The Extrapolated DSH and Bad Debt Audit
Calumet Regional is a 400-bed acute care hospital with a September 30 fiscal year end. In June the MAC opened a cost report audit of FY2023. It sampled 40 of 2,100 Medicaid day records and found that 14 days came from patients enrolled in a county medically indigent adult program funded through the state's 1115 waiver rather than the Medicaid State Plan. The MAC proposes to remove all 4,900 waiver-related days, which would cut the FY2023 DSH payment by $1.6 million. It also sampled 60 bad debt accounts, disallowed $88,000, and proposes to extrapolate that to $610,000 for the year. Two years ago the hospital's internal auditor wrote a memo warning that waiver days might not count; the CFO decided to keep claiming them because every hospital in the state does it. The additional documentation request gives 30 days to respond, the FY2023 NPR has been issued, and no reserve has been recorded.
1. What are the hospital's response options and deadlines, and how does the 60-day overpayment rule interact with them?
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The ADR response is the decisive step. Thirty days is the only chance to shape the record before the MAC makes a determination. The hospital should respond in writing, item by item, with supporting documentation, and should request the sampling workpapers, the universe definition, and the projection methodology at the same time.
After the MAC issues its revised NPR, the hospital may request a PRRB hearing within 180 days of receipt. The amounts at stake - $1.6 million and $610,000 - clear the $10,000 jurisdictional threshold. Issues not raised before the MAC may be difficult to introduce later, so the ADR response should preserve every argument the hospital might ultimately make.
The 60-day clock (42 CFR 401.305) runs separately and does not wait for the appeal. Once the hospital concludes that the waiver days were not allowable, it has identified an overpayment and must report and return it within 60 days, even if it disputes the extrapolation. A pending appeal does not toll the obligation where the hospital has actually determined that money is owed; the good-faith dispute exception narrows considerably once the two-year-old internal audit memo is in the file. Practically: refund the conceded principal and litigate the extrapolation, rather than litigating everything and risking a separate, avoidable finding on the reporting failure.
2. Is there any defensible argument for the waiver days, and how should the hospital weigh asserting it?
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The only real argument is legal, not equitable: that the waiver program constitutes medical assistance under the State plan - for example, because the state has a State Plan amendment covering the same population, because the waiver's special terms and conditions expressly extend State plan benefits, or because the day records actually reflect State plan eligibility that was coded as waiver enrollment. That requires reading the State plan, the waiver special terms and conditions, and the state's eligibility manual against a sample of accounts. If the coding is wrong and the patients were State plan eligible, the finding is a coding problem, not a coverage problem, and the fix is documentation.
'Every hospital does it' is not a defense and is affirmatively harmful. It converts an interpretation dispute into evidence of knowing conduct, which affects the tone of the audit, the likelihood of a broader review, and potentially the referral analysis.
The right posture is to concede the day count if the legal review does not support it, and spend the negotiating capital on the extrapolation, the bad debt sample, and the scope of the look-back. Preserve the narrow legal question only if real documentation exists.
3. What do you examine in the extrapolation, and what governance and financial reporting steps are overdue?
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Extrapolation. Extrapolation is permissible where the MAC uses a statistically valid random sample. Examine: (1) whether selection was truly random or judgmental - a sample drawn from accounts already flagged as suspicious cannot be projected; (2) the universe definition and whether every sampled item actually came from it; (3) each individual disallowance, because one misapplied criterion infects the whole projection; (4) the claimed precision and confidence level against the sample size; and (5) whether the projection was computed per cost report rather than pooled across years. Request the sampling workpapers and the projection software output. If the sample was not statistically valid, the MAC's remedy is generally to correct the sample items only, which on these numbers is a very different outcome from $610,000.
Governance and reporting. The internal audit memo is the fact that will drive everything. It shows the hospital knew of the issue before the audit, which bears on the 60-day rule start date, on whether a loss contingency should have been accrued, and on how the MAC reads the file. The missing reserve is a financial reporting problem independent of the Medicare outcome: a probable and estimable disallowance should be accrued. Document the contemporaneous factual basis for continuing to claim the days, if any; reserve for the probable disallowance; and evaluate self-disclosure for years not under audit rather than waiting for the MAC to expand its review on its own.