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The Medicare Prepayment Audit

On Behalf of | Apr 21, 2015 | Medicare & Medicaid |

One of the most recent and potentially most devastating developments in health care, to the health care provider, is the Medicare prepayment audit. Most providers are blissfully unaware of this development; however, it is critical to your business to understand what the Medicare prepayment audit is, how it could affect your business, what you can do to prepare, and what you can do if you find yourself subject to such an audit. This is particularly true in light of the fact that Texas has been identified as a region of particular focus and interest. In fact, a majority of bankruptcies that have been the result of the Medicare prepayment audit have occurred to providers located in Texas and Florida.

Prepayment audits come in two forms, full and partial. In a full prepayment audit, a provider must first prove to the ZPIC that the claim is both medically necessary and payable before they can receive compensation for any service or item.

Phase One (Initial Determination)

The ZPIC will initiate the Initial Determination, which is the first phase of the prepayment audit process. This is done by sending out a number of ADR letters to the provider, also known as “additional documentation requests.” Over the following several months, said provider can receive well over 1,000 ADR letters. The Prepayment audit begins at the earliest date of service on the ADR letters. You will receive another ADR letter every time you submit a claim, until you are released from the audit. Typically, the provider realizes that there is an issue at this stage.

You must send to the ZPIC all documentation that is necessary to substantiate the claim within 30 days of the date on the ADR letter. This can include progress notes, CMN, prescriptions, and other such information. The claim will be denied if you fail to submit the documents within this time frame, at which point you will need to appeal the denial at a higher level, referred to as the “redetermination.”

After you’ve submitted the requested documentation, you’ll need to wait for the initial determination to come from the ZPIC. Despite the fact that you, as a provider, are required to submit the documentation within 30 days, there is no such regulation or rule for the ZPIC. In most cases, they will notify the provider if the claim was paid or denied within 60 days by sending an explanation of benefits (EOB) for each claim. The ZPIC does not send any additional correspondence, so this EOB is the only way you will know if the claim was denied or paid.

You must calculate the approval/denial percentage once you receive these EOBs. If, for example, 10 out of 50 claims were paid, the approval rate will be 20 percent. The ZPIC will consider a number of factors in deciding to release the provider from the prepayment audit. There is no information in any law, statute, Medicare manual, or otherwise which identifies what these factors are; however, we’ve found that approval rates of roughly 50 percent or greater will generally make the provider eligible for release from the audit. The ZPIC will rarely remove you from such an audit voluntarily, and instead you may need to petition them to remove you from the audit.


If the provider is still ineligible to be released from the audit after the initial determination, the next steps would be to appeal the denied claims. At each stage of the appeal, you should continue to calculate the approval/denial rate. This is critical, as you or your attorney must continue to petition the ZPIC once the approval rate reaches or surpasses 50 percent. Given the lengthy time frame for the appeals process, resources at this stage should be targeted to having the audit removed or having the scope reduced.

At the same time, resources need to be focused on having the initial determinations approved to avoid further levels of appeals and to expedite the receipt of reimbursements.

Claim Denials

At the initial determination and all subsequent levels of appeal, contractors deny claims for numerous reasons. In many instances, the reason for denial is specific to the provider type (i.e., physician, home health, hospice, et cetera). Nevertheless, all provider types share the most common denial reason: “aberrant billing practices.” The ZPICs use this innocuous phrase to account for all problems related to claim submission and review.

The most common type of “aberrant billing practice” is lack of “medical necessity.” This means the provider has failed to provide adequate documentation to substantiate the medical necessity for the item or service provided.

Another common type of “aberrant billing practice” shared among various provider types is inappropriate or illegible signatures. If your signatures are illegible, I would recommend using either an attestation log or an affidavit to support each claim.

The third claim denial reason shared among various provider types is illegible documentation. In this situation, the ZPIC denies the claim because it is unable to determine if the documentation substantiates the medical necessity for the item or service provided. Each document must be closely scrutinized to ensure its legibility.

Effect of Prepayment Audit

The provider must be prepared for a protracted audit and appeal process before a majority of the claims are approved. The entire process can take up to two years. As a result, you must plan in advance for how to deal with the short-term loss in revenues. This is particularly true if your revenues are primarily Medicare based. Some options include 1) developing and diversifying your payor mix, 2) focusing on other services and claims that are not subject to the audit, and 3) maintaining large cash reserves and/or obtaining a line of credit from the bank to cover operating costs during this process.

It is increasingly important to focus on the prepayment denial rate and ensure that it declines steadily over time as the ZPICs have shown an increasing willingness to refer these matters to the Office of the Inspector General and other agencies for further civil or criminal investigations.


The effect of the prepayment audit can be devastating and challenging to the unprepared and uninformed provider. However, with proper planning the effects can be mitigated and the business can be sustained throughout the process.

Alejandro Mora is a health care attorney. He can be reached at [email protected]