Flexible Policy Creates Conflict for State Medicaid Agencies

Travis Bergman


Aegis Compliance & Ethics, LLP

Flexible Policy Creates Conflict for State Medicaid Agencies

A recent report found that Medicaid agencies grant “good-cause exceptions” to payment suspensions in cases of credible allegation of fraud at a particularly high rate. This finding signifies potential ineffectiveness of compliance enforcement in fraud cases. The report acts as a call to action to amend, develop, and implement policies in accordance to the core elements of compliance.

Overview of OIG Report

In September 2017, the Office of Inspector General released a report detailing the challenges facing Medicaid agencies when they need to protect funds that may have been subject to fraud. Specifically, the report details the difficulties in properly utilizing Medicaid payment suspensions. Despite being federally required to cut off funds to healthcare providers under reasonable suspicion of defrauding Medicaid, agencies often forgo these suspensions using “good cause exceptions.”

State Medicaid agencies grant exceptions to allow payments to continue to providers during legal investigation of the alleged fraud, and the exceptions can be deemed necessary for a litany of reasons. According to the OIG report, common reasons cited by agencies include the desire not to jeopardize investigations by alerting the providers in question, concerns over conducting “lengthy fraud investigations without driving innocent providers out of business,” and concerns over “access to care” for patients who depend on the services of these providers. Given that neither federal investigations of Medicaid fraud nor payment suspensions have defined or regulated time limits, “good cause exceptions” represent a crucial tool in protecting patients (and innocent providers) from being harmed in the event of an ongoing investigation.

According to the report’s study of self-reported data from 56 state Medicaid agencies (including all 50 United States; Washington, D.C.; and 5 U.S. territories), the agencies applied good cause exceptions in 755 of 1308 credible allegations of fraud in the 2014 fiscal year, with 631 of those exceptions coming without any payment suspension. States like New York (129 good cause exceptions in 135 credible allegations), Iowa (101 in 145), and Louisiana (122 in 128) demonstrated the difficulty inherent in enforcing federally required payment suspensions.

Harm of Overly Flexible Policy

The OIG report details a gap in policy that contradicts the core elements of compliance. The requirement to enforce payment suspensions serves as an essential tool in protecting Medicaid from continuing to supply funds to those defrauding the program. However, the application of payment suspensions can often be at odds with the well-being of beneficiaries and the success of law enforcement investigations (meaning the flexibility provided to state agencies in applying exceptions gives them incentive to err on the side of caution).

This ineffective policy harms at multiple levels. In the broadest terms, the government loses money as long as fraudulent activity continues. In an April report, the OIG found that Florida failed to apply payment suspensions or good cause exceptions in 54 cases from 2011 to 2013. As a result, the OIG recommended that Florida reimburse the federal government over $8 million, while acknowledging that another $40 million of federal Medicaid payments had been put at risk by this behavior, not to mention the state’s significant share of the payments. This demonstrates the amount of money at stake when just one state fails to properly enforce federal policy. Given the report’s implication that payment suspensions may be underutilized by state agencies across the nation, the amount of federal money being put at risk by this policy gap could be significantly greater.

Healthcare providers also suffer from ineffectiveness in these policies. Because there are no federal limits on the length of investigations or payment suspensions, an investigation of any great length could put a provider out of business even if they are ultimately found innocent. This, in turn, harms the provider’s beneficiaries. Overly aggressive implementation of payment suspensions, as well as lengthy investigations while payments have stopped, will risk the well-being of patients who rely on Medicaid for their healthcare if the provider can no longer afford to offer the necessary services. Given that Medicaid eligibility requirements signal recipients are likely unable to obtain health insurance through other means, the decision to suspend Medicaid payments cannot be taken lightly. Despite the millions of dollars that could be at risk, these issues incentivize agencies to exploit the flexibility in policy supporting good cause exceptions and avoid the federally required payment suspension.

Mitigating Measures

Even before the release of this report, regulatory bodies have taken steps to address the gap in policy and limit opportunities for harm at all levels. In 2014, the Center for Medicare & Medicaid Services (“CMS”) published a toolkit clarifying the intent and proper application of good cause exceptions. In cases where agencies may apply an exception for issues of insufficient access to care, the toolkit encourages them to first take measures to assess and mitigate the risks to beneficiaries. Though it’s not policy, this suggestion represents a positive step toward formalized active engagement in pursuit of safe and responsible application of federal payment suspensions at minimal risk to those dependent on the provider in question.

Similarly, the OIG report found that state Medicaid agencies have begun to formalize their own processes for applying payment suspensions and limiting the use of exceptions. Increased communication and collaboration with Medicaid Fraud Control Units (“MFCU”s), and increased understanding of the Medicaid agency’s role in the payment suspension process, have both been applied to better evaluate fraud cases, and take proper action without jeopardizing investigations or further government payments. CMS also publishes the Medicaid Provider Enrollment Compendium, which establishes screening requirements for providers enrolling with Medicaid agencies. Updated multiple times since publishing in March 2016, this front-end policy should ideally make payment suspension decisions easier by increasing provider accountability and reducing fraudulent activity in the first place.


As constructed, the flexibility allowed to state Medicaid agencies in applying good cause exceptions has arguably led to their overuse. This suggests the payment suspension requirement policy is ineffective in its difficulty to implement. Through independent states’ work and CMS recommendations and publications, agencies have acted to formally address the issues created by this flexibility without sacrificing it completely. We should expect further interpretation and revision in this manner to promote more viable procedure for implementing payment suspensions.

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