Hospital Cost Report Certifications and the False Claims Act

Those who defend Medicare/Medicaid providers are well aware of the fact that the government has developed several explicit certifications to safeguard it against fraudulent requests for reimbursement. The most commonly utilized forms for requesting payment, the CMS Form 1500 and the UB-92, each contain a variety of certifications that must be executed if the request is to be processed and paid. Fraudulent execution of appropriate certifications can lay the foundation for a prosecution by relators or the government under the False Claims Act, 31 U.S.C. § 3729(a)(2). See, e.g., Mikes v. Straus, 274 F.3d 687, 696-700 (2d Cir. 2001). What has not been so widely recognized is the significance of the annual hospital (and home health agency) cost report certifications, not only as to their existence, but also in reference to their far more expansive reach. In order to illustrate the importance of hospital cost report certifications, this article presents a brief case study based upon the Medicare hospital conditions of participation.

The Medicare Cost Report Mechanism

In order to understand the importance of the cost report certification, the role of hospital cost reports needs to be briefly explained. The key purpose inhering in the Medicare cost report system is to protect the government at all times from loss due to mistake or fraud. This goal is accomplished in several ways. First, participating hospitals must file cost reports annually. 42 U.S.C. § 1395g; 42 C.F.R. § 413.20(b). Each year’s report covers all the interim requests for reimbursement, such as the UB-92 forms used by hospitals and home health agencies, submitted during that cost reporting year. Therefore, in reviewing each year’s cost report, all of the claims submitted during that year will be audited and examined. Cost reports are due on or before the last day of the fifth month following the close of the cost report period. Thereafter, it may take 18 months or so for the audit to be performed.

Second, after its review of the cost report, the fiscal intermediary, usually a private contractor that administers the Medicare program in a particular region, issues a Notice of Program Reimbursement (“NPR”) with its findings. Should the intermediary audit conclude that an overpayment was made, that finding is reported in the NPR. The NPR serves as the basis for the intermediary immediately demanding payment of the contested amount within 30 days, or it can withhold the contested amount from on-going reimbursements for the current year’s services. 42 C.F.R. §§ 405.1803 & 413.64(f).

Third, the intermediary has the authority to demand or implement immediate repayment of the full contested amount, even though the provider has several levels of appeal within the Department of Health and Human Services (“HHS”) bureaucracy, as well as ultimate appeal to the appropriate United States District Court and the respective Circuit Court. This constitutes yet another layer of protection for the government.

The Hospital Cost Report Certification

The hospital cost report certifications are broad and expansive in tone, but not necessarily clear as to their meaning. As a preface to the cost report’s certification, the following warning appears:


This advisory is followed by the actual certification language itself:


I HEREBY CERTIFY that I have read the above statement and that I have examined the accompanying electronically filed or manually submitted cost report and the Balance Sheet and Statement of Revenue and Expenses prepared by [name of facility, ID number of facility] for the cost reporting period beginning [date] and ending [date] and that to the best of my knowledge and belief, it is a true, correct and complete statement prepared from the books and records of the provider in accordance with applicable instructions, except as noted. I further certify that I am familiar with the laws and regulations regarding the provision of the health care services, and that the services identified in this cost report were provided in compliance with such laws and regulations (emphasis added). (This is followed by: signature of facility’s officer, title and date)

The Columbia/HCA holding

The most critical case interpreting and applying the language of the cost report certification is United States ex rel. Thompson v. Columbia/HCA Healthcare Corp., 20 F. Supp. 2d 1017 (S.D.Texas 1998) (“Columbia/HCA”). There, relators alleged that Columbia/HCA had executed the above certification on its cost reports, despite the fact that it had violated the Medicare Anti-Kickback statute, 42 U.S.C. § 1320-7b(b), and the Stark law, 42 U.S.C. § 1395nn, by having made impermissible payments to referring physicians. As a result, relators contended Columbia/HCA had violated the FCA. Columbia/HCA moved to dismiss the complaint for failure to state a claim. The District Court denied the motion to dismiss, finding the relators’ theory to be sound.

Several elements of the decision illustrate rather dramatically the broad reach of the cost report certification. First, the district court flatly held that cost report certifications are a condition of payment under Medicare. Id. at 1046. 1 Therefore, it is indisputable that final Medicare hospital payment is conditioned upon a cost report certification. Consequently, fraudulent certification of this express certification language supports an action under the FCA. Next, the district court made an even more fundamental finding, based on the affidavit of a senior Health Care Finance Administration (“HCFA” now “CMS”)2 official: “HCFA interprets the phase, ‘applicable instructions,’ to encompass Medicare program requirements.” Id. at 1041-42. Therefore, all of the statutes and regulations that a defendant hospital might cavalierly attempt to dismiss as irrelevant because they do not explicitly condition payment upon their compliance, are, in fact, encompassed within the explicit language of its cost report certifications. Finally, the district court found, that no matter how many times HCFA may modify the certification language, if it uses the “applicable instructions” language, the content of the certification remains the same. Id. at 1042.

Subsequent cases have recognized the broad reach of Columbia/HCA’s “applicable instructions” holding and how it encompasses virtually all Medicare program requirements. For example, in United States ex rel. Augustine v. Century Health Services, Inc., 136 F. Supp.2d 876 (M.D. Tenn. 2000), aff’d, 289 F.3d 409 (6 th Cir. 2002), this theory was utilized to find that a home health agency, which had reported improperly Employee Stock Ownership Plan expenses on its cost report, had violated the FCA.3 The district court found the “applicable instructions” to be contained in the Provider Reimbursement Manual, various Intermediary Letters, and C.F.R. provisions. 136 F. Supp.2d at 886. Because the defendant had not complied with these Medicare program guidelines, and nonetheless executed the cost report certifications, it had violated the FCA. Moreover, the district court also concluded that when the defendant executed the explicit cost report certifications, it was also implicitly certifying that it would continue to comply with the applicable regulations or file an amended cost report reflecting its non-compliance. Id. at 891-92. The Sixth Circuit concurred. 289 F.3d at 414-15.

Another interesting and very recent case in this regard is In re Cardiac Devices Qui Tam Litigation, 221 F.R.D. 318 (D. Conn. 2004). There, hospitals were accused of charging Medicare for clinical trial procedures involving investigational cardiac devices that were not actually reimbursable under Medicare. In upholding the defendants’ FCA liability, the district court pointed to the language of the hospital cost report certification. Noted the court, “[t]he applicable instructions referenced in the certification included the provisions of the Hospital Manual, including the provisions in Sections 260.1 and 210.12.” Id. at 329. Those provisions absolutely foreclose billing Medicare for experimental procedures as the defendant hospitals had done. Id. at 345, n. 46 (reference to Medicare Hospital Manual provisions). Therefore, fraudulent execution of the cost report certification gives rise to liability under the FCA.

Recent DOJ complaints have relied upon the “applicable instructions” theory as well. For example, in another Columbia/HCA case, United States ex rel Lanni v. HCA, Case No. 00-2584 (RCL) (D.D.C. 2001), the United States’ complaint specifically invoked this theory in paragraph 35: “Each cost report prepared and submitted by HCA and the HCA Hospitals included a certification signed by the chief administrator or a responsible designee of the administrator, which states in pertinent part: …. ‘in accordance with applicable instructions, except as noted.'”

Therefore, this is a different approach entirely than that rejected in United States ex rel. Hopper v. Anton, 91 F.3d 1261, 1266 (9th Cir.), cert. denied, 519 U.S. 1115 (1996), where the qui tam complaint simply alleged that a FCA violation had occurred because of a failure to comply with a federal administrative regulation. By contrast, under the cost report certification theory, it is the fact of the execution of the false certification on the yearly cost reports to Medicare that serves as the basis for FCA liability under 31 U.S.C. § 3729(a)(2).

Medicare/Medicaid Conditions of Participation

As recognized in 42 C.F.R. § 488.3, hospitals that wish to participate in Medicare and Medicaid must establish at the outset that they satisfy certain conditions of participation (“COP’s”).4 42 C.F.R. § 488.5 establishes the mechanism whereby most hospitals discharge this requirement through inspections conducted by the Joint Commission on Accreditation of Healthcare Organizations (JCAHO) or the American Osteopathic Association (“AOA”), which are entirely private organizations. If the hospital successfully passes this initial inspection, as well as inspections thereafter at three year intervals, it is “deemed to meet” this requirement as to the conditions of participation. 42 U.S.C. § 1395bb.

The “accreditation” thereby awarded allows the hospital to participate in Medicare and Medicaid because it is presumed to be in compliance at the time of application. However, this does not mean that the government accepts that the participating hospital is fully in compliance thereafter. CMS can at any time undertake a “validation survey” to ensure that, in fact, the initial compliance has continued. See 42 C.F.R. § 488.7; Evelyn v. Kings County Hosp. Center, 956 F. Supp. 288, 291-92 (E.D.N.Y. 1997). The validation inspection is usually conducted by state government agencies. National Ass’n of Psychiatric Health Systems v. concern, 120 F. Supp.2d 33, 35-6 (D.D.C. 2000). If non-compliance is detected as a result of the state survey, then various consequences can occur ( § 488.7(d)), including possible decertification from the Medicare/Medicaid programs. Cospito v. Hecker, 742 F.2d 72, 88 (3d Cir.1984), cert. denied, 471 U.S. 1131 (1985).

Ironically, “[a]n organization can become accredited and remain accredited despite findings of deficient or unsatisfactory standards of care.” Wyatt by and through Rawlins v. Rogers, 985 F. Supp. 1356, 1430 (M.D. Ala. 1997). Therefore, the fact that a hospital receives JCAHO or AOE accreditation does not necessarily mean it was in compliance with the conditions of participation required for Medicare/Medicaid participation. Consequently, even an accredited hospital can knowingly breach the requisite conditions of participation; if it nonetheless falsely certified via its cost reports that it was fully in compliance with these regulatory requirements, arguably an action lies under the FCA.

The Conditions of Participation Theory

A very interesting question is whether the language of the hospital cost report certification could be construed to include compliance with the conditions of participation. This is particularly of concern given some of the provisions of the conditions of participation. For example, 42 C.F.R. § 482.11 mandates “[c]ompliance with Federal, State and local laws.” By this provision, state and local government hospital regulatory requirements, such as the provisions of the New York “Minimum Standards” for hospitals, arguably become applicable obligations under the federal conditions of participation.

Other important provisions of the conditions of participation include 42 C.F.R. §§ 482.12 (“Governing body”); 482.21 (“Quality assessment and performance improvement program”); 482.22 (“Medical staff”); 482.27 (“Laboratory services”); 482.30 (“Utilization review”); 482.41 (“Physical environment”); 482.43 (“Discharge planning”); 482.54 (“Outpatient services”); and 482.55 (“Emergency services”). Conceivably, failure to comply with any of these provisions, followed by the execution of the hospital report certification, could serve as the foundation for an action under the FCA. Relators or the government might argue that COP’s fall within the category of “applicable instructions” and “laws and regulations,” and so are encompassed within the hospital cost report certifications that were filed with CMS, as a condition for payment. So, the theory argues, if any of these allegations could be proven at trial, then the errant hospital would be held, as a matter of law, to have submitted fraudulent cost report certifications which constitute violations of the FCA.

The potential adverse consequences if such a theory were to be adopted by a federal court are staggering. Each and every cost report embraced all services billed to Medicare on an interim basis by the hospital for that year. Each such claim was false because the hospital later certified in the cost report for that year that it had complied with all applicable instructions and regulations, when in fact it had not. This is as classic a false claim under 31 U.S.C. § 3729(a)(2), as can be imagined. Columbia/HCA holds that payment is conditioned upon the hospital report certification. Therefore, there is no substance to an argument that cost report certifications cannot serve as an express condition for payment. It is simply incorrect to assert each condition of participation or other regulation must expressly state that compliance with its provisions is a condition for payment. Actually, it is the cost report certification that adds that key element, as the court in Columbia/HCA so clearly articulated.

To generate even a worse scenario, there is also an argument that an FCA action could be predicated upon 42 U.S.C. § 1320a-7b(a). This section directs that any federal health care provider who knowingly retains any “benefit or payment” having knowledge that the provider is not entitled to receive it, and fails to disclose to the government that it is not entitled to said benefit or payment, will have committed a criminal offense. So a hospital, having declined to report its non-compliance with the state hospital regulations and federal COP’s, yet nonetheless certifying compliance on its annual cost report with all pertinent instructions and regulations, caused the hospital’s certifications to be false since it was not compliant with this law as well.

Certifications Found on the UB-92

The certifications found on the key request for reimbursement form utilized by hospitals and home health agencies participating in the Medicare program are not as expansive as that contained in the hospital cost report certification. For example, there is no restrictive certification language contained on the UB-92 forms which to any extent corresponds to the stringent certification included in hospital cost reports. Specifically, there is no Medicare certification attesting that the UB-92 was prepared “in accordance with applicable instructions,” which the government surely would argue includes conformity with the Anti-Kickback Act and the Stark law as pertains to hospital cost reports. In fact, the Medicare certification (§ 7), on the reverse of the form, deals exclusively with the release of patient information and facilitating payment from other sources. Consequently, even if a UB-92 claim had been prepared in contravention of the conditions of participation, or other Medicare laws or regulations, that fact alone would not violate the express certification contained on the form itself. Only if the information on the form is alleged to be false or inaccurate in any way, can the UB-92’s be utilized as a predicate for an action under the FCA.5

Is All This Just a Scary Hypothetical?

Is the COP theory just a bad nightmare that will disappear in the morning or does it present a real threat to hospital and home health providers? There are several answers to this question. First, we are aware of one on-going federal court case where a relator has asserted this theory against a hospital defendant. We are also aware that other similar cases have been presented by relators to U.S. Attorneys’ offices for consideration as to possible intervention. Second, James Sheehan, Associate U.S. Attorney in Philadelphia, and the highly respected DOJ theoretician of FCA actions, has publicly gone on record in embracing this theory. In the April 25, 2005 issue of REPORT ON MEDICARE COMPLIANCE, Mr. Sheehan’s comments are reported where he put the health care provider community on notice that his office would bring cases predicated on this theory. Experience demonstrates that where Jim Sheehan leads, the rest of the Department of Justice will soon follow. Third, one need only “Google (™)” “FCA and COP” to see that over 700 hits materialize. For example, the Health Care Compliance Association held an October Audio Conference on “Enforcing the Medicare Conditions of Participation through the False Claims Act.” Also, several relator firms have indicated their familiarity with this theory and their willingness to take such cases.


The use of conditions of participation as a predicate for FCA actions is not just an academic theory that may never see the light of day in the real world. The theory is out there and increasingly being circulated and discussed not only within the realtors’ bar but also by the DOJ. Defense counsel, however, can take several actions to assist their clients and decrease the threat of this new theory being levied against them. Counsel should meet with their healthcare clients and brief them on the theory and how it creates potential liability under the FCA. Immediately, compliance plans should be reviewed to ensure that they devote sufficient attention to conformity with the COP’s. Immediate internal audits may be necessary to get a handle on the extent to which the client has been in conformity with the COP’s. In short, an informed and prompt response to this development is the best defense a hospital or home health agency provider can bring to bear.


1 As the Thompson court noted, 20 F. Supp.2d at 1035, Form 2552 expressly states the consequences of a failure or refusal to certify:

This report is required by law (42 U.S.C. § 1395g; 42 C.F.R. 413.20(b)).
Failure to report can result in all interim payments made since the beginning of the cost report being deemed overpayments. (42 U.S.C. § 1395g).

2 On July 2, 2001, the Health Care Finance Administration (“HCFA”) became the Centers for Medicare & Medicaid Services (“CMS”).

3 Century operated home health agencies which, like hospitals, file yearly Medicare cost reports which contain certification language identical with that found in hospital cost reports.

4 See generally 42 C.F.R. §§ 482.1 through 482.66 (“Conditions of Participation for Hospitals”).

5 The UB-92 does contain the standard warning against misrepresentation or falsification of essential information.


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