Investigations or audits by government regulators, and the far-reaching nature of alleged fraud and abuse violations, may represent a significant risk and uncertainty that would require disclosure in accordance with ASC 275. Federal and state governments aggressively enforce Medicare and Medicaid anti-fraud and anti-abuse legislation. Most notable is the federal False Claims Act, which imposes criminal and civil penalties for making false claims and statements to Medicare and Medicaid. False claims include, but are not limited to, billing for services not rendered or for misrepresenting actual services rendered in order to obtain higher reimbursement, billing for unnecessary goods and services, and cost report fraud. Broadening regulatory and legal interpretations in recent years has significantly increased the risk of penalties for providers; for example, broad interpretations of “false claims” laws can expose ordinary billing mistakes to penalty consideration. In addition to providers that bill the Centers for Medicare &Medicaid Services (CMS) directly for claims in traditional Medicare, this exposure can apply to providers that receive claims payments through Medicare Advantage health plans.

If the government believes that billing fraud may have occurred—for example, assigning inaccurate billing codes to a medical procedure or treatment in order to increase reimbursement, referred to as “upcoding”—it has the ability to conduct investigations that can result in civil monetary penalties or criminal penalties, in addition to recoupment of the underlying claims payments. If a provider is the target of a government investigation, the need for accruals or disclosures related to contingencies associated with the potential effect of illegal acts must be evaluated.

Settlements reached in such investigations may contain an element of retroactive revenue adjustments (e.g., denied claims) and an element of contingent liabilities associated with fines and penalties. The former is an uncertainty that must be considered in estimating revenue (i.e., variable consideration) for the period in which the services were provided, as discussed in HC 3.3.2. ASC 450, Contingencies, provides guidance in evaluating contingent liabilities, such as potential fines and penalties under applicable laws and regulations. Estimates of potential fines and penalties are accrued only if their payment is probable and reasonably estimable.

Providers also may have to incur costs in future years to demonstrate compliance with federal laws. When a provider enters into an agreement (e.g., corporate integrity agreement (CIA)) with the federal government to settle an investigation, such settlement agreements normally impose an obligation on the provider to engage an independent review organization to test and report on compliance with Medicare requirements each year for the following five years. ASC 954-405-25-5 stipulates that a provider should not accrue a liability for the expected costs of future Medicare compliance audits required as a result of settlement agreements. Those costs should be recognized as operating costs as the audits are conducted.