If you’ve been in healthcare compliance for any length of time, you’re probably feeling the whiplash from CMS’ latest regulatory pivot. The agency recently revised its Medicare overpayment rule under 42 CFR § 401.305(a)(2), and the implications are significant—especially for those responsible for internal audits and compliance programs. 

Healthcare providers, compliance officers, and internal audit teams must now carefully assess how they identify, investigate, and report overpayments to avoid False Claims Act (FCA) liability. This article explores the new regulatory framework, its impact on internal audits, and best practices for compliance in response to this policy shift. 

A Fundamental Shift in Standards 

The key regulatory update redefines when a Medicare overpayment is considered “identified.” Previously, under the “reasonable diligence” standard, providers had an affirmative duty to actively search for overpayments. Now, Medicare overpayment is considered identified only when a provider “knowingly” receives or retains it, shifting the burden away from proactive detection. This “knowingly” standard borrows directly from the False Claims Act, encompassing: 

  • Having actual knowledge 
  • Showing deliberate ignorance 
  • Demonstrating reckless disregard 

This means you are no longer required to conduct proactive audits specifically looking for Medicare overpayments. But—and this distinction is important—once you identify an overpayment, you still must act promptly. 

Small healthcare team collaborating on compliance strategies to address Medicare overpayment risks and regulatory requirements.

The Ticking Clock: New Timeframes for Action 

The new breathing room for investigations may be the most welcome change for compliance officers. Previously, you had just 60 days to refund an overpayment after identification. The revised rule introduces a an extended timeline: 

  • You now get 180 days to conduct a good-faith investigation once a potential overpayment lands on your radar.
  • During this investigation period, the 60-day repayment clock stops ticking. 
  • After your investigation wraps up (or 180 days pass), the 60-day countdown resumes. 

This extension acknowledges the reality that thorough investigations take time. However, it also creates a clear expectation that you won’t drag your feet. 

What This Means for Your Internal Audit Function 

For those overseeing internal audits, these changes demand a sharper focus on precision and documentation. Your audit teams must understand precisely when an overpayment crosses the threshold of being “identified” under the new definition. 

Consider this scenario: Your audit uncovers a pattern of incorrectly coded outpatient visits. Under the previous standard, the mere discovery of this issue triggered your obligation to investigate and report more deeply. Now, the trigger point is more nuanced—but potentially more dangerous if mishandled. 

The risks of getting this wrong are substantial. The False Claims Act still looms large, with its treble damages and civil penalties for knowingly failing to return overpayments. If your internal audit identifies an issue and your organization fails to act, you’re potentially looking at a perfect FCA liability storm. 

Adding to the stakes, regulatory agencies and whistleblowers routinely use internal audit reports as smoking guns in FCA cases. If you conduct an audit and identify problems but fail to address them, you’ve essentially created a paper trail of liability. 

Practical Steps for Staying Compliant 

How does one navigate these choppy regulatory waters? Here are some practical approaches that go beyond the usual compliance boilerplate:

     1. Reimagine Your Compliance Policies

Your existing policies likely reflect the old “reasonable diligence” standard. It’s time for a ground-up review: 

  • Clearly define the moment when an overpayment becomes “identified” in your internal policies. 
  • Create explicit protocols linking audit findings to compliance actions. 
  • Establish clear accountability for managing the 180-day investigation period. 

Rather than treating this as a tweaking exercise, view it as an opportunity to streamline your compliance processes while maintaining robust protections.

Healthcare professional charting patient data, ensuring compliance with Medicare overpayment regulations and billing accuracy.

  2. Develop a Structured Investigation Playbook

While proactive audits are no longer mandated, you still need a structured approach when potential issues arise: 

  • Create investigation templates that ensure consistency. 
  • Implement milestone tracking to prevent investigation drift. 
  • Use data analytics to pinpoint the scope of potential overpayments quickly. 

A well-designed investigation process serves two purposes: It helps you resolve issues efficiently while creating a defensible record of your good-faith efforts.

     3. Build an Audit Trail That Tells Your Story

If you ever face scrutiny, your documentation will be your first line of defense: 

  • Maintain comprehensive records that show the evolution of your understanding. 
  • Document not just what you found but how you responded. 
  • Create audit logs that demonstrate your adherence to timelines. 

Think of your documentation as telling the story of your compliance efforts—not just checking regulatory boxes.

     4. Make Compliance Part of Your Culture

Regulations change, but a culture of compliance provides enduring protection: 

  • Train your team on recognizing potential overpayments and the implications of the new standards. 
  • Encourage open communication about compliance concerns. 
  • Recognize and reward proactive identification of issues. 

When compliance is woven into your organizational DNA, regulatory changes become opportunities for improvement rather than sources of anxiety. 

The Bottom Line 

The shift from “reasonable diligence” to “knowingly” represents a significant recalibration of expectations. While it may seem to reduce your proactive obligations, it actually creates a more complex compliance landscape where the stakes of getting it wrong remain extraordinarily high. 

By adapting your internal audit approach, strengthening your investigation processes, and maintaining robust documentation, you can navigate this new regulatory environment while protecting your organization’s financial health and reputation. 

To stay compliant, healthcare organizations must: 

  1. Refine audit and compliance policies to align with the new rule. 
  2. Ensure investigations are conducted efficiently within the 180-day timeframe. 
  3. Implement a transparent process for identifying, reporting, and returning overpayments. 
  4. Train employees and compliance teams to understand their responsibilities. 
  5. Maintain strong documentation to demonstrate compliance efforts. 

Remember: The goal isn’t just avoiding penalties—it’s creating a culture where doing the right thing is simply how you do business.