Federal Court Strikes DOJ's Risk Adjustment False Claims Act Case - For Now

Troutman Pepper

Pepper Hamilton LLP

On October 5, a federal district court in California dealt a significant setback to the government’s efforts to extend False Claims Act (FCA) liability to Medicare risk adjustment submissions. In the closely watched case, commonly known as “Swoben,” the government partially intervened in a whistleblower lawsuit and asserted a number of FCA claims against UnitedHealth and related entities on the theory that improper code submissions led to inflated risk scores under the Medicare risk adjustment program. The federal court dismissed the government’s claims, finding that the government had not established viable claims in its complaint. While the court’s decision represents a significant setback to the government, it did not land a knock-out blow. The government has the opportunity to amend its pleading and set forth its case. Insurers that participate in risk adjustment programs — whether through Medicare Advantage or other programs — should not assume that the risk of such claims has passed.

Risk Adjustment

Under the Medicare Advantage program, private insurers offer Medicare products to enrollees and, in return, receive a monthly payment from CMS for each enrollee. This payment is not altered by the amount of services that an enrollee consumes; however, it is adjusted by the plan’s risk level. “Risk” refers to the anticipated costs associated with a plan’s enrollees. Some enrollees are healthy and rarely seek medical treatment; others have a chronic illness and require significant care. “Risk adjustment” refers to a formula that adjusts CMS’s monthly payments to plans based on the risk, i.e., health, of their enrollees. Note, however, risk adjustment is not limited to the Medicare Advantage program. Rather, it is a common practice that also plays a similar (albeit slightly different) role in many state Medicaid programs and the ACA exchanges.

CMS assigns every enrollee a “risk score” based on demographics (e.g., age and sex) and any diagnosed conditions. CMS relies on insurers to submit accurate diagnosis codes, supported by the enrollees’ medical records, to create these risk scores. Risk increases with age and the presence of medical conditions. Thus, a healthy 65-year-old man will have a lower risk score than an 80-year-old woman with lupus. Once the risk adjustment formula is applied, insurers with sicker enrollees should receive increased payments.

To ensure that submitted diagnosis codes are valid, insurers commonly retain coding companies to perform “retrospective reviews” of their enrollees’ medical records. If the insurer discovers verifiable diagnosis codes not yet submitted to CMS, it may submit them. At the same time, if the review shows that certain code submissions cannot be validated, CMS would expect the insurer to retract that code. Importantly, the insurer must attest to the accuracy and validity of its submissions to CMS.

(Alleged) Fraud in Risk Adjustment

The FCA prohibits an individual from knowingly submitting a false claim for payment to the government. In Swoben, the government sued UnitedHealth and its related entities, alleging that they violated the FCA by attesting to the validity of their risk adjustment code submissions, despite knowing that their retrospective reviews were one-sided and inadequate. According to the government, UnitedHealth hired a coding vendor to perform a “blind” and “one-sided chart review” in which it reviewed enrollees’ medical records and listed applicable diagnosis codes, but failed to compare those results to submitted diagnosis codes. UnitedHealth then allegedly used this review to submit new diagnosis codes, but not to identify and report erroneous coding, thus failing to “look both ways.” The government also argued that it was improper for UnitedHealth to subsequently allow one of its providers, Healthcare Partners, to self-conduct the review of the coding vendor’s results. Because UnitedHealth purportedly knew or should have known that these chart reviews were inadequate, its attestations to CMS were allegedly fraudulent.

The Court’s Decision

The district court dismissed the complaint in its entirety, finding that the government’s FCA allegations failed on multiple levels.

First, the government failed to adequately plead intent under the FCA. As stated by the court, “A complaint may not rely on the notion that a corporation has a ‘collective scienter’ separate from the scienter of any actual human.” The government failed to meet this standard, as it vaguely alleged that the United defendants submitted attestations that they knew were false. Because the government never identified who signed the attestations, or alleged that those signatories knew or should have known that the attestations were false, the court found its pleadings inadequate.

Second, the government failed to meet the Supreme Court’s requirements for pleading materiality under the FCA. In 2016, the Supreme Court called for strict enforcement of the FCA’s materiality element in Universal Health Services v. United States ex rel. Escobar. The Court explained that the materiality showing requires complaints to allege that the violations at issue were “so central . . . that the [government] would not have paid these claims had it known of these violations.” When complaints fall short of this “demanding” and “rigorous” standard, courts may grant a defendant’s motion to dismiss. Here, the California district court found that the government’s complaint contained only conclusory allegations of materiality — e.g., the defendants “knowingly made, used, or caused to be made or used a false Risk Adjustment Attestation material to a false or fraudulent claim” — and entirely failed to allege that the government would have withheld UnitedHealth’s risk adjustment payment had it known about United’s review process. Accordingly, the court found the government’s complaint (once again) inadequate.

Third, the government failed to comply with Federal Rule of Civil Procedure 9(b), which required the government to identify “with particularity” the role of each defendant involved in the alleged fraud. The government’s complaint was a “classic ‘shotgun pleading’” that lumped all of the UnitedHealth entities together.

Finally, the court dismissed the government’s “reverse claims theory” — i.e., the theory that UnitedHealth submitted a false attestation that was material to its obligation to repay certain risk adjustment payments — but only on the grounds that the whistleblower had waived the claim.


  • The court’s decision shows that the government will be held to the pleading standards established in Escobar and prior precedent. It is not enough for the government to simply assert vague allegations that fail to identify the name and role of each individual and corporate entity, and/or fail to allege that the government would have refused payment had it known of fraudulent conduct.
  • That said, the court did not reject the government’s theories of liability on the merits, and its opinion allows the government to seek leave to amend its complaint. If the government is able to “fill in the blanks” according to the court’s instructions, the court will need to decide whether these theories have merit. If they do, this case could have real impact on how insurers conduct their risk adjustment submissions and reviews and could encourage further whistleblower actions.
  • Risk adjustment is a common practice in the health insurance industry, and it is plainly a focus of government enforcement. Swoben is not the only case pending on a theory of FCA liability for risk adjustment coding submissions. Moreover, the Office of Inspector General’s “Active Work Plan” indicates this is an area of focus and it will be looking closely at payments made under the Medicare Advantage risk adjustment program.
  • This court’s opinion was a victory for UnitedHealth, but it is not the end of the story. Risk adjustment participants should continue to monitor developments in this area. Under the current landscape, even with the Swoben decision, it is important for risk adjustment participants to be cautious in their retrospective reviews of submitted diagnosis codes. It may be more prudent to conduct “bi-directional” reviews, meaning that insurers should notify CMS of all coding changes, including those that would decrease the insurer’s risk adjusted payment. The insurer should also make sure that the individual signing the attestation is aware of the review process and is able to truthfully assert that the information is correct to the best of his/her knowledge.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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