John Balko & Assocs. v. Sebelius, 12cv0572

Decision Date28 December 2012
Docket Number12cv0572
PartiesJOHN BALKO & ASSOCIATES d/b/a SENIOR HEALTHCARE ASSOCIATES, Plaintiff, v. KATHLEEN SEBELIUS Secretary U.S. Department of Health and Human Services, Defendant.
CourtU.S. District Court — Western District of Pennsylvania


Memorandum Opinion re: Parties' Cross-Motions for

Summary Judgment (doc. nos. 94 and 103)

I. Introduction

Currently pending before the Court are the Cross-Motions for Summary Judgment filed by Plaintiff John Balko & Associates ("Balko") and Defendant Kathleen Sebelius, Secretary U.S. Department of Health and Human Services ("Secretary"). Doc. Nos. 94 and 103. The parties' dispute centers on the Secretary's use of extrapolation to determine Balko's liability for overbilling Medicare for routine services, such as ear wax removal. Balko argues that the determination that it had a high error rate was legally flawed. Doc. No. 97, 10-15. Balko also argues that the Medicare Appeals Council ("MAC") abused its discretion and that its decision is not supported by substantial evidence. Id., 15-18.

At the Initial Case Management Conference, the parties agreed that this case should be decided on Cross-Motions for Summary Judgment. After careful consideration of the Motions and Briefs in Support thereof (doc. nos. 94, 97, 103, 104), Concise Statements of Material Facts and Responses thereto (doc. nos. 98, 102, 105, 109), Briefs in Opposition (doc. nos. 101 and108)1 , Reply Briefs (doc. nos. 108 and 443), Supplemental Letter Briefs2 (doc. nos. 486 and 487), and Administrative Record ("AR"), Balko's Motion for Summary Judgment (doc. no. 94) will be DENIED and the Secretary's Motion for Summary Judgment (doc. no. 103) will be GRANTED.

II. Factual and Procedural Background

The parties have stipulated that the AR constitutes the facts upon which this Court must base its decision. The AR is 38,075 pages in length3 and consists of all of the materials that were considered by the MAC in making its determination, in addition to the MAC's Opinion and transmittal letter.4 The following is a summary of those facts necessary for the Court's disposition of this matter.

Medicare is a health care benefits program administered by the United States Department of Health and Human Services ("HHS"). It provides care for patients who are: at least 65 years of age; have certain disabilities; and/or have End-Stage Renal Disease. The Centers for Medicare and Medicaid Services ("CMS") is the agency within HHS that administers Medicare.

Highmark Medicare Services ("Highmark") is a Medicare Contractor. See AR 212; 42 U.S.C. § 1395u(a)(1); see also United States v. Erika, Inc., 456 U.S. 201, 208 n. 11 (1982). Balko billed Highmark for Medicare claims for service, including podiatry, audiology, vision care, and cerumen management (ear wax removal). See AR 212. SafeGuard Services ("SafeGuard") is a Medicare program safeguard contractor5 ("PSC") which is responsible for "identify[ing] cases of suspected fraud, develop[ing] them thoroughly, and in a timely manner, and tak[ing] immediate action to ensure that Medicare Trust Fund monies are not inappropriately paid out and that any mistaken payments are recouped." CMS, Medicare Program Integrity Manual ("PIM"), § 4.2.6

Because SafeGuard determined that Balko "was the highest paid group rendering services at custodial care facilities in Pennsylvania from 2005 through 2007," SafeGuard reviewed a sample of Balko's claims from January 1, 2005, through January 31, 2008. AR 2059-60. SafeGuard identified a "universe of claims" to be reviewed and, using a sample size calculation, determined that a stratified random sample of 81 (out of a universe of 5,445) beneficiaries was a statistically valid random sample. AR 2060, 2166. This sample only contained claims paid for certain listed services. Id. SafeGuard determined that 99.85% of the claims submitted by Balko were improperly paid. Id. SafeGuard then extrapolated this error rate within each of the sixstrata to determine that $881,414.72 had been incorrectly paid to Balko. AR 2058, 2063, 2163-64. SafeGuard calculated the lower bound of a 90% one-sided confidence interval to be $851,109.07, and demanded that amount from Balko. AR 2058, 2167.

Balko appealed this demand to the Medicare carrier, Highmark. AR 1968-85. As part of this appeal, Balko submitted additional evidence to Highmark to support the claims that it had previously submitted to Highmark. AR 1986-2029. Highmark then determined that some of the claims that SafeGuard had found to have been improperly paid, were, in fact, correctly paid. AR 1907-08. Highmark determined, however, that 81.7% of the claims submitted by Balko were incorrectly paid. See AR 1093.7 After again extrapolating the respective error rates for each stratum, SafeGuard calculated the lower bound of a 90% one-sided confidence interval to be $696,347.52. AR 1907.

Balko next appealed Highmark's determination to the Medicare Qualified Independent Contractor, First Coast Service Options ("First Coast"). AR 1729-50. Balko again submitted additional evidence to support those claims that Highmark had found were improperly paid. AR 1752-1801. First Coast determined that 77% of the claims submitted by Balko were incorrectly paid. See AR 6726. After extrapolating the respective error rates for each stratum, SafeGuard determined the lower bound of a 90% one-sided confidence interval to be $641,437. Id.

Balko appealed (this being the third appeal) First Coast's determination to an Administrative Law Judge ("ALJ").8 See AR 60; 42 C.F.R. § 405.1014. The ALJ remanded the case to First Coast so that certain files could be included in the record to be considered by the ALJ. See AR 60. The ALJ bifurcated the appeal and held one hearing regarding the validity of the statistical sample. AR 6667-756. He also allowed the parties to submit written documents in support of their respective positions. Id. The ALJ also considered all of the evidence that had been submitted to First Coast, SafeGuard, and Highmark. Id. The ALJ then issued an Opinion invalidating the statistical sampling. AR 212-19.

The MAC, sua sponte,9 vacated the ALJ's Opinion, holding that bifurcation was not appropriate. AR 152-54. Upon remand, the ALJ conducted two additional hearings. AR 6757-7034. He again allowed for written submissions and considered the full record before him. The ALJ then issued an Opinion on all issues. AR 59-88. The ALJ found that "the statistical sampling and associated extrapolation methodology are invalid." AR 88. The ALJ also affirmed First Coast's determinations with regard to the individual claims that had been reviewed and ordered that amount to be repaid to the government. Id.

The ALJ found that the statistical expert employed by Balko, Dr. Cox, "[was] qualified to provide expert testimony in this case regarding the sample of [Balko's] claims and the extrapolation of the overpayment amount." AR 69. Ms. Tracy Bendinsky, a statistician employed by SafeGuard, was questioned by the ALJ during the course of the hearing. AR 6722-26. The ALJ made no findings of fact with regard to the testimony or report of Ms. Bendinsky.AR 59-88, 176-83. The ALJ found Dr. Cox's argument that SafeGuard failed to comply with 42 U.S.C. § 1395ddd(f)(3) compelling. Id.

The ALJ held that there was "no documentation to support that prior to their decision to do the extrapolated overpayment that [Balko] sustained a high level of payment error, nor is there any documentation to support that [Balko] was educated regarding the payment errors alleged in this matter." AR 70. The ALJ also mentioned that there were other flaws in SafeGuard's statistical sampling, but did not articulate those flaws because of his finding that SafeGuard "failed to show it met the statutory requirements for statistical sampling and extrapolation." See AR 6.

The MAC, sua sponte, reversed the ALJ's determination that the statistical sampling and extrapolation were invalid. AR 23. The MAC affirmed the ALJ's determinations regarding the sample claims that had been reviewed by First Coast. Id.

The MAC found that the ALJ did not have jurisdiction to consider SafeGuard's determination that there was a high level of payment error. AR 16-17. The MAC also found that the 99.85% error rate originally calculated by SafeGuard "constitute[d] a high level of payment error sufficient to trigger extrapolation of the overpayments to the universe of claims, as allowed by [statute]." AR 17. The MAC also held that the Medicare Act:

unambiguously provides that a determination of high payment error rate (or failed educational interventions) is a condition precedent to extrapolating overpayment amounts, not a condition precedent to the contractor's decision to conduct the auditing functions, which include statistical sampling, as authorized by the Medicare Integrity Program. Nowhere does the statute require that a contractor must make any such determination before reviewing provider or supplier claims.

Id. (citations omitted).

The MAC rejected Balko's argument that the exclusion of underpayments and zero dollar payments invalidated the sample. AR 20-21. The MAC held that PIM § (2004 ed.),which states "[t]he universe and sampling frame will usually be all relevant claims or line items for the period under review," justified exclusion of zero dollar payments and that underpayments were not excluded. AR 20. The MAC also rejected Balko's arguments with respect to the sample and strata size. AR 21. The MAC held that SafeGuard followed PIM guidelines, which allow for many factors, some subjective rather than objective, to be considered when determining sample and strata size. Id. Finally, the MAC rejected Balko's arguments with respect to non-sampling errors. AR 21-22. The MAC held that the PIM only required that SafeGuard "'adjust the extrapolation of overpayment,' not initiate a new sampling process." AR 22 (quoting PIM § 3.10.9 (2004 ed.)) (emphasis removed)....

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