In response, regulators and prosecutors have ramped up scrutiny of health plans and providers paid under these systems. The two-fold problem in managed care is that (i) a private third party payor sits between providers and suppliers on one side and the government on the other, and (ii) information submitted to the government by or through the plans has implications on payments for future services, sometimes under future contracts. This set up creates unique issues for enforcement under the civil False Claims Act (FCA) because the law typically relies on claims for payment submitted to the government as the nexus for liability. In this article, we explain why these managed care payment systems raise unique issues, how the U.S. Department of Justice (DOJ) has approached managed care including through the False Claims Act, and where enforcement attention may turn next.
Medicare Advantage and Medicaid Managed Care
Medicare Advantage plans are health insurance plans offered by private insurers known as Medicare Advantage Organizations (MAOs). In general, under Medicare Advantage, the Centers for Medicare and Medicaid Services (CMS) pays each MAO a monthly, capitated amount intended to cover all Medicare-covered health care items and services provided to the plan’s enrollees.[1] The per-member, per-month (PMPM) payment amount is based on the forecasted costs of providing services to an enrollee and does not take into account the actual costs of items or services being provided to that individual during a given payment year. Instead, MAOs submit annual bids to CMS that estimate the cost of providing Medicare Advantage services in a given service area to an eligible beneficiary with a national average “risk profile”; this estimate is then used in combination with other information in the process of establishing plans’ base capitation rates.[2]
In the Medicare Advantage program, base capitation rates are “risk adjusted” based on historical data regarding the plan enrollees’ specific health profiles, which are communicated by the MAO to the government using diagnosis codes reported in encounter data records submitted by the MAOs and other providers to CMS over time. In turn, diagnosis codes are used to place enrollees into CMS’s hierarchy of risk adjustment condition categories, which becomes one component of a formula used to calculate the PMPM amount. Updated encounter data is submitted by plans throughout each given payment year and used to update the PMPM amount if necessary mid-way through the payment year. Ultimately, based on these interim estimates of PMPM to which the MAO is entitled for the payment year, the data serves as the basis for calculating an actual, final PMPM and to reconcile payments retrospectively after the close of the payment year. Because MAOs accept financial risk for the cost of each enrollee’s care during the program year, MAOs sometimes contract directly with health care providers or with Medical Services Organizations (MSOs) that directly employ or contract with providers, with twin goals endorsed by CMS of accurately recording a patient’s condition through diagnosis codes and intervening to address conditions before they become acute and expensive to treat.
Managed Medicaid is the state-level equivalent of Medicare Advantage. Each Managed Medicaid program is different, but the general structure usually involves Managed Care Organizations (MCOs) contracting with states to cover a set package of benefits for enrollees.[3] As with Medicare MAOs, states generally pay Medicare MCOs on a capitated basis through a fixed PMPM fee. This fee is typically assessed based on variables set in the contract between the state and the MCO.[4] States have some flexibility to set their own payment methodologies, provided they are actuarially sound. In addition, states often apply their own risk adjustment methodologies; any such methodology must be applied in a budget-neutral manner across all MCOs in a given state’s Medicaid program.[5]
Medicare Advantage and Medicaid Managed Care plan enrollment has grown significantly over the past decade. Between 2010 and 2023, for instance, Medicare Advantage enrollment increased from 11 million to 30.9 million enrollees.[6] Today, nearly half of all Medicare enrollees are enrolled in Medicare Advantage.[7] Medicaid Managed Care also continues to grow and now serves as “the primary Medicaid delivery system in more than half the states.” [8]
Increased government scrutiny of managed health care
As managed care has grown, so too has government scrutiny within these payment systems. Recently, DOJ has identified the pursuit of fraud associated with capitated plans as an “important priority.”[9] Aligning with this focus, in November 2023, DOJ announced plans to “‘substantially’” increase the number of prosecutors specializing in health care fraud.[10]
Most overt DOJ enforcement in the space has focused on the submission of false diagnosis codes, in cases against both plans and providers. DOJ has pursued plans for submitting false diagnoses resulting in increased PMPM payments. For example, multiple plans have been subject to government scrutiny for performing medical record reviews that added new diagnoses identified in patient medical records but did not also delete unsupported diagnoses.
DOJ has also scrutinized providers for submitting false diagnosis codes to plans, resulting in increased payment to both plans and providers. MAOs contract and in some cases employ providers, individually or in groups organized to form networks, to care for enrollees. Providers and provider networks often accept some risk-based payment, and in some cases share in the MAO’s profit/cost savings through shared-savings plans. While permitted in concept by CMS and HHS-OIG, such arrangements can create financial incentives that draw scrutiny from regulators. Because MAO-affiliated providers become a source of diagnosis information that ultimately impacts risk-adjusted PMPM payments the MAOs receive from CMS, auditors, investigators, and prosecutors examine diagnostic patterns to determine whether those incentives have over-powered medical judgment, leading providers to diagnose conditions that either do not exist, or exist at lower acuity levels than a provider records. If risk-adjusting diagnosis codes submitted by a provider to a plan and ultimately to the government are not supported in the medical record, and that code can be tied to an MAO’s claim for inflated payment, the government’s position is that the provider can face potential liability under the FCA for “causing the submission” of a false claim. As further discussed below, establishing a causal nexus between an allegedly false diagnosis code and a false claim for reimbursement has presented challenges for the government.
These theories are usually brought under the civil FCA, but in some extreme cases involving allegedly willful misconduct, DOJ has pursued criminal charges.[11] DOJ has also filed statements of interest in MAO FCA qui tam cases asserting that claims should not be dismissed simply because they operate under a capitated payment system.[12] The government has further taken the position, at least at the motion to dismiss stage, that “claims” subject to FCA liability can include those submitted to private insurers that receive government funding as MAOs. This suggests the government’s interest in these cases extends beyond the risk-adjustment context that has been the focus of prior enforcement activity.
Possible challenges confronting enforcement actions
Managed care payment systems pose unique issues under the FCA because (i) a private insurer sits between the government and health care services providers, and (ii) the amount the insurer is paid is decoupled from the amount or type of health care services provided to federal health care program beneficiaries. Thus, while it is clear that the government is putting money into the system, it is more difficult to trace the flow of funds in relation to individual items or services.
Accordingly, in FCA cases involving Medicare Advantage and Medicaid Managed Care, the government will face additional obstacles to establish what claims are false and the specific ways in which the government was harmed, the timing of such harm, and the magnitude of any such harm. These factors can make it difficult for the government – as well as private relators litigating FCA cases – to carry the burden of proving all elements necessary to prevail under the FCA, especially when coupled with the baseline complexity of the managed care payment systems.
Among other challenges, capitated payment systems can make it more difficult for the government to establish the element of materiality.[13] In considering materiality, courts generally evaluate whether a false claim was material to the government’s payment decision. In the case of capitated plans, the nexus between individual items, services, or diagnoses, and disbursement of government funds on a PMPM basis, is less clear than in a traditional FFS context. Further, most courts have held that no FCA liability exists where the rate of reimbursement is not affected by the allegedly false claim.[14] In reaching this conclusion, courts have found that plaintiffs who have failed to show any reimbursement differential have also failed to establish that the government would not have paid a plan had it known of the allegedly false statements.[15]
However, courts are not completely uniform in this interpretation. For instance, a court in the Southern District of Ohio recently found that the relevant test for materiality in a claim against an MCO was whether payment – that was at least in part funded by the government – was increased to defendants, and not whether the government’s payment was increased.[16]
In other cases, courts have concluded that the government has failed to establish falsity on the part of plans allegedly engaged in activities that would tend to increase government expenditures. For example, some courts have held that where diagnoses are valid and accurate, they may not be considered false, even where the Medicare Advantage plan actively seeks to identify new diagnoses through intentional outreach to beneficiaries.[17]
The reconciliation process that accompanies Medicare Advantage contracts creates further challenges for establishing FCA liability. Because annual Medicare Advantage contract periods remain open for data submission and correction for more than a year, and PMPM payment amounts are not calculated until that period closes, plans are expected to correct erroneous data – such as the number of enrollees each month or the risk adjustable diagnoses – before payment amounts are finalized. As a result, the funds received by the plan from monthly payments cannot constitute “overpayments” under the FCA until after the contract period closes.[18] This extended reconciliation process raises questions about whether, and if so when, an erroneous data submission is a false claim, when a diagnosis code results in an overpayment, and when or whether a false diagnosis code is material for purposes of the FCA.
In addition, even if the government can establish the elements of an FCA violation – including, for instance, in order to survive a motion to dismiss early in the litigation process – capitated payment systems can make it inherently difficult to prove damages, especially in cases when a provider is paid by a capitated plan on a FFS basis.
Importantly, the unique elements present in the Medicare Advantage context have not stood in the way of multiple settlements, particularly when there is a direct nexus between the allegedly false claim and an outlay of government funds. For instance, a relator-initiated suit involving alleged misconduct by a physician association that caused MAOs to submit incorrect diagnosis codes to CMS resulted in a nine-figure settlement in 2018.[19] Similarly, a health services provider and several affiliates agreed to a US$90 million settlement in 2021, following allegations of FCA violations based on the knowing submission of inaccurate information about the health status of Medicare Advantage beneficiaries.[20]
Looking ahead
The increased enrollment and associated cost of Medicare Advantage and Medicaid Managed Care plans has heightened the government’s interest in these programs. In 2024 and moving forward, we anticipate that the government will continue efforts to use the FCA as an enforcement tool to target alleged fraud involving Medicare Advantage and Managed Medicaid programs. Companies and providers operating in this space would be well-advised to monitor such developments in this evolving area of government regulation and enforcement.
References
[1] See 42 U.S.C. § 1395w-23; see also 42 C.F.R. § 422.2.
[2] See 42 U.S.C. § 1395w-24(a)(6)(A)(i); see also 42 C.F.R. § 422.254(b)(1).
[3]See MACPAC, Medicaid Managed Care Capitation Rate Setting (March 2022) at 1, https://www.macpac.gov/wp-content/uploads/2022/03/Managed-care-capitation-issue-brief.pdf (“MACPAC MCO Rate Setting Article”).
[4] See CMCS Information Bulletin Regarding Medicaid Managed Care Options in Responding to COVID-19 (May 14, 2020) at 1, https://www.medicaid.gov/sites/default/files/Federal-Policy-Guidance/Downloads/cib051420.pdf (“CMS Bulletin”).
[5] See 42 C.F.R. § 438.5(b)(6).
[6] See MedPac, July 2023 A Data Book: Health Care Spending and the Medicare Program 121 (2023), https://www.medpac.gov/wp-content/uploads/2023/07/July2023_MedPAC_DataBook_SEC.pdf; see also Jonathan Stempel, Anthem must face U.S. government lawsuit alleging Medicare Advantage fraud, Reuters (Oct. 3, 2022, 1:36 PM), https://www.reuters.com/legal/anthem-must-face-us-government-lawsuit-alleging-medicare-advantage-fraud-2022-10-03/ (emphasizing the growth in Medicare Advantage enrollment between 2013 and 2022).
[7] CMS, Access to Health Coverage (last updated Jan. 26, 2024), https://www.cms.gov/pillar/expand-access.
[8] MACPAC, Managed Care, https://www.macpac.gov/topics/managed-care/ (last visited Jan. 31, 2024).
[9] Remarks of Deputy Assistant Attorney General Michael D. Granston at the ABA Civil False Claims Act and Qui Tam Enforcement Institute, U.S. Department of Justice, Office of Public Affairs (Dec. 2, 2020), https://www.justice.gov/opa/speech/remarks-deputy-assistant-attorney-general-michael-d-granston-aba-civil-false-claims-act; Reed Abelson & Margot Sanger-Katz, ‘The Cash Monster was Insatiable’: How Insurers Exploited Medicare for Billions, N.Y. Times (Oct. 8, 2022), https://www.nytimes.com/2022/10/08/upshot/medicare-advantage-fraud-allegations.html; see also Justice Department’s False Claims Act Settlements and Judgments Exceed $5.6 Billion in Fiscal Year 2021, U.S. Department of Justice, Office of Public Affairs (Feb. 1, 2022), https://www.justice.gov/opa/pr/justice-department-s-false-claims-act-settlements-and-judgments-exceed-56-billion-fiscal-year.
[10] Michael W. Paddock & Bill Mateja, Increased Enforcement in Healthcare? DOJ to Add More Prosecutors, The National Law Review (Nov. 9, 2023), https://www.natlawreview.com/article/increased-enforcement-healthcare-doj-add-more-prosecutors.
[11] Former Executive at Medicare Advantage Organization Charged for Multimillion-Dollar Medicare Fraud Scheme, U.S. Department of Justice, Office of Public Affairs (Oct. 26, 2023), https://www.justice.gov/opa/pr/former-executive-medicare-advantage-organization-charged-multimillion-dollar-medicare-fraud.
[12] See United States’ Statement of Interest Regarding Defendant’s Motion to Dismiss at 4-6, United States ex rel. Martinez v. Orange County Global Med. Ctr, Inc., No. 8:15-cv-01521, 2017 WL 9482462 (C.D. Cal. Sept. 14, 2017) (arguing that “the fact that a defendant submits a false claim to an MAO that is paid a capitated rate, rather than directly to the government, . . . does not insulate it from liability. Since an MAO itself can be held liable under the FCA for submitting a false claim . . . so too can a provider that causes the MAO to violate the FCA.”). Despite the government’s filing, the court granted the defendant’s motion to dismiss. See United States ex rel. Martinez, v. Orange County Global Med. Ctr, Inc., No. 8:15-cv-01521, 2017 WL 9482462 at *4 (C.D. Cal. Sept. 14, 2017); see also Statement of Interest of the United States in Response to Defendant Modivcare Solutions LLC’s Motion to Amend to Certify for Interlocutory Appeal at 4, 9, United States ex rel. White v. Mobile Care EMS & Transp., Inc., No. 1:15-cv-555, 2021 WL 6064363 (S.D. Ohio Dec. 21, 2021) (“As an initial matter, the FCA does not limit ‘claims’ only to payment requests submitted directly to the Government . . . Instead, ‘claims’— as defined in 31 U.S.C. § 3729(b)(2)(A)(ii) — also can include requests submitted to entities like Aetna that receive funding from the Government to operate programs like the joint federal-state Medicare-Medicaid MyCare Ohio program…. [N]either the FCA nor the Supreme Court’s holding in Escobar make FCA liability dependent on government budgeting architecture.”).
[13] Universal Health Services, Inc. v. United States ex rel. Escobar, 579 U.S. 176, 181, 193, 196 (2016) (To satisfy the strict materiality standard, the relator (or government) must allege that the violations at issue “are so central ... that the [government] would not have paid these claims had it known of these violations.” The materiality requirement is a “rigorous” requirement that “looks to the effect on the likely or actual behavior of the recipient of the alleged misrepresentation.” (internal quotation marks omitted)).
[14] See United States ex rel. Mbabazi v. Walgreen Co., No. 19-2192, 2021 WL 4453600, at *6 (E.D. Pa. Sept. 28, 2021) (“In the case of fixed-rate claims, like MCO claims, ‘courts have held that there is no FCA liability where a falsely-claimed service or item does not affect the rate of reimbursement.’” (quoting United States v. Kindred Healthcare, Inc., 469 F. Supp 2d 431, 445 (E.D. Pa. 2020))).
[15] Id.
[16] United States ex rel. White v. Mobile Care EMS & Transp., Inc., No. 1:15-cv-555, 2021 WL 6064363 at *12-13 (S.D. Ohio Dec. 21, 2021).
[17] See United States v. UnitedHealthcare Ins. Co., No. 15-CV-7137, 2018 WL 2933674 at *6-7 (N.D. Ill. June 12, 2018) (finding program sending licensed healthcare providers to beneficiaries’ homes to conduct in-home physicals and identify new diagnoses did not constitute fraud and granting defendants’ motion to dismiss); see also id. at *2 (discussing the role of diagnosis codes in the Medicare Advantage program).
[18] See 42 C.F.R. 422.326(a) (“Overpayment means any funds that an MA organization has received or retained under title XVIII of the Act to which the MA organization, after applicable reconciliation, is not entitled under such title.”) (emphasis added); Memorandum from Jennifer R. Shapiro, Director, Medicare Plan Payment Group with the subject “Deadline for Submitting Risk Adjustment Data for Use in Risk Score Calculation Runs for Payment Years 2021, 2022, 2023, and 2024.” (May 5, 2023), https://www.hhs.gov/guidance/sites/default/files/hhs-guidance-documents/PY_2022_2023_2024_2025_Payment_Run_Notice_508_G.pdf (setting deadlines for “applicable reconciliation”); Centers for Medicare & Medicaid Services, Proposed Rule, Medicare Program; Contract Year 2015 Policy and Technical Changes to the Medicare Advantage and the Medicare Prescription Drug Benefit Programs, 79 Fed. Reg. 1918, 1997 (Jan. 10, 2014) (“payment errors identified as a result of any corrections to risk adjustment data submitted by MA organizations (and other organizations required to submit risk adjustment data to CMS) on or before the annual final risk adjustment data submission deadline are handled as part of the current annual process of risk adjustment payment reconciliation. Because these payment errors are prior to the date defined in this proposed rule as ‘applicable reconciliation,’ we do not consider these errors to be overpayments for the purpose of § 422.326 and § 423.360.” (emphasis added)).
[19] See Medicare Advantage Provider to Pay $270 Million to Settle False Claims Act Liabilities, U.S. Department of Justice, Office of Public Affairs (Oct. 1, 2018), https://www.justice.gov/opa/pr/medicare-advantage-provider-pay-270-million-settle-false-claims-act-liabilities.
[20] See Sutter Health and Affiliates to Pay $90 Million to Settle False Claims Act Allegations of Mischarging the Medicare Advantage Program, U.S. Department of Justice, Office of Public Affairs (Aug 30, 2021), https://www.justice.gov/opa/pr/sutter-health-and-affiliates-pay-90-million-settle-false-claims-act-allegations-mischarging.