Skin Substitutes: $3.2 Million ALJ Decision For Florida Wound Care Practice

Foley & Lardner LLP (Foley) secured a fully favorable Administrative Law Judge (ALJ) decision overturning $3,261,046.50 in Medicare overpayments assessed by the Centers for Medicare & Medicaid Services (CMS) against a Florida wound care clinic. Specifically, the ALJ overturned the Qualified Independent Contractor’s (QIC) determinations involving multiple beneficiaries and claims for skin substitute grafts and dermal grafts that relied solely on the products’ Q-code status to characterize them as investigational and experimental (and thereby preclude Medicare coverage).

Heightened Scrutiny for Wound Care Products

Skin substitute products or human cells, tissues, and cellular tissue-based products (HCT/Ps) have become subject to heightened scrutiny from the Department of Health & Human Services, Office of Inspector General (OIG), and CMS in recent years, with regulators citing increased utilization and expenditures as a basis for further review.¹ Indeed, Medicare spending for HCT/Ps has risen from $256 million in 2019 to over $10 billion in 2024.² CMS seeks to reduce gross fee-for-service program spending for HCT/Ps by $19.6 million in 2026 by reimbursing HCT/Ps as incident-to supplies as opposed to biologicals, despite regulation of HCT/Ps by the U.S. Food & Drug Administration (FDA).

In March 2025, CMS issued controversial Local Coverage Determinations (LCDs) for Skin Substitute Grafts/Cellular and Tissue-Based Products for the Treatment of Diabetic Foot Ulcers and Venous Leg Ulcers that was scheduled to become effective in January 2026. The new LCD would have dramatically limited the number of HCT/Ps covered by Medicare. Although CMS ultimately withdrew the LCD in December 2025, a target focus of CMS is still to reduce alleged spending waste for HCT/Ps.³ Accordingly, heightened scrutiny by OIG and CMS has caused wound care providers to face increased Medicare audits, overpayment demands, and recoupment actions, requiring such providers to navigate the multi-level Medicare appeals process.

Improper Characterization of Products as Investigational and Experimental

In this particular case, the Florida wound care clinic (Clinic) faced overpayment demands claiming, among other things, that the application of certain skin substitutes products to the beneficiaries’ non-healing wounds were investigational and experimental (and therefore not covered by Medicare). Foley advocated extensively on behalf of the Clinic, responding with a robust defense strategy to unfavorable decisions from the Medicare Administrative Contractor (MAC) and QIC with arguments rooted in Medicare policy, professional coding guidance, and FDA documentation indicating the safety and efficacy of the products.

Notably, the QIC improperly upheld the initial overpayment demand on new grounds that were not identified in the original overpayment determination, claiming that Q-codes used to bill the products indicated that the products were investigational and experimental. However, in the favorable decision, the ALJ rejected this argument and cited CMS’ guidelines on Q-codes, noting that such codes are only established to identify drugs, biologicals, and medical equipment or services not identified by national HCPCS Level II codes, but for which codes are needed for claims processing.

The ALJ’s favorable decision underscores that MACs or QICs may not uphold overpayment determinations by labeling HCT/Ps as investigational or experimental solely because they are Q‑coded. As Medicare scrutiny of HCT/Ps continues, this decision offers instructive guidance for wound care providers facing aggressive recoupment efforts and highlights the critical advantage of a proactive, well‑coordinated defense supported by experienced health care counsel. Wound care providers seeking counsel to navigate overpayment demands or the complex regulatory landscape for HCT/Ps are encouraged to contact the authors.

Footnotes

1. OIG, Medicare Part B Payment Trends for Skin Substitutes Raise Major Concerns About Fraud, Waste, and Abuse (Sept. 8, 2025).

2. CMS, CMS Modernizes Payment Accuracy and Significantly Cuts Spending Waste (Oct. 31, 2025).

3. CMS, Final Local Coverage Determinations (LCDs) for Certain Skin Substitutes Withdrawn (Dec. 24, 2025).

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