As the audits and investigations of wound care procedures with skin substitutes march on, providers who were audited once by a CMS unified program integrity contractor (UPIC) should prepare for a second round. And if the UPIC doesn’t return after identifying errors, it doesn’t necessarily mean the audit was put to bed, an attorney said. The UPIC may refer the provider to the HHS Office of Inspector General (OIG) or U.S. Department of Justice (DOJ) even if there were recoupments in the first round.
“We have mountains of these cases,” said attorney Stephen Bittinger, with Polsinelli. He recommends internal audits and repayments if the provider’s billing for skin substitutes wasn’t medically necessary or didn’t comply with an existing local coverage determination (LCD). Skin substitutes are covered under certain circumstances for the management of chronic, non-healing wounds.
“If [providers] have non-defensible claims on these skin substitutes, they have an overpayment under the 60-day rule,” Bittinger said. Repaying it may short-circuit an audit. “Self-auditing allows providers to examine if the refund should only cover the reimbursement for the device and application payment as there may be” a basis to keep reimbursement for medically necessary debridement and an evaluation and management service. He added that some providers might have grounds to sue the skin substitute manufacturer and/or distributor to recover repayments. Bittinger filed a lawsuit to that effect and “it’s just the first of many to come.”
What Medicare auditors consider defensible wound care procedures with skin substitutes will be narrower when CMS implements a new LCD that applies nationally, as expected. The LCDs—Skin Substitute Grafts/Cellular and Tissue-Based Products for the Treatment of Diabetic Foot Ulcers and Venous Leg Ulcers—will be in effect for all Medicare administrative contractor jurisdictions Jan. 1 (unless CMS delays it again or abandons it).[i]
That’s something to keep in mind as CMS cracks down on skin substitutes through audits and a proposed Medicare regulation that overhauls payment for the pricey products, which potentially could turn down the audit heat eventually. Medicare spending on skin substitutes ballooned from $250 million in 2019 to $10 billion in 2024, a 40-fold increase, while the number of patients getting them only doubled, CMS said in the 2026 proposed Medicare Physician Fee Schedule (MPFS) rule.
“If you’re using a human cells, tissues and cellular and tissue-based products (HCT/P) device for healing, it’s likely to be non-homologous use and it’s not appropriate under an exception for HCT/Ps,” Bittinger said. “It would have been experimental and investigational.” HCT/Ps consist of human cells or tissues that are intended for implantation, transplantation, infusion or transfer into a human.
For example, dermatologists shouldn’t routinely use skin substitutes for acute surgical wounds, Bittinger said. “I don’t care if the basil cell carcinoma you removed is on the forehead and this expensive device will make the forehead pretty,” he said. “That’s not what it’s intended for. That’s abundantly clear from the prior and proposed LCDs.”
He said “the scariest issue for providers” is the possibility they have an “improper purchasing arrangement because we have improper volume discounts out the wazoo.” For example, he has seen inappropriate consignment arrangements where the physician and manufacturer/distributor split the Medicare reimbursement for the skin substitute instead of the physician buying it from the manufacturer/distributor and billing for the cost.
Lawsuit: Manufacturer Touted Coverage
Another sign of the turmoil in the skin substitutes world is the possibility of lawsuits against manufacturers. For example, Texas-based Heights Dermatology, a chain of dermatology clinics, filed a lawsuit in May alleging that Stimlabs LLC, a regenerative medicine manufacturer and supplier, marketed its products as always covered by Medicare.[ii] Heights Dermatology bought 45,000 units of its products over two years. But the products allegedly weren’t always covered by Medicare, and Heights Dermatology found out the hard way in UPIC audits, leading to the recoupment of almost $5 million, according to the lawsuit. Heights Dermatology lost its appeal before an administrative law judge and has repaid CMS.
Jason Bring, an attorney for Stimlabs, said Heights Dermatology “voluntarily dismissed the lawsuit. It’s no longer pending.” But Bittinger said the dismissal “has nothing to do with the merits of the case and the two sides are in settlement negotiations.” If Heights Dermatology refiles, it will do it in state court. Bittinger said Stimlabs “just disclosed that one of the owners lived in the same state as my client, which means it needs to move from federal court to state court.”
According to the lawsuit, the FDA “regulates the processing or manufacturing, distribution, and marketing of cells, tissues, and cellular tissue-based products (“HCT/Ps”).” HCT/Ps are governed by Sec. 361 of the Public Health Service Act and regulations at 21 C.F.R. Part 1271, which means they’re not regulated as drugs, biologics, or medical devices, don’t receive FDA approval and aren’t obliged to go through an FDA premarket review. Other HCT/Ps are regulated by Sec. 1271 if they meet certain criteria (e.g., intended for homologous use only, which means the skin substitutes perform the same function in the recipient as in the donor).
“Because FDA premarket review or approval is not required, it is the responsibility of each manufacturer or tissue processor to determine prior to marketing whether their HCT/Ps meet the criteria under Part 1271,” the lawsuit said.
The FDA decides whether an HCT/P falls under Part 1271 based on its intended use. For example, the FDA considers homologous use of amniotic membrane products to “be any function where the product serves as a selective barrier to protect against the environment,” the lawsuit said. But “marketing amniotic membrane products as supporting bone regeneration, wound healing, or reducing scarring or inflammation is not homologous use and not permissible under FDA regulations,” according to the lawsuit.
Heights Dermatology alleged that Stimlabs marketed products “solely as HCT/Ps under Part 1271 and therefore did not have FDA approval or clearance.” But the Stimlabs allegedly marketed the skin substitutes as Medicare covered during certain periods of time.
Common Errors With Skin Substitutes
There are themes to the errors identified in audits of wound care procedures with skin substitutes. For example, because physicians may apply skin substitutes on wounds that have responded to more conservative therapy, their claims could be at odds with Medicare coverage rules. In other words, it could be the success of conservative wound therapy—not the failure to provide or document it--that may doom a claim for skin substitutes.
“If the patient came in with a 30-centimeter wound to start and they have been receiving wound therapy for the past month and now their wound is only two centimeters, they have not failed standard wound therapy,” said Amy Bailey, a principal of HBE Advisers LLC. Even though the wound is almost healed from the provision of standard wound therapy, including debridement and compression wrapping, physicians and other clinicians “often proceeded to skin substitutes because the wound isn’t totally healed. It doesn’t meet core coverage requirements.”
Another way to trip up claims is failure to document conservative treatment before applying skin substitutes, which are supposed to be a last resort for chronic, non-healing wounds. The pending LCDs cover skin substitutes for diabetic foot ulcers that have “failed to achieve at least 50% ulcer area reduction” for at least four weeks. The same goes for chronic, non-infected venous leg ulcers. The documentation should show “Increased size or depth, no change in baseline size or depth, or no sign of improvement or indication that improvement is likely (such as granulation, epithelialization, or progress towards closing).”
But Bailey said sometimes documentation is too vague. It might say something like “the patient has had a wound for 40 days. Wound has failed to heal so we will go ahead with skin substitute.”
Here are other ways compliance may go awry:
- Continuing to apply skin substitutes even though the size of the wound has grown. “It’s clearly not working,” Bailey said. “You have to be able to demonstrate the wound has decreased in size before you use another skin substitute.”
- Applying skin substitutes to patients with active infections. “One of the strict contraindications in this coverage policy is for patients who have active infections in their wounds,” Bailey said. “We have seen in a number of these audits that the medical records are abundantly clear the patient has a wound infection.”
- Exceeding frequency limitations, Bailey said. An existing LCD (which is in effect until the national version supersedes it) states that more than 10 applications to treat a single wound during a 12-week period isn’t considered medically necessary “and will be subject to review.” The LCD also states that “separately billed repeated use of the skin substitute after 12 weeks for a single wound or episode is non-covered.
Payment Changes May Lower the Audit Volume
Audits may eventually let up if CMS finalizes a new payment methodology in the proposed 2026 MPFS rule because it would take away the lucrative incentive to bill for skin substitutes, appropriately or not. “The great thing is the devices work wonderfully and good manufacturers trying to do the right thing will figure out a way to adjust and patients will be helped,” Bittinger said. He noted there are about 60 skin substitute manufacturers, many of which market their products as HCT/Ps.
CMS treats skin substitutes as drugs or biologics when they’re applied in physician offices and wound care clinics and pays average sales price plus 6% under the MPFS.
Now it’s proposing to pay for many skin substitutes as incident-to supplies when they’re used for a procedure in non-facility settings and hospital outpatient departments. CMS also would categorize skin substitutes consistent with their FDA regulatory status: 361 (HCT/P); pre-market approvals; or 510(k)s.
If CMS finalizes the new methodology, the payment for skin substitutes in all three categories nationally will be $125.38 per square centimeter, Rock said. Providers would bill the CPT code for the procedure plus the HCPCS code for the supply, said Valerie Rock, a principal at PYA. CPT codes 15271-15278 describe the application based on wound size and anatomical location, she said.
“This isn’t all skin substitutes,” Rock explained. “Products (biologicals) licensed under Sec. 351 will continue to be reimbursed under the ASP methodology,” including FDA-regulated HCT/Ps.
Skin substitutes that are HCT/Ps and FDA cleared under 510K “are like a covering over a wound,” while PMAs treat the wound, Rock said. CMS “acknowledges the difference between PMA supplies and the other two but they are carving out these Sec. 351 products that meet the definition of biologicals” and will codify that definition accordingly.
