This article originally appeared in The National Law Review on September 21, 2022. It is republished here with permission.
Courts are grappling with unique questions in the context of managed care programs in False Claims Act (FCA) cases. But are they getting it right? Two questions trending in courts relate to: (1) materiality under the FCA when purported conduct does not directly impact the amount of government payment (but only the amount of payment from the privately-operated managed care plan), and (2) falsity and materiality related to diagnosis codes that were correct. Both these questions are disputed and the subject of government overreach, despite that the answers should be clear. We are watching several cases in this space.
Was the Conduct Material to a Government Payment Decision?
One question courts have been asked is, can claims submitted to managed care plans that do not impact government payment be actionable under the FCA? We do not see how such claims could be considered actionable under a proper interpretation of Escobar. Most courts agree, however the Department of Justice (DOJ) continues to pursue such cases under the FCA.
Background to Materiality Inquiry in MA Cases
The FCA imposes civil liability on any person or entity who knowingly presents, or causes to be presented, a false or fraudulent claim for payment by the federal government. 31 U.S.C. § 3729(a)(1)(A) (2022). For liability to attach, the false claim must be material to the government’s decision to pay (i.e., the government would not have paid or likely would not have paid the claim had it known of the conduct). United States ex rel. Escobar v. Universal Health Servs., Inc., 579 U.S. 176 (2016).
In Escobar, the Supreme Court articulated the “demanding” materiality element of an FCA violation. 579 U.S. at 194. The Supreme Court described the materiality standard as “look[ing] to the effect on the likely or actual behavior of the recipient of the alleged misrepresentation,” and held that, “[w]hat matters is . . . whether the defendant knowingly violated a requirement that the defendant knows is material to the Government’s payment decision.” Id. at 193, 181 (emphasis added).
Medicare Advantage Plans (“MA Plans”) are health plans offered by private insurers known as Medicare Advantage Organizations (MAOs) or Managed Care Organizations (MCOs). The Centers for Medicare and Medicaid Services (CMS) makes monthly fixed capitation payments to these organizations, which use the proceeds to pay for their beneficiaries’ services. The capitated rate is paid per enrollee based on diagnosis codes and demographic risk factors, rather than payment per services actually provided.
In applying the Escobar standard to claims arising under managed care, materiality should not ordinarily be found in cases where health care providers submit claims to managed care plans that do not falsely inflate government payment to those MA Plans. Such claims do not meet the materiality standard articulated by the Supreme Court.
Courts That Have Gotten It Right
The overwhelming majority of courts have applied Escobar properly in finding there is no materiality when an allegedly false claim submitted to an MA Plan does not affect the government’s capitated payment rate to the MAO or MCO. However, this has not deterred relators and the government from continuing to file cases.
United States ex rel. Rasmussen v. Essence Group Holdings Corporation
In 2020, the Western District of Missouri considered a complaint that alleged the defendants (who partnered to form an MA Plan) encouraged medical providers to administer unnecessary tests in order to determine additional diagnoses for patients which were later submitted to CMS for incorporation into their MA capitated payments. United States ex rel. Rasmussen v. Essence Grp. Holdings Corp., No. 17-3273-CV-S-BP, 2020 WL 4381771, at *5-6 (W.D. Mo. Apr. 29, 2020). When evaluating the defendants’ motion to dismiss, the court noted that “CMS is not billed for the [additional tests] because it pays Defendants a fixed sum regardless of the medical services provided to the patients. Thus, even if the [additional tests] are medically unnecessary . . . this fact cannot support a claim under the FCA.” Id. at *4. While the court acknowledged that adding additional diagnoses can impact the capitated payment amounts the government pays (because the additional diagnosis might increase the capitation rate), the court clarified that diagnoses can only support a claim under the FCA if the diagnoses are false. Otherwise, if the diagnoses are correct, MA plans are entitled to those increased capitated payments. Ultimately, the district court held that the relator failed to state a claim under the FCA and granted defendants’ motion to dismiss, with prejudice. Id. at *10.
United States ex rel. Gray v. UnitedHealthcare Insurance Company
In a 2018 case, the Northern District of Illinois considered a complaint about defendants’ (MA providers) alleged “HouseCalls” that sent licensed health care providers to MA beneficiaries’ homes to conduct in-home physical examinations. United States ex rel. Gray v. UnitedHealthcare Ins. Co., No. 15-cv-7137, 2018 WL 2933674, at *3 (N.D. Ill. June 12, 2018). The relator asserted that the HouseCalls program was fraud intended to increase the capitated payments made to defendants each month. Id. at *3. The court first addressed the relator’s overarching assumption that “fraud through traditional fee-for-service and fraud through Medicare Advantage providers is the same.” Id. at *7. The court rejected this assumption, explaining that “unlike traditional Medicare, CMS does not pay for every service provided through Medicare Advantage. Rather, it pays Medicare Advantage plans a set, monthly payment regardless of the number of uncovered, unnecessary, or excessive services provided.” Id. Accordingly, the court clarified that “the government is harmed only when the plans make false diagnoses and report that information, causing CMS to pay Medicare Advantage plans a greater capitated amount than it would otherwise pay. If the diagnoses made and information provided were not false, then there is no harm to the government (at least no harm which is enforceable through the False Claims Act).” Id. This is precisely why the court rejected the relator’s theory of materiality, as “the Court’s analysis of each alleged violation is not whether the violation is material to the government’s decision not to pay claims under traditional Medicare. Rather, the Court views each violation through the lens of whether it is material to CMS’s determination of the capitated payment amount.” Id. The court granted the motion to dismiss.
There were also allegations in Gray that the MA Plan violated the Anti-Kickback Statute by providing in-home examinations for free and by providing Walmart gift cards to induce in-home visits. The relator alleged that the free in-home examinations and the gift cards were kickbacks that resulted in increased future capitated payments from the government to the MA Plan. The court found that theory “too speculative” and requiring “too many assumptions,” given the variety of factors that contribute to the capitated rate. The court summed up relator’s argument as follows: “Thus, to induce payment to United, the alleged kickbacks must go through a number of steps. First, United must schedule an in-home examination. The examination must result in a diagnosis of some condition that was not previously discovered and that would result in a higher risk designation by CMS. United then submits that diagnosis, along with information on a number of other factors, including age, gender, health, and disability status. CMS then uses all of the collected data to calculate the capitated payments to United for the following year. This theory also assumes that the enrollee would not have otherwise gone to a physician—or the emergency room—so that United would recover that data through ‘uninduced’ means. This theory is too speculative and Gray provides no concrete allegations to support its plausibility.” Id. at *9-10.
Subsequently, the court denied relator’s motion to file a third amended complaint because the proposed amended complaint did not cure the deficiencies the court had identified with the prior complaint. The court dismissed the action, with prejudice. Order, ECF No. 77.
United States ex rel. Martinez v. Orange County Global Medical Center
In 2017, the Central District of California considered an FCA complaint in which the relator alleged that Orange County Global Medical Center (“OCGMC”) submitted, or caused the submission of, false claims to the government under MA due to the defendant’s allegedly false certification to an MA Plan of compliance with the requirements for a cardiac rehabilitation program. United States ex rel. Martinez v. Orange Cnty. Glob. Med. Ctr., No. 8:15-cv-01521-JLS-DFM, 2017 WL 9482462, at *1 (C.D. Cal. Sept. 14, 2017). The relator alleged that OCGMC’s false certification to Kaiser was material to the government’s expenditure of federal funds because it “artificially increased the benchmark capitated rate that the Government paid Kaiser” for MA enrollees. Id. at *2. The court disagreed, explaining that because CMS’s benchmark capitated rate calculation system does not consider “the historical volume, value, or cost of services a Medicare Advantage Organization provides, the hospital’s alleged false certification to Kaiser could not have inflated these CMS benchmarks.” Id. at *3. Rather, CMS determines the benchmarks based on average expenditures for Medicare fee-for-service (not MA) beneficiaries as well as a quality metric. Id. Thus, the court granted defendant’s motion to dismiss. Id. at *4.
We note that the government filed a Statement of Interest in this case stating that “‘the volume or value of services provided to Part C beneficiaries and the costs incurred by a particular MAO could certainly affect’ whether a MAO chooses to submit a bit, the MAO’s bid amount, and the Government’s share of savings for a below-benchmark bid.” Id. at *3. Given this assertion, the court granted relator leave to amend, but instructed that the complaint could not survive without “sufficiently articulat[ing] how OCGMC’s alleged false billing affect the Government’s outlays to [the MA Plan].” Id. at *3 (emphasis in original).
United States ex rel. Zemplenyi v. Group Health Cooperative
Some courts applied the proper materiality analysis even pre-Escobar. For example, in 2011, a relator alleged that defendant MAOs and their affiliated providers performed medically unnecessary cataract surgeries in order to increase revenue, allegedly resulting in false claims being submitted to Medicare for reimbursement. United States v. Grp. Health Co-op., No. 2:09-cv-603-RSM, 2011 WL 814261, at *1 (W.D. Wash. Mar. 3, 2011). The Western District of Washington rejected this argument, holding that because of MA’s capitated payment system, “it cannot be said that false claims are being made, since payments remain the same regardless of whether a surgery is performed or not.” Id. at *2.
The court granted the defendants’ motion to dismiss the relator’s claims under the FCA’s substantive provisions. Id. at *4. The court explained that while the relator alleged that “by incurring higher costs, Defendants may receive higher capitated payments for managed care beneficiaries in the future, it nonetheless remains the case that those costs are self-incurred, and the government continues to pay a flat rate,” and that accordingly, “since the conduct alleged did not alter the payments made by the government, it cannot be said that any alleged false statement was material to the government’s decision to pay.” Id. at *2.
At Least One Court Has Gotten It Wrong
Respectfully, we must disagree with at least one court’s ruling in this area, the Southern District of Ohio’s holding in United States ex rel. White v. Mobile Care EMS & Transport. This decision is against the weight of other authority, as detailed above.
United States ex rel. White v. Mobile Care EMS & Transport
A district court in Ohio has taken a different approach from other federal courts. There, the relators alleged that they were instructed in various manners to overbill for transport services. United States ex rel. White v. Mobile Care EMS & Transp., Inc., No. 1:15-cv-555, 2021 WL 6064363, at *3-4 (S.D. Ohio Dec. 21, 2021). In particular, the relators alleged that the defendants (medical transport services providers and a broker for such services) provided ambulance transport for patients—allegedly even after learning that such services were not medically necessary—and then billed MyCare Ohio, a managed care plan administered by Aetna, for such services. Id. at *6.
The defendants argued that because there could not have been impact on government payment, only impact on payment from Aetna, the relators could not state a claim under the FCA. Id. at *12. The court rejected this, holding (incorrectly, in our view) that the relevant test was whether payment—that was at least in part funded by the government—was increased to defendants, and not the test applied by other courts of whether the government’s payment was increased. Id. at *13-14. Therefore, the court denied the defendant’s motion to dismiss, holding that the defendant’s conduct could plausibly be material. Id. at *12-14.
Interestingly, the court certified the issue for interlocutory appeal, in recognition that the materiality question “would materially affect the outcome” of the case and that “reasonable jurists may disagree” on the appropriate resolution of the materiality issue. Id. at 18. However, on August 23, 2022, the Sixth Circuit denied the petition for permission to appeal without commenting on the merits of the underlying issue.
The court’s holding was incorrect, in our view, because the alleged misrepresentations submitted by defendants could not have been material to the government’s decision to pay. Even if ambulance transport services were overprovided to MA enrollees, no extra government funds were spent because the government pays a capitated rate to defendants, irrespective of how many ambulance transport services are provided. The district court justified its holding by explaining that “FCA liability turns on the presentation of a false claim,” and explained that claims submitted to government contractors count as false claims presented to the government. Id. at *12. However, the mere existence of a false claim presented to the government or a government contractor is only one element of the FCA analysis. In order to adequately state a claim (and thus survive a motion to dismiss), the relator must also allege that the false claim was material to the government’s decision to pay (among other elements). See Escobar, 579 U.S. at 181 (“What matters is . . . whether the defendant knowingly violated a requirement that the defendant knows is material to the Government’s payment decision”). Because the alleged “extra” ambulance transport services had no impact on government payment, we believe this case should have been dismissed. The FCA is about protecting the government from purported fraud, not private parties.
Are the Diagnosis Codes False Because They Are Retroactive or Prompted?
Multiple cases involving retroactive chart review are also trending through the FCA case law pipeline. Retroactive chart review occurs when a health care provider reviews and adds diagnoses to an MA enrollee’s chart after the enrollee’s visit. This process can be problematic in terms of FCA liability if the diagnoses retroactively added to an MA enrollee’s chart are false and later submitted to CMS, thus impacting government payment to the MAO. However, if the diagnosis codes are not incorrect, but merely retroactive or prompted, in our view, courts should dismiss FCA actions. This issue is briefed and ready for decision in two courts.
United States ex rel. Osinek v. Permanente Medical Group
In 2021, the Department of Justice (DOJ) filed a complaint in intervention against Kaiser Permanente (Kaiser) and other defendants. DOJ alleged that the defendants retroactively revised patient medical records to add diagnoses with an addendum after patient visits, including through utilizing human reviewers and/or automated algorithms to identify new diagnoses for patients. United States ex rel. Osinek v. Permanente Med. Grp., No. 13-cv-03891-EMC, 2022 WL 1422944, _ F. Supp. 3d. _ (N.D. Cal. May 5, 2022), at *4-5. DOJ alleged that defendants “upcoded” diagnoses by exploiting high-value conditions to “maximize its reimbursement from Medicare.” Id. at *4. For example, defendants allegedly engaged in data mining, where defendants identified higher value Hierarchical Conditions Categories (“HCC”) and then “determined the diagnoses its doctors would need to make to support the HCCs Kaiser wanted to submit for Medicare reimbursement.” Id. at *4. As another example, Kaiser allegedly told its physicians to diagnose chronic kidney disease instead of the lower value nephritis or nephropathy. Id. at *4.
The defendants moved to dismiss the United States’ complaint-in-intervention on June 21, 2022, launching challenges to the complaint’s failure to plead falsity, materiality, scienter, and raising other arguments. In our view, this motion should be granted, including because the government’s primary theory of falsity was not that that the diagnoses were inaccurate themselves but rather that the diagnosis codes were false allegedly because the processes used to generate them did not comply with purported legal requirements. Without allegations supporting that the diagnoses were actually inaccurate (or allegations of different improprieties), our view is that an FCA claim in this context should be dismissed. However, government overreach and judicial willingness to consider broad arguments for what is false and material may result in a different outcome. The motion is set for hearing on October 13, 2022.
United States ex rel. Ross v. Indep. Health Corp.
In a similar case earlier in 2021, the government intervened against MAO defendants in the Western District of New York. United States ex rel. Ross v. Indep. Health Corp., No. 12-cv-299S, 2021 WL 3492917, at *1 (W.D.N.Y. Aug. 9, 2021). The government alleged that the defendants implemented a retroactive medical records review program to search for and submit additional diagnoses codes to CMS for risk adjustment. United States’ Complaint-In-Intervention at ¶¶ 6-7, ECF No. 142. Allegedly, in these retroactive chart reviews, defendants “disregarded the [purported] requirement that a condition for which a diagnosis code is submitted must be documented as relevant to patient care, treatment, or management during a visit or encounter in the date of service year, and not merely mentioned in records from prior years, suggested by computer algorithm, or inferred anywhere on an outpatient medical record.” Id. at ¶ 13. The government also alleged that the defendants implemented an “addenda process,” whereby they “used leading and suggestive forms to nudge providers to sign off on diagnoses, often without any basis, that [defendants] suggested the provider assessed during an encounter but did not adequately document in the medical records.” Id. at ¶¶ 15-16. Allegedly, these two processes resulted in the submission of unsupported diagnoses codes to CMS that increased the defendants’ capitated payments. Id. at ¶¶ 17-19.
The defendants filed a motion to dismiss on November 16, 2021. ECF No. 154. In opposition, the government admitted that its “primary allegation is that Defendants’ diagnosis codes were not accurate, complete, or truthful because they failed to submit codes in conformity with ‘all relevant national standards.’” Gov’t Opp. at 10, ECF No. 156. This is a lawyerly way of saying that the codes were not necessarily inaccurate, which in our view supports dismissal of the case. The Western District of New York has not reached a decision on the pending motion to dismiss.
Analysis & Implications
The government’s intervention in Osinek and Ross may have implications for widely-used coding practices that impact risk adjustment. As the court acknowledged in Gray, health care providers often conduct additional testing in order to determine potential diagnoses early-on, to better serve patients and public health, and to ultimately save money in the long-term. 2018 WL 2933674, at *7. However, this process could potentially be hindered or chilled by the pendency of the Kaiser or Ross cases, as they could deter health care providers from running additional tests or providing preventative services out of fear of FCA exposure.
Our view is courts should not find a false claim where additional screening for diagnoses resulted in increased capitation payments so long as the additionally identified diagnoses are correct. Past courts have acted in accord. For example, in the Rasmussen case discussed above, the relator had alleged that the defendants “identified patients in th[eir MA] plan who might have additional medical conditions that could be diagnosed and coded, thereby increasing their risk score (and, in turn, the following year’s capitation rate)” and that defendants attempted to arrange an additional examination by the patients’ physicians to determine whether the additional medical conditions existed and could be coded. 2020 WL 4381771, at *2. The court noted that, even though the additional diagnoses increased the capitation rate for patients, the relator had not alleged that there were any false diagnoses. Id. at *4-5. Therefore, the MA Plan was entitled to those increased capitation payments. Id. at 5.
Similarly, in Gray, the court pointed out that “there is the risk that plans will provide services to affect data to increase their capitated payment amount” but that “without a false submission, this practice is not a violation of the False Claims Act.” 2018 WL 2933674, at *7.
Despite past losses for plaintiffs in MA-premised FCA cases, government scrutiny in the MA context is not diminishing. This is demonstrated by the government’s intervention in Osinek and Ross. Moreover, earlier this year, DOJ announced that it secured approximately $5.6 billion in FCA recoveries in federal fiscal year 2021, with healthcare companies accounting for the majority of the department’s second-biggest haul in history. DOJ continues to pursue MA cases, suggesting that regulatory scrutiny in this area of law will persist and increase. DOJ recently asserted that this area is an “important priority for the department.”
Of course, health care providers should work with regulatory counsel to ensure all claims are appropriate and proper—regardless of payor. However, the improper use of the FCA to enforce against purportedly false claims submitted to managed care plans—when such claims do not meet materiality and/or falsity thresholds—significantly increases exposure of health care providers, as the FCA carries with it treble damages as well as mandatory penalties per false claim. We are watching closely the developing case law in this area to see how courts square materiality and falsity elements of the FCA with enforcement overreach.
Foley & Lardner summer associate Lindsey Zirkle contributed to this article.