A federal court decision to vacate regulations concerning “overpayments” to Medicare Advantage plans has left open questions about the way the government pays the insurers and pending cases brought by the U.S. Department of Justice.

On September 7, 2018, Judge Rosemary Collyer of the District Court for the District of Columbia agreed with plaintiffs in the case that the Centers for Medicare and Medicaid Services’ (CMS) application of the 2014 Overpayment Rule violated the “actuarial equivalence” requirements in the Medicare Advantage program. The plaintiffs in the case—Medicare Advantage insurers in the UnitedHealth Group of companies—were granted summary judgment, and the Overpayment Rule was vacated.

The plaintiffs’ claim, and Judge Collyer’s decision, rests on discrepancies between the way CMS determines payments for services in the traditional (fee-for-service) Medicare program and payments for services in the Medicare Advantage program. CMS is statutorily required to pay Medicare Advantage insurers at a level that is actuarially equivalent to the cost CMS incurs in paying for services in the traditional Medicare program.

In traditional Medicare, payments to doctors are based on the services received by Medicare patients. The providers bill CMS for the services using procedure codes. Doctors are also required to submit diagnosis codes, reflecting the reasons the treated patients sought services from the provider, but payments are based on procedure codes.

In its suit, UnitedHealth argued that providers in traditional Medicare arrangements don’t pay much attention to the diagnosis codes, given their irrelevance to payment. In the Medicare Advantage program, however, diagnosis codes are integral to determining the level of payment to insurers.

In Medicare Advantage, insurers are paid a monthly per capita amount based on the “risk” the Medicare Advantage enrollees will need services and the expected cost of those services. The level of risk applied to the Medicare Advantage population is determined in part by the level of risk identified in traditional Medicare, as determined from the diagnosis codes submitted by providers.

CMS’ payment methodology is intended to ensure that costs in the Medicare Advantage program are actuarially equivalent to costs under traditional Medicare. Judge Collyer’s decision undertook a deeper inspection of the methodology, revealing the discrepancy.

In its analysis of the case, the court noted that CMS treats as valid the diagnosis codes submitted by providers—and used in calculating payments both under traditional Medicare and in Medicare Advantage. But CMS requires Medicare Advantage insurers to validate the diagnosis codes submitted by Medicare Advantage insurers. That means, according to CMS, that each diagnosis code must be supported in the patient’s medical record. To police the requirement, CMS conducts diagnosis code validation (Risk Adjustment Data Valuation or RADV) audits and requires Medicare Advantage insurers to repay “overpayments” based on the rate of diagnosis codes that are determined to be unsupported in medical records.

This gets to an essential point in the case: it is not actuarially sound to compare unaudited figures used to calculate per-capita payments with audited figures used to calculate overpayments. According to the court, the American Academy of Actuaries advised CMS on this point.

The court noted that, when CMS introduced the audit methodology in 2008, insurers pointed to the unaudited vs. audited records discrepancy. CMS responded by adopting an “adjuster” to the results of the RADV audits, incorporating an estimate of the error rate in traditional Medicare. Presumably, then, a rate of unsupported diagnosis codes in a Medicare Advantage plan would be acceptable if it fell within the estimated traditional Medicare error rate.

Critical to the court’s finding is the fact that the adoption of the adjuster was limited to the audit methodology.

Subsequently, the Affordable Care Act (ACA) contained a vague requirement that health plans return all overpayments to CMS to avoid violation of the False Claims Act. The 2014 Overpayment Rule sought to clarify the ACA provision by stating any diagnostic code not adequately documented in a patient’s record would result in an overpayment. The rule further stated that an overpayment is identified whenever a Medicare Advantage insurer determines, or should have determined through the exercise of reasonable diligence, that it had received an overpayment. Such diligence was defined as including, at a minimum, proactive compliance activities to monitor for the receipt of overpayments.

The court noted that the 2014 Overpayment Rule did not adopt an adjuster to account for the incompatibility between the use of unvalidated data to determine payments to Medicare Advantage insurers and audited medical charts to determine overpayments. UnitedHealth argued that the Overpayment Rule, therefore, failed to ensure actuarially equivalent payments to Medicare Advantage insurers.

The plaintiffs also argued that the Overpayment Rule’s obligations apply a negligence standard for purposes of False Claims Act liability, which the plaintiffs said is an unlawful departure from the standard for liability under the False Claims Act itself. The court agreed, saying that what the Overpayment Rule proscribed extended far beyond the False Claims Act and the Affordable Care Act, and CMS lacks the authority to apply it.

In addition to raising questions about the future of CMS’ Medicare payment methodologies, Judge Collyer’s decision to grant UnitedHealth’s motion for summary judgement and vacate the 2014 Overpayment Rule could give considerable weight to insurer arguments in other pending legal cases. Over the last two years, the U.S. Department of Justice joined in whistleblower lawsuits claiming UnitedHealth mischarged CMS and kept inflated Medicare Advantage payments. The claimants cite unsupported diagnosis codes and violations of the False Claims Act.