Health Benefit Plans

Prompt Payment of Claims

Denied and Disputed Claims

Proposed Amendment: N.J.A.C. 11:22-1.6

Authorized By: Holly C. Bakke, Commissioner for Insurance, Department of Banking and Insurance

Authority: N.J.S.A. 17:1-8.1, 17:1-15e, 17:29B-4(9), 17B:17-1 et seq., 17B:30-13.1, 17B:30-23 et seq. and 26:2J-15b.

Calendar Reference: See Summary below for explanation of exception to calendar requirement.

Proposal Number: PRN 2002-288

Submit comments by October 18, 2002 to:

Karen Garfing, Assistant Commissioner

Department of Banking and Insurance

Legislative and Regulatory Affairs

20 West State Street

PO Box 325

Trenton, NJ 08625-0325

FAX: (609) 292-0896


The agency proposal follows:


The Department of Banking and Insurance (Department) rules at N.J.A.C. 11:22-1 implement P.L. 1999, c.154 (codified at N.J.S.A. 17B:30-26 through 34) concerning health information electronic data interchange technology (HINT). These rules set standards for the payment of claims relating to health benefit plans and dental plans regulated under Titles 17, 17B and 26 of the New Jersey Revised Statutes. Specifically, N.J.A.C. 11:22-1.6 contains the criteria relating to denied or disputed claims.

On November 19, 2001, the Department proposed amendments to N.J.A.C. 11:22-1.6 that would prohibit a practice whereby carriers use extrapolation of errors discovered in an audit of a sample of claims as a basis for adjusting claims previously paid and that were not part of the audited sample (see 33 N.J.R. 3869(a)). Some of the comments received by the Department on the proposal included suggestions for revising the proposal specifically to set forth certain instances where the use of extrapolation would be permitted. The Department determined that these revisions would be appropriate, and, therefore, is reproposing these amendments. The Department is including in this reproposal a summary of the comments received, as well as the Department's responses to the comments.

The Department received a total of 13 comments from the following: New Jersey Hospital Association, New Jersey Pharmacists Association, New Jersey Dental Association, Carrier Clinic, Garden State Pharmacy Owners, New Jersey Council of Chain Drug Stores, New Jersey Podiatric Medical Society, Delta Dental Plan of New Jersey, Inc., Health Net of New Jersey, Inc., New Jersey Association of Health Plans, Oxford Health Plans, Magellan Behavioral Health, and Marc Robbins for Robbins Pharmacy.

COMMENT: Several commenters expressed support for the Department's proposal. Two of the commenters stated that extrapolation creates a fiction of "disputed" claims, and is counter to sound public policy. One of the commenters indicated that while auditing and extrapolation are appropriate procedures to ensure efficient operations and to protect against abuses, the methods currently employed by some auditing firms are abusive, unfounded and deceitful. The commenters stated that any payment adjustments made by a carrier should be based on actual errors, not on an inferred amount based on an extrapolated sample.

One of the commenters requested clarification that this proposed amendment would preclude pharmacy benefit managers (PBMs), as agents of a carrier, from using extrapolation in their audits.

One of the commenters stated that while they would actually prefer a prohibition against retrospective audits in general, the Department's proposal is a positive first step toward ensuring that carriers act in good faith in their claims payment practices.

One of the commenters described his experience with extrapolation by an HMO. The commenter indicated that extrapolation was based on one prescription that had a change in dose over the phone by the prescriber. The commenter documented the change in his computer system. The HMO indicated that since the commenter did not document the change on the original prescription, the HMO recaptured the entire claim for the initial fill, as well as refills. The commenter added that the manner in which he documented the prescription change was in accordance with New Jersey Board of Pharmacy regulations. According to the commenter, the HMO used this one instance to extrapolate a percentage to apply to all claims transmitted to them even though the commenter's error rate was less than 0.86 percent based on over 20,000 prescriptions dispensed and billed.

RESPONSE: The Department appreciates the support for its proposed amendment, and notes that the amendment applies to pharmacy benefits managers (PBMs), third-party administrators (TPAs), and other entities that audit claims on behalf of a licensed carrier where such claims relate to coverage regulated by the State. The amendment does not apply to claims paid for self-funded health benefit plans.

COMMENT: One of the commenters stated that carriers frequently audit or review claims retrospectively, and request refunds from providers for previously paid claims. According to the commenter, the carrier will then withhold the amount requested in the refund (without any notice to or consent from the provider) from the subsequent payment due the provider for services rendered that are unrelated to the refund requested. The commenter requested that the Department include the following language in its proposed amendment to N.J.A.C. 11:22-1.6: "(g) No carrier or its agent shall request a refund from a provider for a previously processed and paid claim and then subsequently withhold this amount from future funds to the same provider intended as payment of services rendered for an unrelated patient or service."

RESPONSE: The question of offsets of provider claims is a general practice, not limited to extrapolated audit amounts, and is therefore beyond the scope of these rules.

COMMENT: One of the commenters stated that the Department's proposed amendment is too broad, and would greatly discourage and hinder the settlement of claim payment disputes between carriers and providers by prohibiting a carrier and provider from agreeing to use the extrapolation method to settle a disputed claim. On the other hand, the commenter also stated that statistical sampling and extrapolation may not be appropriate in a situation where a carrier samples claim payments to numerous individuals and applies an average to provide remedies to the separate individuals. The commenter suggested that the Department modify its proposal if it intended to address this harm.

A few commenters stated that if health plans were prohibited from using sampling and extrapolation as a tool, especially in audits, fraud prevention activities among the plans would be severely hindered. The commenters indicated that when conducting an audit in an attempt to detect and deter fraud, a health plan selects a sample of claims and examines them. From this representative sample, the plan then extrapolates the findings and applies them to the universe of claims under study from that particular provider. According to the commenters, if every claim must be separately investigated, even when there exists clear evidence of a pattern, it would only be feasible to conduct an audit when the amount defrauded in the claims exceeds the cost of investigation. Plans would suffer losses on many audits, even when fraudulent activity is detected. This prohibition could thus open the door for widespread fraud.

RESPONSE: The Department agrees that extrapolation should be permitted in certain instances. Accordingly, the Department is revising proposed N.J.A.C. 11:22-1.6(f) to include five instances in which the use of extrapolation for calculating overpayments of claims is permissible. However, the Department is not revising its proposal to permit agreement between carriers and providers to use extrapolation for settling a disputed claim. It is the Department's position that if such a practice were allowed, carrier providers agreements would contain a provision that providers agree to the use of extrapolation generally.

COMMENT: Two commenters stated that the Department's proposed amendment directly contradicts substantial legal precedent permitting statistical methods in litigation, arbitration and other dispute resolution procedures. The commenters further stated that various Federal and state agencies, including the New Jersey Department of Banking and Insurance, rely on statistically valid sampling and extrapolation to conduct market conduct exams.

RESPONSE: The Department agrees with the commenter, and is revising the proposed amendment to N.J.A.C. 11:22-1.6 to include appropriate exceptions to the ban on extrapolation.

COMMENT: One commenter agreed with the Departmentís proposal by stating that unilateral action by a health plan to take back money without the opportunity for a provider to respond would be inappropriate.

RESPONSE: The Department agrees with the commenter, and appreciates the support for its proposed rule.

COMMENT: Two commenters stated that carriers must use valid statistical methods. One commenter suggested that the Department consider proposing the following alternative language: "(f) A carrier or its agent shall not use extrapolation as its sole basis for calculating adjustments to claims previously paid, unless it employs valid statistical methods, including a valid random sample, and the case involves allegations of fraud or repeated or systematic abuse, or the extrapolation is used as part of a litigation, arbitration or any other dispute resolution procedure concerning those claims. In particular, a carrier shall not automatically offset an amount it claims is due based only on extrapolation against future claims until the carrier has given the provider a reasonable opportunity to respond in writing or in person."

RESPONSE: While the Department agrees with the commenter that a carrier should not be permitted unilaterally to impose offsets against provider claims, the Department does not have the resources or expertise to evaluate statistical methodology.

COMMENT: One commenter suggested that the Department's proposal should expressly state that it applies only to binding extrapolations (that is, where the claimant is required, by prior contract, to refund payments based on the carrier's extrapolation). The commenter further stated that to retain control over the use by carriers of "binding" extrapolations, the Department should consider requiring that a carrier's use of binding extrapolations be approved in advance by the Department. The commenter suggested that the Department consider the following language:

"(f) 1. No carrier or its agent shall require any person to be bound

by extrapolation as a basis for calculating adjustments to claims

previously paid without the Department's prior approval of the

extrapolation methodology; absent such prior approval, adjustments

to claims previously paid shall be based only on actual identifiable error(s)

in the submission, processing or payment of a particular claim(s).

2. Subsection (f)1 shall not be construed to prohibit or

limit the use of extrapolations to project overpayments of claims

in any of the following circumstances:

i. where the extrapolation is non-binding,

ii. in judicial or quasi-judicial proceedings,

iii. in governmental administrative proceedings,

iv. where relevant records have been altered or


v. where relevant records are not available, or

vi. where there is clear evidence of claim fraud

or abuse."

One commenter suggested that the Department's proposal should expressly state that it does not apply to proceedings before a judicial or administrative tribunal. The commenter indicated that it assumed that the Department did not intend to prohibit carriers involved in judicial or administrative proceedings from proving their overpayments by the use of expert testimony in such proceedings or to control the proofs carriers may introduce therein.

One commenter suggested that the Department's proposal should expressly state that it does not apply where relevant documentation is missing or appears to have been altered and/or where there is reasonable suspicion of fraud and abuse. The commenter stated that carriers sometimes face the challenge of proving the amount they have overpaid to a provider who has altered and/or disposed of relevant records. Sometimes, carriers are able to obtain copies of a provider's records for a sample of its claims, but then are denied subsequent access. The unavailability of genuine records precludes the individualized review of additional claims. If the Department's amendment were to prohibit extrapolation based on the available documentation, wrongdoers would unjustly benefit at the expense of their victims, and prospective wrongdoers would have cause to "lose" relevant documentation.

The commenter additionally stated that even where all of a provider's documentation remains intact, perpetrators of fraud should not be immune from extrapolations so long as the perpetrator has the ability to provide an independent accounting (so as to transfer the burden of individualized claim review to the provider who caused the problem).

RESPONSE: The Department agrees with the commenters, and as mentioned above, is revising the rule by including limited exceptions to the extrapolation prohibition.

The Department's reproposed amendment includes the originally proposed subsection at N.J.A.C. 11:22-1.6(f) prohibiting the use of extrapolation as a basis for calculating adjustments to claims previously paid, and stating that actual error is the only permissible basis for calculating adjustments to previously paid claims. The reproposed amendment also includes additional paragraphs within this subsection that contain exceptions to the prohibition on the use of extrapolation.

A 60-day comment period is provided and, therefore, pursuant to N.J.A.C. 1:30-3.3(a)5, the proposal is not subject to the provisions of N.J.A.C. 1:30-3.1 and 3.2 governing rulemaking calendars.

Social Impact

This reproposed amendment will have a favorable impact on claimants because they will not be subjected to monetary charges imposed on them by carriers for errors in paid claims that claimants never may have made. The Department anticipates that carriers who may currently engage in this extrapolation practice will react unfavorably to this reproposed amendment. Those carriers, however, should recognize the unfairness of such a practice to claimants. The Department's reproposed amendment permits the use of extrapolation in certain instances. In those cases, its use should prove to be favorable to both claimants and carriers.

Economic Impact

This reproposed amendment will have a favorable impact on all claimants because they will not have to pay charges imposed on them by carriers that have been adjusting paid claims by extrapolating. Carriers that have been using extrapolation as a basis for adjusting previously paid claims will be unfavorably impacted by this reproposed amendment because they will no longer be able to collect charges imposed on claimants under this method. Carriers will, however, be permitted to continue to use extrapolation in certain instances, which are set forth in the reproposed amendment. The impact on the Department will be negligible because the Department will absorb any administrative or enforcement costs associated with this amendment.

Federal Standards Statement

A Federal standards analysis is not required because this reproposed amendment is not subject to any Federal standards or requirements.

Jobs Impact

The Department does not anticipate that this reproposed amendment will result in the generation or loss of jobs.


Agriculture Industry Impact

This reproposed amendment has no impact on the agriculture industry.

Regulatory Flexibility Analysis

This reproposed amendment may apply to some carriers that constitute "small businesses" as that term is defined in the Regulatory Flexibility Act, N.J.S.A. 52:14B-16 et seq. The amendment prohibits carriers from using extrapolation as a basis for calculating adjustments to claims previously paid, with some exceptions. In those cases where extrapolation is prohibited, carriers will need to employ a different methodology for determining the suitability of making adjustments to previously-paid claims. The costs of complying with this prohibition are discussed in the Economic Impact above. It is not anticipated that compliance will require employing professional services. The requirement applies uniformly, regardless of the business size of the carrier, because the unfairness of the prohibited practice to claimants is unrelated to carrier size.

Smart Growth Impact

The reproposed amendments have no impact on the achievement of smart growth and the implementation of the State Development and Redevelopment Plan.

Full text of the proposal follows (additions indicated in boldface thus; deletions indicated in brackets [thus]):

11:22-1.6 Denied and disputed claims

(a) - (e) (No change.)

    1. Carrier adjustments to claims previously paid shall be based only on actual identifiable error(s) in the submission, processing or payment of a particular claim(s), and shall not be based on extrapolation, with the following exceptions:

    1. Where the extrapolation, including the method, is non-binding;
    2. In judicial or quasi-judicial proceedings, including arbitration;
    3. In governmental administrative proceedings;
    4. Where relevant records required to be maintained by the provider have been altered, reconstructed or are unavailable;
    5. Where there is clear evidence of claim fraud or abuse by the provider.