Securing insurance protection against fraud and abuse liability

Healthcare Financial Management, July, 1999 by Sheila Callison

Healthcare organizations concerned about corporate compliance need to review securing appropriate insurance coverage as part of their corporate compliance program. Provider organizations often mistakenly expect that their directors and officers liability (D&O), malpractice, or standard errors and omissions (E&O) insurance policies will cover the cost of Medicare fraud and abuse fines. The insurance industry has developed a specific billing E&O insurance product to cover providers that run afoul of government fraud and abuse statutes.

Healthcare organizations found to have violated Federal fraud and abuse laws usually negotiate a settlement amount with government representatives. The fines and penalties assessed can be triple damages plus interest, and an additional $5,000 to $10,000 per fraudulent claim.

A common misconception among healthcare provider organizations is that their directors and officers liability (D&O), malpractice, or standard errors and omissions (E&O) insurance policies will cover the cost of Medicare fraud and abuse fines. In reality, however, standard policies do not cover these fines or the organization's internal audit expenses associated with a government investigation.

Standard D&O policies cover wrongful acts. A wrongful act is defined as any actual or alleged act, error, omission, misstatement, misleading statement, or breach of duty by the insured. Losses that such policies do not cover include punitive or exemplary damages, liquidated damages, civil or criminal fines, sanctions, payroll or other taxes, penalties, the multiplied portion of any multiplied damage award, or damages or types of relief deemed uninsurable under applicable law.(a)

Malpractice insurance, which includes professional and general liability insurance, generally covers third-party bodily injury, property damage, personal injury, advertising injury, or employee benefits liability arising from the insured's health service activities. Such policies do not cover disciplinary or administrative proceedings or reviews by government or private insurance programs. Malpractice insurance therefore does not cover fines generated as a result of a government fraud and abuse audit.

Standard errors and omissions policies generally do not cover these fines either. The insurance industry, however, has developed a specific billing errors and omissions insurance product designed to cover hospitals, health systems, provider networks, and individual physicians found to be noncompliant with government fraud and abuse statutes.

Provisions of Billing E&O Policies

A billing E&O policy generally covers civil fines resulting from a government audit as well as the cost of the audit process, legal representation, and other costs associated with an investigation of Medicare and Medicaid billing practices. The policy normally is written as a claims-made policy with varying liability and deductible limits, depending upon level of risk. The policy does not cover costs associated with intentionally fraudulent claims.

Billing E&O policies vary by Medicare provider type. Hospital policies generally have a high deductible of $500,000 to $1 million for civil fines and penalties and lower deductibles of $25,000 to $100,000 for audit and defense costs. Medical groups and individual physician policies generally provide first-dollar coverage with a $1 million limit of liability because of the generally lower risk they pose for billing noncompliance and large penalty assessments.

Areas of Vulnerability

Areas that contribute to a healthcare organization's vulnerability to fraud and abuse actions are current law, subcontracts and alliances, and reliance on technology.

Current law. While the Health Insurance Portability and Accountability Act of 1996 deafly signaled that the number of audits would increase regardless of whether questionable billing appears to be erroneous rather than intentionally fraudulent, providers can take some comfort from a June 3, 1998, letter from HHS Inspector General June Gibbs Brown to the American Health Lawyers Association. In the letter, Brown wrote that the efforts of the Office of Inspector General are targeted at improper claims made intentionally or with reckless disregard for the truth, not billing errors.(b)

For hospitals, the impact of the False Claims Act still is not completely known, primarily due to ongoing attempts to introduce new safe harbors to amend the act. Under these proposals, Federal prosecutors would be allowed to apply the False Claims Act only when the level of billing errors exceeds a minimum threshold.

Subcontracts and alliances. Organizations that offer Medicare and Medicaid risk products assume more responsibilities and often find contracting with a network of specialists or ancillary providers to be advantageous. Part of such contracting arrangements should include a claims review process of all subcontracted work and billing processes. Hospitals, in particular, should be aware of their liability for billing errors made by carve-out specialty services, such as outpatient surgery centers and imaging centers, that do their own coding and billing.