Reg. 59082, 69083
(November 10, 2010).
4 Under the Medicaid Act, a state plan must:
“provide such methods and procedures relating to the utilization of, and the payment for, care and
services under the plan . . . as may be necessary to safeguard against unnecessary utilization of
such care and services and to assure that payments are consistent with efficiency, economy, and
quality of care and are sufficient to enlist enough providers so that care and services are available
under the plan at least to the extent that such care and services are available to the general
population in the geographic area.”
42 U.S.C. § 1396a(a)(30)(A).

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this mandate, all states develop a network of healthcare providers who voluntarily enter into
contracts with the state to furnish certain services or goods in a cost-effective manner and receive
reimbursement.5 When a healthcare provider enters into a contractual relationship with the state
Medicaid agency, the individual or entity agrees to: (1) keep such records as are necessary to
fully disclose the extent of the services provided to individuals receiving assistance under the
state plan; and (2) furnish to the state agency such information regarding payments claimed by
the provider for the services rendered.6 As such, the burden is always on the provider to prove
entitlement to public monies.
This concept, that healthcare providers are entitled to reimbursement only for the services
or goods that are rendered, was buttressed by the Patient Protection and Affordable Care Act
(P.L. 111-148) (“PPACA”). Under PPACA, providers are prohibited from retaining government
overpayments in the healthcare context. Specifically, PPACA creates an affirmative duty on
providers who receive an overpayment of Medicare or Medicaid funds to “report and return” the
overpayment to DHHS, the State, or another entity, as appropriate.7 The statute even sets a
deadline for reporting and returning the overpayment: An overpayment must be reported and
returned within sixty days of the date on which the overpayment was identified, and any
overpayment retained beyond that point constitutes an “obligation” which may cause the
provider to incur additional penalties or sanctions.8 Now, more than ever, healthcare providers
5 While many states,including New Mexico, provide Medicaid services utilizing managed care organizations, the
recoupment of public funds, i.e., an overpayment, is the same whether it is to a managed care entity or directly to the
state underthe traditional fee-for-service model. Starko,Inc. v. new Mexico Human Services Department, 333 P.3d
947, 950 (2014) (“Under the fee-for-services model, the [New Mexico Human Services Department] directly paid
medical service providers . . . from public funds.”).
6 42 U.S.C. § 1396a(a)(27) and 42 C.F.R. § 431.07
7 42 U.S.C. § 1320a-7k(d)(1).
8 42 U.S.C. § 1320a-7k(d)(2)-(3).

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will be subject to scrutiny and will have to justify reimbursements received from the Medicaid
program.
II. THE SEMINAL CASE: ILLINOIS PHYSICIANS UNION V. MILLER
More than thirty years ago, the Seventh Circuit Court of Appeals addressed the issue of
Medicaid overpayments, including the use of statistical sampling, in Illinois Physicians Union v.
Miller and found in favor of the state Medicaid agency.9 In that case, a practitioner, Elsy
Salazar, and the physicians union brought suit challenging the procedures employed by the
Illinois Department of Public Aid (the “Department”) to audit physicians who are reimbursed for
their medical services through the Illinois’ Medicaid program.10 In July 1975, the Department
conducted a routine audit of Salazar’s records and determined that Salazar had been overpaid.11
The Department extrapolated the amount owed and made a recoupment claim.12
Salazar contended that the use of sampling and extrapolation was improper and argued,
among other things, “that the burden of proof on the issues of whether there have been
overpayments and the amount of those overpayments rests on the Department and may not be
shifted.”13 The Seventh Circuit disagreed and noted that, under Illinois regulations, providers
“may rebut the Department’s findings by presenting evidence to establish that the sample used
by the Department is invalid or by conducting an audit of one hundred percent of the medical
9 675 F.2d 151 (7th Cir. 1982).
10 675 F.2d at 152.
11 Id.
12 Id.
13 675 F.2d at 154.

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records for which payments were received.”14 The court stated that, “the issue is not whether
overpayments may be statistically presumed, but whether the state, in attempting to preserve its
welfare monies, may place the burden on the physician to demonstrate that the Department’s
calculations are incorrect.”15 The court noted that “extrapolation based on a review of a
relatively small sample is a valid audit technique in cases arising under the Social Security Act . .
. and that ‘[a]t all times the burden is on the physician to prove entitlement to welfare monies.”16
“Thus, the Department’s presumption that the percentage of error in the total number of cases is
the same as the percentage of error in the audited cases does not have the procedural effect of
shifting any burden.”17 In conclusion, the Seventh Circuit stated, “[w]e see nothing arbitrary or
capricious about requiring physicians who are benefitting from the program to bear this burden,
when the state has already borne the cost of the initial audit and the evidence to rebut that initial
determination is uniquely within the physician’s control.”18
14 675 F.2d at 153.
15 675 F.2d at 154.
16 675 F.2d at 155 and 154. Anotherissue that typically arises when extrapolation is used to determine a Medicaid
or Medicare overpayment is the sampling size. Federal courts have found a sample size sufficient with only 30
claims. See, e.g., Maxxim Care EMS, Inc. v. Sebelius,2011 WL 5977666 (S.D.Tx., November 29, 2011) (upholding
sample size of 30 claims; Pruchniewski v. Leavitt,2006 WL 2331071 (M.D.Fla., August 10, 2006) (same). This
includes the percentage of sampled claims to the universe. Ratansen v. California Department of Health Services,
11 F.3d 1467, 1472 (9th Cir. 1993) (Medicaid claims using a sample size of 3.4%) Michigan Department of
Education v. United States Department of Education,875 F.2d 1196, 1206 (6th Cir. 1989) (approving audit
conducted through random, stratified sampling and noting that audits of thousands ofcases comprising the universe
of cases would be impossible and therefore upheld a 4% sample size).
17 675 F.2d at 154. The Seventh Circuit agreed with the district court that,“in view of the enormous logistical
problems of Medicaid enforcement, statistical sampling is the only feasible method available” to determine an
overpayment. 675 F.2d at 157, citing in accord, State of Georgia v. Califano,446 F.Supp. 404 (N.D.Ga. 1977). “In
State of Georgia, the court specifically considered,and rejected, the same argument Salazar raises here. It noted that
the use of statistical samples to audit claims and arrive at a rebuttable initial decision was reasonable where the
number of claims rendered a claim-by-claim review a practical impossibility. The court concluded that it was not
unreasonable to place the burden on the challenging party to present evidence to rebut the statistical sample.”
IllinoisPhysiciansUnion, 675 F.2d at 155.
18 675 F.2d at 158.

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III. FEDERAL REGULATIONS REQUIRE THE STATE MEDICAID AGENCY TO
IMPLEMENT PROCEDURES TO SAFEGUARD AGAINST PROVIDER
OVERPAYMENTS
As a participant in the Medicaid program, all states are required by federal regulations to
establish program integrity requirements including maintaining a statewide surveillance and
utilization control program that: (a) safeguards against unnecessary or inappropriate use of
Medicaid services and against excess payments and (b) assesses the quality of those services19
In order to “safeguard against unnecessary or inappropriate use of Medicaid services and against
excess payments, the Centers for Medicare and Medicaid Services (“CMS”) has authorized the
use of statistical sampling “[t]o promote the most effective and appropriate use of available
services and facilities the Medicaid agency must have procedures for the on-going evaluation, on
a sample basis, of the need for and the quality and timeliness of Medicaid services.”20
In Goldstar Medical Services, Inc. v. Department of Social Services, the Connecticut
Supreme Court analyzed federal Medicaid regulations and held that “the use of extrapolation”
was valid.
Specifically, federal regulations indicate that [DHHS] intends for state agencies to
monitor closely whether federal funds are allocated appropriately. For example,
42 C.F.R. § 455.13(a) requires state agencies to have in place “[m]ethods and
criteria for identifying suspected fraud cases . . . .” See 42 C.F.R. §455.12.
Additionally, 42 C.F.R. § 455.1(a)(2) requires that states “[h]ave a method to
verify whether services reimbursed by [m]edicaid were actually furnished to
recipients.”21
19 42 C.F.R. § 456.3(a) and (b).
20 42 C.F.R. § 455.22. “Because 42 U.S.C. § 1396a(a) concerns the methods and procedures for payment in state
plans, its accompanying regulations, namely 42 C.F.R. § 456.22 are applicable . . .” in cases where the state
Medicaid agency seeks to recoup overpayments made to providers. Goldstar Medical Services, Inc. v. Department
of Social Services, 288 Conn. 790, 955 A.2d 15 (2008).
21 Goldstar Medical Services, Inc. v. Department of Social Services, 955 A.2d at 32.

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The court reviewed HCFA Ruling 86-1 wherein the Secretary of DHHS concluded “that the use
of statistical sampling to project an overpayment is consistent with the [federal government’s]
common law right to recover overpayments, the [m]edicare statute, and the [DHHS]
regulations,” and “does not constitute a denial of due process on the part of the provider.”22
Federal regulatory authority thus requires states to ensure that medicaid funds are
allocated appropriately and simultaneously recognizes the impracticality of
discrete assessment of claims in an effort to recoup overpayments where a
multitude of claims is involved. Given the nature of the medicaid program as a
state and federal cooperative regime, it would be incongruous to interpret our
statutory scheme to disallow a practice that is recognized at the federal level as
the only feasible method of recouping funds that improperly have been procured.
See Sikand v. Wilson-Coker, . . . [276 Conn. 618, 620-21, 888 A.2d 74 (2006)]
(observing that “once [a state] chooses [to participate in the medicaid program] it
must develop a plan that complies with the [federal] [m]edicaid statute and . . .
regulations” [internal quotation marks omitted]). Accordingly, we conclude that
the trial court properly concluded that the department’s use of the extrapolation
method was appropriate.23
IV. THE IMPACT OF HCFA RULING 86-1 ON MEDICAID OVERPAYMENTS
In 1986, CMS’s predecessor, the Health Care Financing Administration (“HCFA”),
issued Ruling 86-1 regarding Medicare overpayments. In the ruling, HCFA explicitly authorized
the use of statistical sampling and held that it created a presumption of validity that could be
challenged by Medicare providers. The Ruling provides that:
In reimbursing providers, HCFA has to balance the need to process billings
rapidly in order that a provider’s liquidity needs do not suffer and the need to
verify that the claims submitted are for services covered by the [Social Security]
Act. Mixed into this balance is the volume of claims which must be reviewed.
Considering the volume of claims (as cited earlier to be over 330.3 million for
fiscal year 1985), it is virtually impossible to examine each bill submitted by a
provider or supplier in sufficient detail to assure before payment in every case that
only medically necessary services have been provided. Therefore, as a practical
matter, HCFA and its contractors must depend on the provider to submit claims
for services that are covered by the Act. In most cases, this reliance is justified.
22 955 A.2d at 32-33.
23 955 A.2d at 33.

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However, if HCFA or its contractors later have reason to make an indepth and
careful review of claims for services which have been previously paid and
discover that medically unnecessary services have been provided, a provider
cannot cry “foul” when these payments (to which they were never legally entitled)
are recovered.
Sampling does not deprive a provider of its rights to challenge the sample, nor of
its rights to procedural due process. Sampling only creates a presumption of
validity as to the amount of overpayment which may be used as the basis for
recoupment. The burden then shifts to the provider to take the next step. The
provider could attack the statistical validity of the sample, or it could challenge
the correctness of the determination in specific cases identified by the sample
(including waiver of liability where medical necessity or custodial care is an
issue). In either case, the provider is given a full opportunity to demonstrate that
the overpayment determination is wrong. If certain individual cases within the
sample are determined to be decided erroneously, the amount of overpayment
projected to the universe of claims can be modified. If the statistical basis upon
which the projection was based is successfully challenged, the overpayment
determination can be corrected.24
Numerous cases, both for Medicare and Medicaid overpayments, have relied on the
foundational principles set forth in Ruling 86-1. See, e.g., HCA Healthcare Services of Kansas,
Inc. v. State of Kansas (healthcare provider filed for judicial review challenging the amount the
provider had to reimburse Kansas Medicaid for overpayment; the Kansas Court of Appeals
upheld the statistical sampling noting that the provider is free to challenge the sampling
methodology)25; Prechel v. Department of Social Services (physician sought review of Medicaid
overpayments; the Michigan court held, among other things, that the burden was on the
physician to prove entitlement to welfare monies and that extrapolation used by the state
Medicaid agency created a rebuttable presumption)26; Matter of Polanco v. Commissioner of the
Department of Social Services of the State of New York (Medicaid provider challenged an
24 HCFA Ruling 86-1.
25 HCA Health Care Services of Kansas, Inc. v. State of Kansas, 21 Kan.App.2d 141, 900 P.2d 838 (Ct.App. 1994).
26 Prechel v. Department of Social Services,186 Mich.App. 547, 465 N.W.2d 337 (Mich.App. 1990).

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overpayment; the court held, in part, that the provider failed to rebut the presumption of the
validity of the statistical sampling and that the burden was on the provider to demonstrate that
proper records were maintained);27 Chaves County Home Health Service, Inc. v. Sullivan (home
health providers appealed a district court decision rejecting their challenges to procedures
adopted by DHHS for the recoupment of Medicare overpayments; the District of Columbia
Court of Appeals noted that HCFA Ruling 86-1 shifts the burden to the provider to challenge the
statistical sampling methodology)28.
In addition, federal regulations permit HCFA Ruling 86-1 to be used as authority in any
proceeding brought to recover Medicaid overpayments. Under 42 C.F.R. Part 400, Subpart B –
Definitions, which are applicable both Medicare and Medicaid, CMS has stated that:
(a) After September 1981, a precedent final opinion or order or a statement of polity
or interpretation that has not been published in the Federal Register as part of a
regulation or of a notice implementing regulations, but which has been adopted by
CMS as having precedent, may be published in the Federal Register as a CMS
Ruling and will be made available in the publication entitled CMS Rulings.
(b) Precedent final opinions and orders and statements of policy and interpretation
that were adopted by CMS before October, 1981, and that have not been
published in the Federal Register are available in CMS Rulings.
(c) CMS Rulings are published under the authority of the Administrator, CMS. The
are binding on all CMS components, on all HHS components that adjudicate
matters under the jurisdiction of CMS, and on the Social Security Administration
to the extent that components of the Social Security Administration adjudicate
matters under the jurisdiction of CMS.29
27Matter of Polanco v. Commissioner of the Department of Social Services of the State of New York , 212 A.D.2d 443
(Supreme Court, Appellate Division, First Department, New York 1995).
28 Chaves County Home Health Service, Inc. v. Sullivan,931 F.2d 914 (D.C.Cir. 1991).
29 42 C.F.R. § 401.108; see also, 42 C.F.R. § 405.1063, Applicability of laws, regulations and CMS Rulings, which
include Medicaid:
(a) All laws and regulations pertaining to the Medicare and Medicaid programs, including, but not
limited to, Titles XI, XVIII, and XIX of the Social Security Act and applicable implementing
regulations, are binding on ALJs and the MAC.

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V. WHAT CAN A PROVIDER DO WHEN FACED WITH AN MEDICAID
OVERPAYMENT?
In Schuldt Chiropractic Wellness Center v. Sebelius,30 Chief Judge Laurie Smith Camp,
outlined what a provider can do to when faced with an overpayment claim. In Schuldt, the
Medicare Zone Program Integrity Contractor for DHHS conducted an expanded post-payment
medical review of claims submitted by Schuldt for chiropractic services furnished to 75
beneficiaries, from January 2008 through March 2010. The review was conducted by statistical
sampling of 214 claims representing 445 services billed, out of a universe of 5,098 services
billed for 154 beneficiaries. The alleged overpayment was in the amount of $126,041.31.
Schuldt challenged the overpayment and a hearing was held before the Administrative Law
Judge (ALJ). At the hearing, expert testimony was offered by Schuldt’s statistician and the
ALJ’s own statistician and the ALJ determined that 344 of the services billed were properly
submitted and Schuldt should be paid for them.
CMS filed a referral memorandum with the Medicare Appeals Counsel (“MAC”)
asserting that the ALJ’s decision contained an error. The MAC, on its own motion, conducted a
de novo review on the sole issue of whether Schuldt had met its burden of proving that the
statistical sampling methodology was invalid and insufficiently reliable to be used for the
purpose of estimating an overpayment to a larger universe of claims. The MAC reversed the
ALJ and Schuldt filed for judicial review. On appeal, the federal district court’s review was
(b) CMS Rulings are published under the authority of the Administrator, CMS. Consistent with §
401.108 of this chapter, rulings are binding on all CMS components,on all HHS components that
adjudicate matters underthe jurisdiction of CMS, and on the Social Security Administration to the
extent that components of the Social Security Administration adjudicate matters under the
jurisdiction of CMS.
30 Schuldt Chiropractic Wellness Centerv. Sebelius,2014 WL 247972 (D.Nebraska, January 22, 2014).

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limited to determining whether DHHS’s action, reflected in the MAC decision, was supported by
substantial evidence in light of the record as a whole.31
In upholding the MAC decision, Chief Judge Smith Camp noted that statistical sampling
created a presumption of validity that could be rebutted by a provider such as Schuldt.
A provider may (1) dispute denials in the sample, as Schuldt successfully did
before the ALJ whose findings in this respect the MAC left undisturbed, or (2)
challenge the statistical validity of the extrapolation from the sample as Schuldt
also did to the satisfaction of the ALJ, but not to the satisfaction of the MAC.
To challenge the accuracy of the extrapolation, a provider could separately
present evidence of a different random sample from the universe that yields a
lower rate of denials or prove that the projection is not a true estimate of the rate
of denials in the non-sample universe. A provider may also establish the validity
of all or a sufficient number of its actual claims to demonstrate that the HHS
projection is factually impossible of correctness.32
Because Schuldt failed to present evidence of a different random sample from the universe of
claims or present a sufficient number of actual claims from the non-sampled universe to
demonstrate that the projection was factually impossible of correctness, the district court held
that “Schuldt did not meet its burden” and upheld the MAC’s findings.33
VI. CONCLUSION
State Medicaid agencies must protect the integrity of the public fisc, this includes
monitoring and safeguarding whether the reimbursements paid to healthcare providers was
proper. If an overpayment is alleged, Medicaid providers, who voluntarily chose to contract with
the Medicaid agency, always bear the burden of establishing the right to be reimbursed and,
where statistical sampling and extrapolation is used, must rebut the presumption that the
31 Schuldt,at *2.
32 Schuldt,citing, Chaves City Home Health Services, Inc. v. Sullivan,931 F.2d 914, 921-22 (D.C.Dir. 1991)
(internal quotations and citations omitted).
33 Id., at *4.

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overpayment amount is incorrect. While this can be accomplished, it requires the provider to
present either clinical evidence rebutting the alleged failure of specific claims within the sample,
expert testimony such as a statistician to challenge the sample, or conduct a 100% review of all
claims within the universe. All options can be costly but is the price that has to be paid in order
to do business in this arena.