United States: CMS' Medicare Advantage Overpayment Rule: Arbitrary, Capricious, And Vacated

In a key case being watched by the industry, Judge Collyer of the United States District Court for the District of Columbia issued an opinion today granting UnitedHealthcare's Motion for Summary Judgment in UnitedHealthcare Insurance Co. v. Azar, No. 16-157 (D.D.C.), which challenged CMS' 2014 Overpayment Rule (the "Rule"). Judge Collyer's decision vacated the Rule in its entirety, finding that, by effectively imposing a 100% accuracy requirement on the data that Medicare Advantage organizations ("MAOs") report to CMS for risk adjusted payment purposes, the Rule violated the statutory mandate of "actuarial equivalence" between CMS payments for healthcare coverage under traditional Medicare and Medicare Advantage ("MA"). Moreover, the Court found that the Rule's facilitation of False Claims Act liability for MAOs' failures to engage in "reasonable diligence" overshot CMS' statutory authority, and that its definition of when an overpayment is "identified" was finalized without adequate notice as required by the Administrative Procedure Act. These latter two holdings may also have significant implications in the context of CMS' separate but similar overpayment rule for Medicare Part A and Part B providers.


CMS promulgated the 2014 Overpayment Rule in order to implement the Affordable Care Act requirement that MAOs report and return any overpayments that they identify. Under the ACA, an overpayment must be reported and returned within 60 days after the date on which the overpayment was identified. Failure to return an overpayment within 60 days of identification can lead to "reverse" False Claims Act liability, i.e., for avoiding an obligation to the Government. The 2014 Overpayment Rule includes mirror provisions that apply to Medicare Part D sponsors.

A "Crucial Data Mismatch" Created by the 2014 Overpayment Rule

UnitedHealthcare's case, filed in January 2016, challenged a fundamental imbalance created by CMS' 2014 Overpayment Rule in the way that payments to MAOs are calculated. MA is a program through which Medicare beneficiaries can, instead of enrolling in traditional Medicare and having the federal government directly pay health care providers for the services they receive, enroll in plans offered by private health insurers that contract with CMS. CMS pays MAOs a per member per month amount for each beneficiary enrolled in a plan offered by the MAO.

The monthly capitation payments to MAOs are calculated based on the average per-capita monthly payment for a traditional Medicare beneficiary in a particular county, adjusted for the health risk associated with the beneficiary's particular demographic characteristics and health conditions. This health risk adjustment is calculated using data about traditional Medicare beneficiaries, including diagnosis codes reported to CMS by their physicians, which allow CMS to predict the marginal cost of various medical conditions and demographic characteristics.

Critically, diagnosis codes submitted by physicians do not affect payment from traditional Medicare and are therefore fallible, with error rates suggested to be as high as 20%. As part of the traditional Medicare program, CMS does not engage in any proactive efforts to review or audit these diagnosis codes. Therefore, the risk adjustment data applied to Medicare Advantage payments is likely to reflect significant errors. Indeed – and significant to Judge Collyer's decision – when CMS' contractors audit MAOs under the Risk Adjustment Data Validation ("RADV") program, they must consider the estimated error rate in CMS' payments under traditional Medicare due to errors in diagnostic coding and demand refunds only when an MAO's error rate exceeds that of traditional Medicare.

In the 2014 Overpayment Rule, however, CMS defined "overpayment" to include payments resulting from "any diagnostic code that is inadequately documented in a patient's medical chart" and, further, stated that an overpayment was "identified" whenever an MAO "should have determined through the exercise of reasonable diligence" that it had received an overpayment. Effectively, therefore, the Rule "subjects the insurers to a more searching form of scrutiny than CMS applies to its own enrollee data, thus resulting in a false appearance of better health among Medicare Advantage beneficiaries compared to traditional Medicare participants and systemic underpayments for healthcare costs to Medicare Advantage insurers."

The Mismatch Created a System Where "'Actuarial Equivalence' Cannot Be Achieved"

For several reasons, Judge Collyer found problematic this mismatch between (i) the data used by CMS to create its risk adjustment model and by contractors in RADV audits, and (ii) the data that MAOs must use to identify and refund overpayments. First, the Medicare Advantage statute requires that "the Secretary shall adjust the payment amount" of the payments to MAOs for certain risk factors "so as to ensure actuarial equivalence." Citing an earlier D.C. Circuit case, Judge Collyer opined that "two figures are actuarially equivalent only when they share 'a given set of actuarial assumptions.'" The statutory requirement of actuarial equivalence, therefore, does not allow CMS, in comparing per capita payments to MAOs to payments for services under traditional Medicare, to "happily ignore[] the requirements of the 2014 Overpayment Rule that an insurer repay within 60 days any overpayment, no matter what its degree, about which it knew or 'should have determined through the exercise of reasonable diligence.'" Given these requirements, "the 'expected' value of payments from CMS for healthcare costs under Medicare Advantage plans will be lower than the 'expected' payments CMS itself will make under traditional Medicare, since CMS does not audit or engage in similar self-examination for accuracy of its own records." The Court held that "[t]he consequence [of CMS' 2014 Overpayment Rule] is inevitable" and "establishes a system where 'actuarial equivalence' cannot be achieved." Thus, the Rule failed to satisfy the statutory mandate of actuarial equivalence.

The Rule Was Arbitrary and Capricious

Having determined that the Rule violated the statutory mandate of actuarial equivalence, the Court then determined that the Rule was arbitrary and capricious because CMS had impermissibly abandoned its prior policy that recognized the differences between traditional Medicare and Medicare Advantage data. This policy was principally apparent in CMS' application of an "FFS Adjuster" in the RADV audit process. The purpose of a RADV audit is to determine whether the diagnoses submitted by an MAO to CMS for risk-adjusted payment purposes are supported by medical records. Diagnoses that are determined not to be supported by a medical record are disallowed and any risk-adjusted payments that resulted from the unsupported diagnoses are subject to recoupment. However, recognizing that traditional Medicare's fallible diagnosis coding data is the basis of the Medicare Advantage risk adjustment methodology, RADV auditors hold MAOs accountable only for diagnosis coding error rates that exceed the estimated coding error rates inherent to the traditional Medicare program. UnitedHealthcare also pointed to other CMS publications espousing a similar principle. The Court found that "[a]gency policies and practices may take many forms and still be sufficiently established so that any change in the policy must be explained", and that the practices and publications cited by UnitedHealth sufficiently established the existence of a prior CMS policy. The Court then held that CMS failed to provide a "legitimate reason for abandoning that statutory mandate [of actuarial equivalence]" in the Rule.

The Rule Overshot CMS' Statutory Authority

The Rule's Requirement that MAOs Engage in "Reasonable Diligence" Improperly Extended the Reach of False Claims Act Liability

Despite already having found that the Rule was arbitrary and capricious, the Court also considered UnitedHealthcare's challenge to the Rule's provision that "[t]he MA organization has identified an overpayment when the MA organization has determined, or should have determined through the exercise of reasonable diligence, that the MA organization has received an overpayment." UnitedHealthcare had argued that, in so doing, the Rule effectively and improperly held MAOs liable under the False Claims Act for basic negligence. The Court agreed with UnitedHealthcare, explaining that the False Claims Act imposes liability only for actions taken with actual knowledge, in deliberate ignorance of the truth or falsity of the information, or in reckless disregard of the truth or falsity of the information. However, the Rule effectively extended liability to circumstances in which an MAO "should have determined through the exercise of reasonable diligence, that the MA organization has received an overpayment," i.e., basic negligence. The Court stated that, in so doing, the Rule "extends far beyond the False Claims Act and, by extension, the Affordable Care Act. Not being Congress, CMS has no legislative authority to apply more stringent standards to impose FCA consequences through retaliation."

The Rule's Definition of "Identified" Violated the APA's Notice Requirements

The Court also agreed with UnitedHealthcare that the Rule's statement that an MAO would have "identified" an overpayment when "it has determined, or should have determined through the exercise of reasonable diligence, that the MA organization has received an overpayment" was inconsistent with the proposed rule's definition of "identified", under which an MAO would have "identified" an overpayment when "it has actual knowledge of the existence of the overpayment or acts in reckless disregard or deliberate ignorance of the existence of the overpayment." The Court found the change between these two scienter standards to be "obvious" and a "surprise switcheroo on regulated entities", such that the Rule's definition of "identified" was promulgated without adequate notice as required by the APA.

A Win for Fairness with Potentially Broader Reach

Judge Collyer's opinion took CMS to task for its attempt in the 2014 Overpayment Rule to require MAOs to engage in "proactive compliance" efforts with respect to the accuracy of diagnosis information collected about their members. The opinion relied heavily on the particular statutory language applicable to the MA program, as well as CMS' previous recognition of the data mismatch problems in the context of the RADV audit program. Judge Collyer's clear understanding and careful analysis of the data mismatch created by the Rule have eliminated a critical unfairness established by the Rule.

The impact of Judge Collyer's reasoning, however, may also extend beyond the Medicare Advantage and Medicare Part D context. Her analysis of the Rule's provision that an MAO has "identified" an overpayment when it should have determined the existence of the overpayment through reasonable diligence as effectively and inappropriately applying a basic negligence standard to impose False Claims Act liability has clear application to the similar language used by CMS in the separate overpayment rule applicable to Medicare Part A and Part B providers. It is difficult to predict that this same regulatory language in the Part A and Part B context would not suffer a similar fate, (i.e., a vacating of the rule), or how CMS' adoption of this lower standard for False Claims Act liability could be any less of an overreach in the Part A and Part B context. Likewise, the change between the proposed and final regulatory definitions of "identified" in the MAO context are nearly identical to the change between the proposed and final regulatory definitions of "identified" in the Medicare Part A and Part B overpayment rules. Therefore, it seems likely that Part A and Part B providers were also given inadequate notice of the final definition of "identified." Given these similarities and the apparent applicability of Judge Collyer's analysis, her opinion calls into question the validity of these provisions of the Medicare Part A/Part B overpayment rule.

What's Next?

CMS will likely dust off the proposed overpayment rule, which Judge Collyer noted was consistent with the False Claims Act and Affordable Care Act. Although the 2014 Overpayment Rule was vacated and calls into question the separate but similar rule for Part A and Part B providers, the decision has no impact on the underlying statutory obligation to report and return overpayments.

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