Federal Audit Findings for Medical Device Credits

There are five critical mistakes made by providers.

By now, healthcare providers that perform “device-dependent” or “device-intensive” procedures know the follow-up steps necessary in reporting vendor or manufacturer warranty credits for replacement devices or free-of-charge initially placed devices. When credits received are equal to or exceed 50 percent of the replacement cost, or when the initially placed device is free or 100 percent credited, these savings must be passed on to the Medicare program. Providers conducting these procedures include acute-care hospitals (under inpatient and outpatient status) and ambulatory surgery centers (ASCs). The array of procedures performed includes cardiovascular, orthopedic, neurosurgical, and many other types. Per the Centers for Medicare & Medicaid Services (CMS), the reporting of implantable medical device credits for device-dependent procedures is mandatory.

To ensure compliance in conveying device credits and to identify providers that do not comply, the U.S. Department of Health and Human Services (HHS) Office of Inspector General (OIG) has a specific Annual Work Plan item to address the matter. Either through targeted device credit audits or enveloped in broader general billing compliance regulatory framework for hospitals and ASCs, the OIG ferrets out “non-compliers.” Adding fuel to the fire, the OIG also has a related Work Plan item based on device credits already reported but done improperly: outlier payments for outpatient claims with reported credits. From this perspective, the OIG analyzes device credits that have been reported, but the corresponding device line item charges have not been adjusted accordingly, thus triggering additional but inappropriate Outpatient Prospective Payment System (OPPS) reimbursement known as “outlier” payment.

During these audits and analyses, termed “aggressive” by some accounts, what inadvertent provider oversights or violations are the OIG finding, and why? What are the critical errors being made by inpatient, outpatient, and ASC providers concerning implantable medical device credits?

  1. Device Credits Available but not Pursued. The most prevalent issue found on audit is the simple fact that the hospital or ASC did not pursue and/or obtain the available vendor/manufacturer credit(s) for the replacement device. Per CMS guidelines, all vendor or manufacturer credits must be pursued; if not obtained, those available credits must still be reported as if the provider received them. In other words, the available credits must be passed on to the Medicare program, whether received or not. If the credits are calculated as 50 percent or greater of the replacement cost (or if it’s free/100 percent credited for an initially placed device), then those potential credits must be reported via the UB-04 or CMS-1500 claim form.

    Typically, the device credit workflow process is fairly straightforward: the provider packages and returns the explanted device to the vendor or manufacturer, per its directions with the warranty claim or other related documentation. The vendor tests or “interrogates” the explanted device and issues the hospital or ASC a credit in the form of a credit memo, usually a specific percentage of the actual replacement cost. The provider calculates the credit percentage: the amount is taken against the cost of the replacement device, and that becomes the calculation that determines whether or not the credit must be reported to Medicare.

    While vendor credits are generally processed by healthcare providers upon receipt, they must be anticipated by the initial submission of the warranty claim or credit-claim documentation, post-procedure. But both before and after that occurrence, providers can make a bevy of mistakes. Quite often, these available credits are not claimed upfront, being missed or overlooked as potential monies returned for the explanted device. In other cases, the credits are not monitored and tracked after the credit-claim is filed, and simply fall through the cracks without follow-up. There are pitfalls all along the workflow process. Sometimes the credit is issued, and notification is sent to the provider’s accounting department, which processes the credit, but doesn’t alert the appropriate clinical and revenue cycle staff down the device credit “food chain,” and subsequently, it’s never reported to Medicare on a correct UB-04 or CMS-1500 claim form.

    Of note, the OIG directly petitions vendors to determine if credits have been issued to the hospital or ASC and will confirm such information prior to auditing the provider. In this way, the OIG has firsthand data.

    Ultimately, each hospital or ASC bears responsibility in reporting those credits in timely and accurate fashion, by filing either a correct initial claim to Medicare or a corrected subsequent claim. The OIG has discovered that many providers have not developed an internal workflow process to support and manage the obtaining of these available credits, with the bulk of the findings being the aforementioned top audit finding: available credits not pursued.

     (Sidebar: A useful tidbit of information is that the upfront discounts a healthcare facility receives for bulk purchasing or vendor “preferred customer” purchase agreements are not the same as the replacement “device credits” described herein. These former discounts and upfront “sale” pricing amounts are considered, however, and get deducted from the device’s usual or list price to find the “actual” cost to the facility. For replacement devices, it is the replacement cost prior to vendor- or manufacturer-issued credits that establishes the “replacement cost” denominator, i.e., the actual cost the facility paid the vendor for the respective device. This should be apparent on the purchase order or invoice.)

  2. Miscalculation of the Credit Threshold in Component Devices. Many implantable devices are actually a “system” of separate components, purchased at separate costs and often credited separately (if at all) by the vendor when replaced. For example, an implantable cardioverter-defibrillator (ICD) pulse generator and its leads are considered components of the “ICD system;” the ICD procedure is billed by individual line items on the UB-04 claim form, representing the pulse generator and the individual lead or leads. The same is true for most pacemaker systems. Credits are issued in kind. Mistakes can and do occur when assessing the credit threshold of a device component, often by miscalculating the issued credit against the cost of the entire system, and not solely – and correctly – against the credited component’s replacement cost.

    The OIG discovered during its early audit endeavors that hospitals and ASCs, upon receiving a credit memo for a device system’s component (e.g., an ICD lead), often mistakenly consider the entire system’s replacement cost instead of just considering that component’s pricing. This misstep skews and grossly underestimates the basic calculation to determine if the credit-in-hand meets the “50 percent-or-greater” threshold. Staff – clinical, accounting, and revenue cycle – who have “ownership” of the device credit monitoring, tracking, and reporting process must become familiar with the various devices and device systems implanted by the provider. Ensuring solid knowledge of the array of reportable devices when credited at this threshold can greatly assist in avoiding this error.

  3. Misidentification of Implanted Devices: Does This Device Credit Get Reported or Not? Knowing which implantable medical devices must be reported with credits is tantamount to success. In audit after audit, the OIG has found numerous instances of device credits not reported because of provider unfamiliarity with the inpatient, outpatient, and/or ASC “device-dependent” procedure lists.   

    Each provider type, inpatient, outpatient, and ASC, can have differing devices to consider when following CMS policy in reporting device credits of 50 percent or more. Resources are key, and varied, but not difficult to amass. First, each provider must become familiar with the proposed and final rules associated with their services. These annual disclosures are published in the Federal Register and are easily obtainable in e-format for reading, sharing, and archiving into a “Device Credit Resource e-Library.” The inpatient final rule is published prior to Oct. 1 of each year, inpatient being based on the fiscal year; outpatient and ASC final rules are published by December (often earlier) of each year, these provider types being based on the calendar year. Data files, usually in the form of tables and/or addenda, are published with the rules that list “device-dependent” procedures for which credits must be reported when 50 percent or greater. Additionally, CMS publishes transmittals (“change requests”) and/or quarterly updates covering this as well. Assigned staff should perform (at the very least) an annual update of each provider type procedure listing to ensure adherence to the latest published data to avoid the audit finding of misidentification of device credits that must be reported.

  4. ASCs Misreporting or Omitting the -FB or -FC Modifiers. CMS instructive guidance pertaining to device credit modifiers for ASC-performed procedures indicates that replacement device credits meeting the 50 percent-or-greater threshold for “device-dependent” procedures must be reported with modifiers -FB or -FC, whichever is most appropriate. The OIG has found that ASC staff can become confused about the appropriate application of these modifiers, which line-item codes anchor these reimbursement-altering modifiers, reporting correct line-item charges when the credit is 50 percent or greater (and when the credit is 100 percent), and finally, how these modifiers impact final reimbursement for replacement procedures.

    Modifiers -FB and -FC have the same purpose: to reduce reimbursement for the “device-dependent” procedure by considering a 100 percent credit when reporting modifier -FB, or by considering a 50 percent-or-greater credit (up to 99 percent) when reporting modifier -FC. The tricky part of this reporting is that the modifiers do not get appended to the HCPCS Level II code for the device, but instead are appended to the main or “anchoring” CPT code for the procedure! Confusing, to say the least! As hinted above and as described below, line-item charges for the discounted devices must likewise be adjusted accordingly. A block or fixed reduction is taken out of the ASC reimbursement for the procedure, and the device credit amount is never reported; the modifier signifying 50 percent or 100 percent credits triggers corresponding reductions in reimbursement when coded on the CMS-1500 claim form. Educating staff in ASC billing is essential; obviously, these modifiers would be “soft-coded” or hand-applied per case, as appropriate, and would not be “hard-coded” in the ASC’s billing system. Knowing the appropriate ASC device credit modifier to report and reporting it in correct fashion – appended to the procedure’s CPT code, not the device code – is essential in avoiding this audit finding and remaining in compliance with CMS policy.

  5. Outpatient Outlier Payments: Overlooking Line-Item Adjusting. Within the last few years, the OIG has been auditing OPPS hospital services with a trackable UB-04 claim record of two unique data points: device credits and outlier payments. Upon closer inspection, the OIG discovered that many of those outlier payments, added to the individual claim’s bottom-line Medicare reimbursement, were inappropriate, because the credited device also reported was never reduced in the line-item pricing (i.e., the device was over-charged and thus the total claim amount was overstated). This sets up a claim imbalance (charges to reimbursement) and triggers an inappropriate outlier payment.

    An outlier payment under OPPS, simply put, is an additional amount of money paid “if the cost of care is extraordinarily high in relation to the average cost of treating comparable conditions or illnesses.” Additionally, “to qualify for outlier payments, a provider’s charges for services, adjusted to cost, must exceed a given threshold established by CMS.” But CMS guidelines have been both confusing and rather obtuse. While there have always been instructions for line-item device charge revisions when reporting free, no-cost, or 100 percent credited devices (i.e., a token charge of $1.00 or $1.01 must be charged for the device), there has never been correlating CMS information when reporting partial credits. Therefore, hospitals have tended to overlook the line-item price reduction step for 50 percent-or-greater credits.

    Assign staff in revenue cycle with system access for line-item charge override capability to reduce line-item charges for full and partial device credits. In order to reduce and replace a line-item charge for UB-04 preparation, the assigned staff will need to know – and/or have access to – specific variables, such as the amount of the device replacement cost, the amount of the device credit, and the hospital’s mark-up factor for the device. From a management perspective, this OIG focus should be added to the hospital’s device credit reporting workflow processes and policies/procedures. While an OIG audit might not be avoidable, missing line-item charge adjustments that trigger an inappropriate outlier payment, as detailed here, can be avoided.

Programming Note: Join Michael Calahan today, Feb. 11 at 1:30 p.m. EST (10:30 a.m. PST), for an exclusive RACmonitor webcast, “Implantable Medical Device Credit Reporting Still Under Fire – Avoid Getting Burned!


Michael Calahan, PA, MBA, AHIMA-Approved ICD-10 CM/PCS Trainer

Michael G. Calahan is vice president of hospital and physician compliance with HealthCare Consulting Solutions (HCS). He is an AHIMA-Approved ICD-10-CM/PCS Trainer and a Certified Compliance Officer. He has worked at or with "the big four" healthcare consulting firms as well as OptumInsight (formerly Ingenix) and CGI (a current RAC).

He has authored numerous industry articles and publications for Johnson & Johnson, Ingenix, Decision Health and St. Anthony's Coding. He is a national speaker appearing at conventions and meetings for AHIMA, HFMA, MGMA, state hospital organizations and medical societies; he has performed numerous well-attended webcasts for RACmonitor over the last several years for both hospital and physician audiences.

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