Home Health Agency Prevails in Court Challenge to Extrapolated Medicare Overpayment

In a rare decision, a Federal District Court has largely set aside a multi-million dollar extrapolated Medicare overpayment. Cypress Home Care, Inc., a home health agency based in northeast Texas, successfully challenged the overpayment assessment in court after the Medicare Appeals Council had upheld it. The case is Cypress Home Care, Inc. v. Azar. Adam Bird, a partner in the healthcare practice group of Calhoun Bhella & Sechrest LLP, was lead counsel for Cypress.

Background – Medicare Audits and Appeals

As most providers know, the Centers for Medicare and Medicaid Services (CMS) contracts with private entities to audit claims and ensure they are (or were) properly payable. These private contractors are known as Recovery Audit Contractors (RACs), Supplemental Medical Review Contractors (SMRCs), Medicare Administrative Contractors (MACs), Zone Program Integrity Contractors (ZPICs), and Unified Program Integrity Contractors (UPICs).

When performing post-payment audits, CMS contractors are authorized to project alleged overpayments with the use of statistical sampling. This means that the contractor will request and review what it believes is a statistically valid sample of the provider’s claims within a given timeframe. The sample review results are then extrapolated to the provider’s “universe” of claims. For example, a contractor may request a sample of 40 claims from a durable medical equipment supplier that were paid throughout a two-year time period. Within those two years, the supplier received $2 million in Medicare payments for all of its claims. During the audit, the contractor believes that 20 of the 40 claims at issue did not satisfy Medicare coverage guidelines. This means that, generally speaking, the contractor will conclude that the supplier was overpaid by Medicare by approximately $1 million. The results of these audits can be financially devastating for providers.

Most providers who receive overpayment demands – including those involving extrapolated overpayments – have the right to contest the overpayment through a lengthy five-step appeals process. The provider can contest any and all aspects of the overpayment determination, including the validity of any statistical sampling methodology used by the contractor to calculate the alleged amount.

The first step of the appeals process is a request for redetermination, which is conducted by the provider’s MAC (i.e., the same contractor that processes the provider’s Medicare claims). The second stage of the process, known as reconsideration, is performed by a separate type of CMS contractor called a Qualified Independent Contractor (QIC). The third step in the process is a hearing before an Administrative Law Judge (ALJ), which is followed by review by the Medicare Appeals Council. If a provider is dissatisfied with the Council’s decision, it can seek judicial review in Federal District Court.

Cypress Home Care, Inc. v. Azar

Health Integrity, now known as Qlarant Integrity Solutions, is a UPIC whose jurisdiction includes the state of Texas. In 2010, Health Integrity requested and reviewed a sample of Cypress’ Medicare claims. Following its review, the UPIC alleged that Cypress had been overpaid by Medicare by approximately $11.5 million. Cypress immediately appealed the overpayment determination. The MAC and QIC issued partially favorable decisions that reduced the overpayment amount but left the extrapolation intact. Cypress requested a hearing before an ALJ. After taking testimony from well over a dozen witnesses and reviewing the voluminous case file, the ALJ determined that Health Integrity’s sampling methodology was statistically invalid. Upon review of the ALJ’s decision, CMS asked the Medicare Appeals Council to reinstate the extrapolation. The Council agreed to do so but found that several more of the sample claims were covered by Medicare. Based on the Council’s decision, the overpayment was recalculated to be approximately $5 million.

Cypress then filed suit in the U.S. District Court for the Eastern District of Texas, arguing that the Council’s decision was inconsistent with Medicare coverage guidelines and that there was no evidence to support the statistical validity of the extrapolation. In a thorough, 35-page decision, the District Court agreed with Cypress. The Court found that the Council had reviewed most of the sample claims using coverage guidelines that were not in effect during the audit period. The Court also determined that the Council did not have sufficient evidence on which to conclude the sampling methodology was statistically valid.

The Cypress decision is unique in that it is perhaps the only Federal District Court decision in the country reversing a Medicare Appeals Council decision upholding an extrapolation. Dozens of providers have attempted to challenge the Council’s decisions on extrapolation in court, but to date they have all been unsuccessful.

The Cypress court’s analysis of the Medicare coverage issues is similar to that used by a Federal Appeals Court in 2016 in Caring Hearts Personal Home Services, Inc. v. Burwell. The Cypress court, as in Caring Hearts, found that the Council used the wrong home health coverage guidelines when evaluating the claims at issue. More specifically, the Council had used homebound criteria and physical therapy regulations that were not enacted until 2013 and 2010, respectively, to analyze claims for services rendered in 2008 and 2009. When performing audits and appeals, CMS and its contractors are generally required to use the coverage criteria in effect when the services were rendered. The Cypress court concluded that the Council’s failure to do so meant that its decision could not stand.


Providers facing large, multi-million dollar overpayment assessments calculated through the use of statistical sampling should consider the following:

  • Providers should learn to recognize “on the front end” when a reviewer is requesting a statistical sample of claims. If a records request covers 2-4 years of billing and seeks 30 or more claims (depending on the type of provider), there is a strong chance the results of the audit may be extrapolated.
  • Providers should contest the statistical validity of a reviewer’s sampling methodology as part of every appeal they file. Generally, providers are entitled to a new review of the extrapolated overpayment at each step in the appeals process. Providers should marshal every viable argument to challenge the extrapolation.
  • Don’t give up hope just because the MAC or QIC determined the extrapolation was statistically valid. Every level of the appeals process (except for review in Federal Court) entails a “de novo” review, which means the adjudicator isn’t bound by the prior reviewer’s decision. This means that an argument that an ALJ may find persuasive an argument that didn’t prevail with the QIC. 
  • Any successful challenge to a large overpayment determination requires a thorough, well-designed strategy; otherwise, a provider may face hurdles attempting to fight an extrapolation. For example, the rules governing the Medicare appeals process say that a provider must generally submit all evidence it wishes to have considered as part of its case before the QIC issues a reconsideration decision. In addition, a provider challenging a Council decision in Federal District Court may be precluded from raising new arguments that were not considered by the Council. 
  • Statistical sampling and extrapolation are complicated processes and should be analyzed by competent professionals. Providers should consult with an attorney and statistician who have experience with the types of audits / overpayments they are facing.


Although every fight against a large, extrapolated overpayment may seem daunting, the Cypress decision shows that success is always possible – even under the most harrowing circumstances. By implementing a sound strategy early in the process, providers can improve their chances of prevailing in the future.

Adam Bird is a partner in the healthcare practice group at Calhoun Bhella & Sechrest LLP. Please contact him at (202) 804-6031 or abird@cbsattorneys.com to set up a free consultation. 


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