Client Advisory Notice | D.C. District Court vacates CMS’s Medicare Advantage 2014 Overpayment Final Rule

By Brian Annulis, Benjamin D. Bresnick

September 18, 2018

In a highly anticipated opinion, on Friday September 7, 2018, Judge Rosemary Collyer dealt a blow to the Department of Health and Human Services by vacating CMS’s 2014 Overpayment Rule as it applies to Medicare Advantage Plans, commonly known as Medicare Advantage Organizations (MAOs).

The case, UnitedHealthcare Insurance Co. et.al v. Azar (the Secretary of Health and Human Services), originates from claims that CMS was not compliant with its own regulations that mandate certain uniformities in payments between traditional fee for service Medicare and the MAOs that UHC and other commercial insurance companies offer. The claims were made by UHC on behalf of itself and its subsidiaries that operate MAOs.

UHC further argued that the 2014 Overpayment Rule was inconsistent with the Administrative Procedure Act which governs how governmental agencies go about rulemaking – as well as certain provisions of the Affordable Care Act, and the False Claims Act (FCA). Ultimately, these findings led the court to invalidate and vacate the 2014 Overpayment Rule in its entirety. And because the 2014 Overpayment Rule that applies to MAOs is substantially like the Medicare overpayment rule (including the 60-day return rule) that applies to Medicare participating Part A and Part B providers/suppliers, the court’s decision is significant.

UHC successfully argued the following substantive points:

1. CMS failed to demonstrate “Actuarial Equivalence” between traditional Medicare and MAOs.

The Medicare statute requires equivalence between the payment methodologies that determine remuneration between traditional Medicare and MAOs. Under traditional Medicare, Part A providers are reimbursed by DRG and Part B suppliers by the service rendered. In contrast, MA Plans are paid a flat rate Per Member Per Month (PMPM) to care for the individuals enrolled in that MA Plan. The PMPM fees are adjusted based upon the characteristics (risk scores) of the patient being serviced with the logical assumption that sicker (i.e., riskier) patients are more expensive than healthy patients. As such, if a patient has a higher risk score, the MA Plan receives more money per month from CMS to care for that patient.

To adjust the risk scores and thereby increase the PMPM payments, CMS does not look at the services provided but rather to the Hierarchical Condition Category (HCC) codes that are associated with the patients. CMS publishes the list of HCC codes and physicians can associate these HCC codes with a particular patient. The court explained that “…if a beneficiary has a condition that CMS has determined based on its Medicare data increases average costs by 20%, that person will have an adjusted risk score of 1.2 and the Medicare Advantage payment rate applicable to that person will be set at 120% of the average benchmark rate.”

UHC was able to convince the court that because the HCC codes are not audited in the same way or with the same vigor as the treatment codes used under traditional Medicare that it was impossible to demonstrate “actuarial equivalence.” The court explained: “This inequity is inevitable because CMS sets Medicare Advantage rates based on costs that are presumed-based on traditional Medicare diagnosis codes – to be associated with particular health status information that is not verified in underlying patient records. The same unverified diagnosis is, under the 2014 Overpayment Rule, treated as an overpayment that must be repaid, thus reducing the reimbursement to a Medicare Advantage insurer while requiring no such reduction in payment under traditional Medicare. Similarly auditing CMS records for errors or fraud could resolve the difference, if the audits were timely and if CMS were able to construct a legitimate program to carry out such audits.” As such, the court found no “Actuarial Equivalence” and so found the underlying statute to be violated.

2. CMS inappropriately defines “knowing” in the 2014 Overpayment Rule.

The court also addressed the 60 Day Repayment Rule established in the Affordable Care Act which is used as a lever for potential FCA litigation. At issue here is the legal standard by which a person or entity is determined to know of an overpayment. Within the FCA statute, ‘knowing’ or ‘knowingly’ is defined as false information about which a person “has actual knowledge…acts in deliberate ignorance of the truth or falsity of the information,” or “acts in reckless disregard of the truth or falsity of the information.”

In contrast, the preamble of the 2014 Overpayment Rule defined knowing to include reasonable diligence that “at a minimum…would include proactive compliance activities conducted in good faith by qualified individuals to monitor for the receipt of overpayments.” The court held that this difference in defining knowledge, knowing or knowingly serves to create a different legal standard under which a person or entity is presumed to have knowledge that a submitted claim is false. UHC successfully argued, and the court agreed, that the 2014 Overpayment Rule treated or attempted to treat knowing as simple negligence. The court further stated that “the 2014 Overpayment Rule extends far beyond the FCA and, by extension, the Affordable Care Act.” Not being Congress, the court held that CMS “has no legislative authority to apply more stringent standards to impose FCA consequences through regulation.”

3. CMS violated the Administrative Procedure Act (APA) with arbitrary and capricious rule making.

The court also agreed that the 2014 Overpayment Rule failed under the APA’s rulemaking requirements. The APA sets forth the body of rules and standards under which federal administrative agencies, such as CMS, make the rules and regulations to administer their respective programs. A proposed rule fails under the APA if it is not considered to be a logical outgrowth of the agency’s regulatory activity. The court describes the concept of logical outgrowth as one where the “affected parties should have anticipated that the relevant modification was possible.”

In this case, UHC argued – and the court concurred – that UHC had no way to anticipate that CMS could attempt to change the definition of identified overpayments to include the activities of compliance programs. In the initial 2014 proposed rule, CMS defined “identified” as having “actual knowledge of the existence of the overpayment or [acting] in reckless disregard or deliberate ignorance of the existence of the overpayment.” However, in the final rule, CMS adopted a definition of “identification” as having “determined, or should have determined through the exercise of reasonable diligence, that the MA organization has received an overpayment.” The court noted that CMS had removed the prior threshold requirements of actual knowledge, deliberate ignorance and reckless disregard, and replaced the threshold for identification with “reasonable diligence”. The court described this change in position as a “surprise switcheroo”, holding that this was a “distinct” difference that was more “burdensome” to the MA agencies and that CMS did not provide adequate notice for this change.

Because of these problems, the court invalidated the 2014 Overpayment Rule for MAOs in its entirety and because the 2014 Overpayment Rule in question is substantially like the separate but similar overpayment rule for Medicare Part A and Part B providers/suppliers, it seems likely that that rule will fail too.

At this point, the answer to the “what now” question is slightly foggy. But it is possible that, in the coming days, CMS will appeal the court’s decision or engage in a new round of rulemaking to create and release an updated version of the Overpayment Rule(s) that falls within their statutory limitations. Alternatively, the court suggested that Medicare could cure the substantive problem with the MAO payments by addressing the actuarial inconsistencies between the data used for payment in traditional Medicare and MAO programs. However, this seems to be a more difficult task for CMS to undertake.

In the interim, the court left the FCA and the standard in place which requires knowledge, reckless disregard, or deliberate ignorance of the fact that a submitted claim is false. Furthermore, independent of the overpayment/60-day return rules mandated by the Affordable Care Act, Medicare providers/suppliers have a statutory duty to report and return known overpayments.