On September 7, 2018, the United States District Court for the District of Columbia vacated CMS’s 2014 Overpayment Rule for Medicare Advantage insurers at 79 Fed. Reg. 29,844, 29,918-25 (the 2014 Overpayment Rule), ruling that the 2014 Overpayment Rule suffers from a “crucial data mismatch” that subjects these insurers to systemic underpayments and increased likelihood of False Claims Act (FCA) liability. In UnitedHealthcare Insurance Co., et al. v. Azar, UnitedHealthcare and several affiliates challenged CMS for perceived inequities in calculations underlying the receipt and potential repayment of costs for Medicare Advantage plans.
The Court ruled that by implementing the 2014 Overpayment Rule, CMS set up a system that would inevitably fail to satisfy the statutory mandate of “actuarial equivalence” between payments under Medicare Advantage and traditional Medicare. In ruling on UnitedHealthcare’s motion for summary judgment, Judge Rosemary Collyer also reasoned that, by implementing the 2014 Overpayment Rule, CMS pulled a “surprise switcheroo” on insurers that imposed a “distinctly different and more burdensome” standard without adequate notice. Click here to read Judge Collyer’s full opinion in UnitedHealthcare Insurance Co., et al. v. Azar, et al., No. 1:16-cv-00157 (Sep. 7, 2018 D.D.C.).
Background
Medicare Advantage (or Part C) insurers must provide, at a minimum, the same level of benefits provided by traditional Medicare. However, unlike traditional Medicare, which pays based on services provided, Medicare Advantage insurers are paid a pre-determined monthly sum for each covered person. CMS must nevertheless pay Medicare Advantage insurers in a manner that ensures “actuarial equivalence” between payments to traditional Medicare and Medicare Advantage.
At the same time, the Affordable Care Act (ACA) requires insurers to report and return any overpayment within 60 days after the date the overpayment is “identified,” a term the ACA did not define. To implement the law for Medicare Advantage insurers, CMS issued the 2014 Overpayment Rule to clarify that “identifying” an overpayment occurs when the insurer “determined, or should have determined through the exercise of reasonable diligence” that it received an overpayment. In the preamble to the publication of the final 2014 Overpayment Rule (the Final Rule), CMS further clarified that reasonable diligence would require, “at a minimum . . . proactive compliance activities . . . .” This latter requirement added an element that, as the Court explains, many stakeholders believed was neither anticipated nor fair. The Final Rule is available here.
The Court’s significant holdings on UnitedHealthcare’s challenges related to the terms “actuarial equivalence” and “identified” are explained below.
District Court: The 2014 Overpayment Rule Violates “Actuarial Equivalence” Mandate due to “Crucial Data Mismatch”
UnitedHealthcare first argued that CMS failed to ensure the Medicare-required “actuarial equivalence” between CMS’s own costs and its payments to Medicare Advantage insurers for the same coverage. UnitedHealthcare also claimed that CMS likewise subjected Medicare Advantage insurers’ data to “a more searching form of scrutiny” than CMS applies to its own data, creating inevitable inequities in payment and liability for lack of repayment. The Overpayment Rule effectively requires Medicare Advantage insurers to “return to CMS any audited ‘overpayments’ to the extent that the insurer’s errors exceed the estimated error rate in CMS payments under traditional Medicare.”
But the Court found an inherent “mismatch” in the data CMS uses for its Risk Adjustment Data Validation (RADV) audits and the data Medicare Advantage insurers use to identify and remit overpayments. The tension, as the Court explained, lies in the fact that “payments for care under traditional Medicare and Medicare Advantage are both set annually based on costs from unaudited traditional Medicare records, but the 2014 Overpayment Rule systemically devalues payments to Medicare Advantage insurers by measuring ‘overpayments’ based on audited patient records[, which] makes an actuarial difference.” (emphasis added)
The Court found that the unfairness to insurers was “inevitable” – CMS would pay “for all diagnostic codes, erroneous or not, submitted to traditional Medicare, [but] it will pay less for Medicare Advantage coverage because essentially no errors would be reimbursed.”
The Court seemed persuaded by the analysis offered by the American Academy of Actuaries (the Academy), which had advised CMS that it “was not actuarially sound to compare unaudited figures to calculate per capita payments and then audited figures to calculate overpayments.” CMS’s inconsistency, the Academy warned, may create systematic underpayment – and the Court agreed.
In many ways, the Court faulted CMS for ignoring a known “fix” to this actuarial discrepancy. The Court specifically noted that CMS seemed to recognize and address the actuarial problem in 2012 in its RADV audits, but it completely omitted such a fix to the actuarial problem in the 2014 Overpayment Rule. The Court noted that CMS pays Medicare Advantage insurers “based on flawed data” and yet “the 2014 Overpayment Rule ignores those flaws when defining an ‘overpayment.’” In other words, the “use of unaudited CMS data, with its known and unknown errors, to set the rates by which Medicare Advantage insurers are paid and then the use of audited data to define ‘overpayments’” reveals an intrinsic problem with the 2014 Overpayment Rule, Judge Collyer wrote.
The Court held that, in sum, “the 2014 Overpayment Rule fails to recognize a crucial data mismatch ” between the data used for traditional Medicare and Medicare Advantage payments and overpayments. By finalizing the 2014 Overpayment Rule in its current form, CMS abandoned the “actuarial equivalence” requirement, which completely failed to recognize the aforementioned data differences that CMS had acknowledged years before. The Court ruled that CMS’s “departure” from its prior policy was therefore arbitrary and capricious.
District Court: CMS Pulled a “Surprise Switcheroo,” Contravened the FCA
The Court likewise faulted CMS for defining “identified” in its proposed rule (the Proposed Rule) but subsequently changing its standard in the Final Rule with more demanding instructions for entities to undertake “at a minimum . . . proactive compliance activities.” In doing so, CMS went too far beyond the existing mental state requirements of “actual knowledge,” “reckless disregard,” and “deliberate ignorance” to impose FCA liability for an overpayment. The Court reasoned that CMS essentially adopted a mere negligence standard when it released the 2014 Overpayment Rule, an unlawful change to the law; UnitedHealthcare argued, and the Court agreed, that adopting a “negligence” standard for overpayments contravenes the FCA itself. The Court found that CMS’s move was a “surprise switcheroo” of standards between the Proposed Rule and Final Rule versions of the 2014 Overpayment Rule. The Court starkly explained that the “standard in the [Proposed Rule] (or the FCA or the ACA) is certainly not the standard in the 2014 Overpayment Rule, however much CMS might want to make it so.”
The Court also found that CMS likewise improperly played legislator when implementing the 2014 Overpayment Rule because its standards “extend[] far beyond the [FCA] and, by extension, the Affordable Care Act.” Adding to its reasons for vacating the 2014 Overpayment Rule, the Court noted that CMS cannot “apply more stringent standards” for FCA liability than Congress intended.
