By SARAH HILLEGONDS
Recently, we have received reports that the Michigan Department of Health and Human Services (MDHHS) Office of Inspector General (OIG) is conducting aggressive audits of pharmacies that concentrate on invoice and inventory records. In most cases, the targets of these invoice and inventory audits are independent pharmacies. According to the OIG, the purpose of inventory audits is to ensure that a pharmacy is not billing Medicaid for more drugs than it purchased. But the methodology utilized by the OIG is susceptible to error, resulting in inaccurate overpayment demands, and there are questions as to the legality of these types of audits prior to July 1, 2015. This article will explore the legal framework governing inventory audits and one of the many legal defenses being raised by pharmacies subject to recoupment as a result of this type of audit.
Pharmacies, like any other healthcare provider, are required to comply with various federal and state laws, as well as state policies as a condition of participation in the Medicaid program. The OIG relies on authorities contained within the Medicaid Provider Manual, as well as its general powers under the Social Welfare Act, 400.1 et. seq., and Executive Reorganization Order 2010-1, MCL 333.26368, to perform inventory audits.
While the OIG has broad powers to conduct audits and recoup funds paid in excess to which a pharmacy is entitled, its power is tempered by notice requirements. MDHHS is required to provide notice to each provider of a change in policy or procedure affecting providers, MCL 400.111a(6). “[A] person is not required to resort to, and shall not be adversely affected by, a matter required to be published and made available, if the matter is not so published and made available.” MCL 15.241. Documents that are required to be published and made available to the public by a state agency include “written statements that implement or interpret laws, rules, or policy, including but not limited to, guidelines manuals, and forms with instructions, adopted or used by the agency in the discharge of its functions.” Id.
On June 1, 2015, pharmacy providers received notice of a new proposed policy, MSA 15-15, which required pharmacies to maintain various records, including invoices, manufacturer and/or wholesaler sales records, distributor delivery records, inventory transfer records, and provider payment records, to support the quantity of goods paid for by Medicaid during the audit period. Under this policy, failure to maintain these records would result in recoupment of pharmacy funds. MSA 15-15 was characterized as an “addition” to pharmacy audit policy to support the ability of the Department to recover funds where there is insufficient documentation of inventory and purchase histories. Prior to MSA 15-15, the Medicaid Provider Manual did not explicitly provide that failure to maintain invoices, manufacturer and/or wholesaler sales records, distributor delivery records, inventory transfer records, and provider payment records would result in recoupment.MSA 15-15 went into effect on July 1, 2015, and was incorporated into the Pharmacy chapter of the Medicaid Provider Manual in subsection 19.2— an entirely new subsection— on October 1, 2015. Although subsection 19.2 has only been in effect since July 1, 2015, the OIG has relied on this section to support audits of pharmacy invoice records from the last seven years.
Outside of subsection 19.2, the OIG is utilizing general policies applicable to all providers to support inventory audits prior to July 1, 2015. The “Record Keeping” section of the General Information for Providers chapter of the Medicaid Provider Manual requires all providers, including pharmacies, to maintain certain fiscal records for a period of seven years. One type of fiscal record that must be maintained is purchase invoices for items offered or supplied to the beneficiary. Medicaid Provider Manual, General Information for Providers, §§ 15.1 and 15.6; See also MCL 400.111b. However, this general policy does not require pharmacies to maintain the other types of documents listed in subsection 19.2, including manufacturer and/or wholesaler sales records, distributor delivery records, inventory transfer records, and provider payment records, and it does not provide that failure to maintain these records will result in recoupment.
Thus, pharmacies hit with overpayment demands by the OIG are challenging the results of inventory audits before July 1, 2015 on the ground that, prior to that date, the Pharmacy chapter of the Medicaid Provider Manual did not provide that failure to maintain the comprehensive list of documents identified in subsection 19.2 would result in recoupment. This issue is currently under review by Administrative Law Judges in the Michigan Administrative Hearing System.
Notwithstanding any potential legal defenses that may exist, Pharmacies should take inventory audits by the OIG very seriously. There could be devastating financial consequences if a pharmacy fails to maintain the documentation listed in subsection 19.2 of the Pharmacy chapter of the Medicaid Provider Manual for a period of seven years. For additional information, please contact a Wachler & Associates attorney at 248-544-0888.
Sarah Hillegonds is an associate attorney at Wachler & Associates, P.C. Ms. Hillegonds practices in all areas of healthcare law and devotes a substantial portion of her practice to representing health care entities in the defense of RAC, Medicare, Medicaid and third-party audits. Ms. Hillegonds also represents healthcare providers in licensing matters.