As providers work tirelessly to furnish essential health care services to the elderly, disabled and infirm, they must navigate the DMAS Provider Agreement as well as labyrinthine federal and state regulations to ensure that services are documented in a manner acceptable to the Department. Let’s face it: none of us are perfect. When a provider (through its many employees) undertakes to document each and every health care service it performs, it will at times fall short of perfect compliance with the Provider Agreement and DMAS regulations. For this reason, among others, providers dread a DMAS audit, where the provider’s documentation is placed under a microscope and seemingly any deviation from the regulations could result in a highly-disruptive retraction of payment.
Fortunately, recent case law holds that minor mistakes or gaps in compliance do not justify a retraction of payment under all circumstances. In Psychiatric Solutions of Virginia, Inc. v. Finnerty, commonly referred to as “Whisper Ridge,” the Court of Appeals of Virginia held that ordinary contract law principles are applied to determine whether a provider’s noncompliance with the Provider Agreement justifies a retraction. This is significant because contract law does not condition the right to payment for services on perfect compliance with contract obligations. Rather, contract law makes a distinction between breaches of contract that are “material” breaches and those that are “de minimis” breaches. For a breach of contract to be “material,” it must “fail to do something that is so fundamental to the contract that failure to perform that obligation defeats an essential purpose of the contract.” Thus, notwithstanding less-than-perfect compliance with the Provider Agreement, a provider is still entitled to payment for health care services where the noncompliance did not defeat the essential purpose of the agreement.
In the recent decision of Sentara Enterprises v. DMAS, the Department sought to retract nearly $200,000 in payments for the provision of enteral nutritional supplements to Medicaid beneficiaries on the grounds that Form DMAS-115 was (i) not signed by a physician and (ii) did not include the recipient’s height. Though the Department conceded that the services were actually and satisfactorily provided, it argued that Whisper Ridge did not apply to these “de minimis” regulatory violations because the retractions were prompted by a lack of regulatory compliance, as opposed to noncompliance with the Provider Agreement at issue in Whisper Ridge. The court disagreed with the Department, noting that “[t]he statutes and regulations governing Medicaid reimbursement only apply to providers who have signed participation agreements.” Consequently, the court held that “principles of contract law should apply to any alleged violation, whether found in statute, a regulation, or some other agency guidance document.” Applying these principles, that court held that the nearly $200,000 retraction was not justified by these “de minimis” breaches.
Sentara Enterprises and Whisper Ridge provide a powerful defense to providers facing retractions for minor mistakes and deficiencies in documentation identified by the Department in a DMAS audit. However, an effective defense of a DMAS audit must be established well before the audit is appealed to the circuit court, and therefore it is crucial that the provider involve experienced counsel early in the process.
 54 Va. App. 173, 676 S.E.2d 358 (Va. Ct. App. 2009).
 Horton v. Horton, 254 Va. 111, 115, 487 S.E.2d 200, 203–04 (1997).
 No. CL12-2742, 85 Va. Cir. 338 (Va. Cir. Ct. Sept. 13, 2012) (City of Norfolk).