What Happens if You Accidentally Hire an Excluded Individual? (42 CFR § 1001.1901)

For small healthcare practices, hiring decisions carry significant compliance implications. Federal regulations prohibit payment for items or services furnished, ordered, or prescribed by excluded individuals or entities. When excluded persons are involved in federally reimbursed activities, related claims are not payable, exposing practices to financial loss and regulatory scrutiny. This article explains the effect of exclusion, outlines common risk areas, and provides practical tools to help small practices manage exclusion-related exposure.

Small healthcare practices frequently operate under staffing pressures that require rapid hiring and reliance on part-time staff, independent contractors, and vendors. In these environments, exclusion screening is sometimes overlooked or misunderstood.

Federal exclusion rules apply based on participation in federally reimbursed services, not on job title or employment status. If an excluded individual furnishes, orders, or prescribes items or services connected to a federal healthcare program claim, payment for those claims is prohibited. Understanding how exclusion operates, and how it affects everyday staffing decisions, is essential for protecting a practice’s financial stability.

Regulatory Overview: Scope and Effect of Exclusion

What 42 CFR § 1001.1901 Establishes

42 CFR § 1001.1901 governs the scope and effect of exclusion from participation in federal healthcare programs. The regulation provides that:

• Exclusion applies across Medicare, Medicaid, and all other federal healthcare programs.

• No payment may be made for any item or service furnished by an excluded individual or entity after the effective date of exclusion.

• Payment is also prohibited for items or services furnished at the medical direction of, or on the prescription of, an excluded individual when knowledge or reason to know exists.

• Excluded individuals may not submit claims or take assignment of claims during the exclusion period.

The regulation focuses on payment prohibition, rather than hiring practices or screening methods.

How Exclusion Affects Small Practices

When excluded individuals participate in activities connected to federal healthcare program claims, the claims themselves are not payable. This effect applies regardless of whether the excluded individual is a full-time employee, part-time worker, or independent contractor.

The regulation does not distinguish between clinical and non-clinical roles. The determining factor is whether the individual’s work is connected to items or services for which federal payment is sought.

Background Checks and Exclusion Status

Standard background checks, license verification, and reference checks do not determine whether an individual is excluded from federal healthcare programs. An individual may pass these checks while still being excluded.

Exclusion status is a separate regulatory condition that directly affects payment eligibility under federal healthcare programs. Awareness of this distinction is critical for small practices that rely on multiple hiring and contracting pathways.

A small internal medicine clinic hired a part-time billing clerk to manage Medicare and Medicaid claims. The clinic verified experience and references but did not review federal exclusion information.

Months later, a data review identified that the billing clerk had been excluded from participation in federal healthcare programs several years earlier. Claims associated with her work were determined to be non-payable under federal rules.

Consequences

• The clinic was required to repay improperly reimbursed claims.

• Additional enforcement review followed due to the volume of affected claims.

• Internal corrective actions were implemented to address staffing controls.

Lesson Learned

Administrative roles connected to billing and claims processing can create exclusion-related exposure. When excluded individuals are involved in claim-related activities, payment prohibition applies regardless of intent or awareness.

What Happens When an Excluded Individual Is Involved

Immediate Effects

• Claims become non-payable under federal healthcare programs.

• Reimbursement received for affected claims may need to be returned.

• Future claims connected to the excluded individual are denied.

Broader Impact

• Financial disruption from recoupments

• Increased audit and enforcement scrutiny

• Operational strain on small practices

1. Identify Covered Roles
   Determine which staff, contractors, or vendors are involved in furnishing, ordering, prescribing, or billing federally reimbursed services.

2. Review Exclusion Information
   Confirm whether individuals involved in those roles appear on federal exclusion resources.

3. Document Reviews
   Maintain records demonstrating that exclusion information was reviewed.

4. Monitor Ongoing Relationships
   Periodically reassess individuals engaged in federally reimbursed activities.

5. Respond Promptly
   If exclusion is identified, discontinue involvement in federally reimbursed services as required.

Assuming Only Clinical Staff Create Risk

Billing, administrative, and support roles can still affect payment eligibility.

Treating Exclusion as a One-Time Concern

Exclusion status can change over time.

Relying Solely on Background Checks

Background checks do not address exclusion status.

Effective exclusion awareness requires consistency. Practices that integrate exclusion considerations into staffing discussions, contracting decisions, and leadership review are better positioned to manage risk.

Embedding these considerations into routine operations supports accountability and demonstrates attention to regulatory obligations.

Under 42 CFR § 1001.1901, items or services furnished, ordered, or prescribed by excluded individuals or entities are not payable by federal healthcare programs. This payment prohibition applies regardless of employment status or role type.

For small practices, understanding how exclusion affects payment, and ensuring awareness of who is involved in federally reimbursed activities, helps reduce financial exposure and operational disruption.

Compliance should be a living process. By leveraging a regulatory tool, your practice can maintain real-time oversight of requirements, identify vulnerabilities before they escalate, and demonstrate to both patients and payers that compliance is built into your culture.

1. 42 CFR § 1001.1901 – Scope and effect of exclusion

2. OIG Exclusions Program (LEIE)
   

3. CMS Compliance Guidance for Small Practices