Federal Court Blocks Medicare From Awarding New Recovery Audit Contracts

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By Marcia Semmes

September 3 —The U.S. Court of Federal Claims has blocked the Medicare program from awarding new Recovery Audit Contractor (RAC) contracts pending a court appeal from CGI Federal.

CGI, a current RAC, is challenging the terms for three of the new RAC contract requisitions, arguing they violate federal procurement law by delaying payments to the RACs. The new RAC contracts will result in RACs waiting three to 10 times longer for payments than under the current contracts, according to the CGI appeal.

The Sept. 2 court order prevents Medicare from awarding the three RAC contracts until the appeal has been resolved. The RAC program is designed to detect and recover overpayments. Current RAC contracts were set to expire in February, but the CMS announced in January they would be extended for several months.

Judge Mary Ellen Coster Williams also enjoined the United States, its officers, agents, and employees from proceeding with award of a contract, the issuance of orders, or performance under the existing Request for Quote Nos. RFQ-CMS-2014-Region 1, RFQ-CMS-2014-Region 2, and RFQ-CMS-2014-Region 4 throughout the duration of the appeal.

Plaintiff CGI Federal Inc. Aug. 27 asked the court for a stay pending appeal, arguing that it met all the requirements for a stay under Rule 62(c) of the Rules of the U.S. Court of Federal Claims, which allows an injunction if the equities weigh heavily in favor of maintaining the status quo and when the question raised is novel or close.

The government filed a response Aug. 28.

Mike Schaengold, who co-chairs the Government Contracts & Projects Practice at Greenberg Traurig in Washington, told Bloomberg BNA Sept. 3 that, "It is very unusual for a trial court to enjoin the government from contract performance and stay the enforcement of the court's judgment pending the outcome of the appeal in a bid protest where the court ruled in the Government's favor on the merits.”

Schaengold said, "This demonstrates that the trial judge, who is an expert in government contracts law, recognizes that reasonable minds could differ on the outcome of the case. While the Federal Circuit will carefully consider the trial judge's views on the merits, I think that it is likely that the Federal Circuit will overturn the decision.”

Contracts Specialist Expects Reversal

Schaengold said he didn't expect the court to rule the way it did. "I think the holding is contrary to the clear intent of FASA," Schaengold said, adding: "It basically turns it on its head."

In enacting FASA, Congress sought to address the problem of the $800 toilet seat by requiring that commercial items be purchased on commercial terms, Schaengold said. While the court recognized that FASA prohibits noncommercial terms, it did a complete end run around the prohibition by allowing the agency to introduce noncommercial terms.

According to Schaengold, the court recognized that the Federal Supply Schedule's umbrella contract cannot use noncommercial terms, but then said orders issued thereunder can.

CGI argued that a stay is necessary because the issue of whether the Federal Acquisition Streamlining Act and Part 12 of the Federal Acquisition Regulation (FAR) apply to Federal Supply Schedule (FSS) orders is a question of first impression for the court. The issue fundamentally affects the terms on which the government purchases approximately $50 billion in commercial items every year, according to CGI.

The court Aug. 22 rejected CGI's argument that the CMS violated FASA and FAR Part 12 by failing to conduct market research or obtain a waiver before it included modified payment terms in the RFQs that were inconsistent with customary commercial practice.

The court said CGI failed to demonstrate that the agency's inclusion of payment terms inconsistent with customary commercial practice was arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.

Under standard commercial practice in the recovery audit industry, a RAC invoices its commission payment immediately after the payer recoups the improperly paid claim. The challenged payment terms required RACs to wait a minimum of 120 days, 80 days longer than RACs had to wait under their original contracts with the CMS.

CGI argued that the public will suffer irreparable harm if the CMS proceeds with the award or performance of contracts under the flawed RFQs. By contrast, the government will suffer no harm if the stay is granted while the decision is appealed, it said.

CGI also pointed out that the court previously acknowledged the importance of maintaining the status quo pending a decision on the merits of the protest, noting a June status conference in which CMS told the court that it would postpone awarding three out of four RAC contracts until Aug. 15, 2014, the date the court issued a final decision on the merits, or the date the case is dismissed, whichever came first.

Improper Payments Identified

As the court explained, the CMS uses the RACs to identify improper payments and highlight any common billing errors, trends, or other Medicare payment issues. After a pilot program, the CMS competitively awarded contracts to four RACs, including CGI in 2008, one for each geographical region of the country.

CGI is the Medicare RAC for Region B, which covers Minnesota, Wisconsin, Illinois, Indiana, Kentucky, Michigan and Ohio. Each RAC reviews the Medicare Fee for Service claims processed in its region to identify improper payment and CMS pays the RACs a contingency fee based on percentage of the improper payment. The RACs identified 887,291 improper payments in 2011, resulting in corrections totaling $939.3 million.

On June 25, 2013, the CMS provided RACs with a draft modification of incumbent contracts that contained terms requiring them to wait to invoice until the improperly paid claims went through the second level of the five-level appeals process—the qualified independent contractor (QIC) level.

The first level is redetermination by the CMS contractor, the third is a hearing before an administrative law judge, the fourth level is the Medicare Appeals Council and the fifth is United States District Court Review. The original RAC program allowed the RACs to get paid after recoupment, which could be prior to any appeal process.

In addition to changing the contingency fee payment terms, the modification also changed contingency fee payment terms by requiring the RACs to create a reserve fund so they could repay CMS their contingency fees if an overpayment was overturned on appeal.

The four incumbent RACs initially rejected the proposed changes, but ultimately entered into contract modifications after negotiations.

On July 31, 2013, CGI signed its contract modification, which stated that all payments would be made only on a contingency fee basis and only after the Medicare overpayment it collected. It also provided that if CGI's determination was overturned at any level of appeal, it had to repay Medicare its contingency fee.

In January 2014, the CMS issued four RFQs for RAC services in four regions for Medicare Part A and Part B. The RFQs contained virtually the same terms as the CMS's proposed contract modification in June 25, 2013, namely that the RACs were required to wait to invoice until the alleged improper claims cleared the QIC level of appeal, 80 days longer than RACs had to wait under the original contracts.

Before the close of bidding, CGI and another RAC filed pre-award bid protests at the Government Accountability Office, claiming that, contrary to FAR Part 12, the payment terms were inconsistent with customary commercial practice, unduly restrictive of competition, and violated the recovery audit program's enabling statute as well as prompt payment requirements.

The GAO denied the bid protests. While the GAO recognized that the RFQs required the RACs to wait a minimum of 120 days before invoicing for their contingency fees, it noted that this 120-day period—representing the expiration of the time a provider may appeal—is only 80 days longer than the RACs had to wait under existing contracts.

Standing Issue Rejected

The court rejected the government's argument that CGI lacked standing because it wasn't prevented from bidding and suffered no direct economic impact. Because CGI was a qualified bidder, expected to bid, would have bid but for the unacceptable payment term and timely challenged this term prior to the close of bidding, the court ruled CGI demonstrated that it is a prospective bidder.

While the court found that CGI had standing to challenge the RFQ, it said the plaintiff's claim failed on the merits. Modification of the payment term was in essence a judgment call by agency officials concerned that there was no contractual vehicle to demand a contingency fee payment back if an overpayment determination were overturned on appeal after a RAC contract ended, the court said.

The CMS was aware before it issued the RFQs of the RAC's objections to the delayed invoicing payment terms and of the possibility the cost of their services would increase, the court said. Nonetheless, it was unwilling to take on the risk of not being able to recoup contingency fees once the contract ended.

This was not arbitrary, capricious, or irrational, the court concluded. Further, the court said, the decision did not violate statute or regulation or result in an uneven playing field since all prospective bidders were equally disadvantaged and there was no real curtailment of competition.

CGI was represented by Scott M. McCaleb, Daniel P. Graham, W. Barron A. Avery, Christine Reynold and Gary S. Ward of Wiley Rein LLP in Washington.

The government was represented by Stuart F. Delery, Robert F. Kirschman, Jr., Kirk Manhardt and William P. Rayel of the Department of Justice; Jeffri Pierre, Department of Health and Human Services, Office of General Counsel; and Jennifer L. Howard, General Services Administration, Office of General Counsel, all in Washington.

To contact the reporter on this story: Marcia Semmes at: msemmes@bna.com

To contact the editor responsible for this story: Jeff Kinney at jeffkinney@bna.com

The court's Aug. 22 decision is at http://op.bna.com/hl.nsf/r?Open=lroi-9nerp3.

CGI's motion for a stay is at http://op.bna.com/hl.nsf/r?Open=lroi-9nfm7a.