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UnitedHealthcare Insurance Co. v. Azar

United States District Court, District of Columbia

September 7, 2018

ALEX M. AZAR II, Secretary of the Department of Health and Human Services, et al., Defendants.


          ROSEMARY M. COLLYER United States District Court

         Health insurance is provided to most seniors and many disabled Americans through Medicare, paid for by taxes and administered by the Centers for Medicare and Medicaid Services (CMS). As amended, the Medicare statute (formally part of the Social Security Act), includes a “Medicare Advantage” program whereby Medicare-eligible individuals can elect to receive their health insurance coverage through a private insurance company. The insurance company must provide at least the same coverage as traditional Medicare, although it often expands coverage, and is to make its profit from Medicare through efficiencies and other cost-saving methods. The statute requires “actuarial equivalence” between CMS payments for healthcare coverage under Medicare Advantage plans and CMS payments under traditional Medicare. In this case, a large group of insurance companies that provide Medicare Advantage coverage challenged a Final Rule, adopted in 2014, by which the documentation used to set the rates to pay the insurance companies is inconsistent with the documentation used to determine if the insurers have been overpaid. The insurers allege that the Final Rule will inevitably fail to satisfy the statutory mandate of actuarial equivalence.

         There is a history to this dispute over actuarial equivalence. The government previously had proposed an audit program for Medicare Advantage insurers and some insurers challenged its methodology for determining overpayments. Since government records for traditional Medicare payments are used to set rates but are not audited, the insurers contended that imposing a 100% accuracy requirement on their records, on pain of being required to return any “overpayment, ” would violate the statutory requirement for actuarially equivalent payments between traditional Medicare and Medicare Advantage. Heeding the advice of actuaries, the government ultimately adjusted its audit plan to recognize the different data sets. For the 2014 Final Rule at issue here, however, CMS has refused to make such an adjustment although the different data sets are again in use.

         After full briefing and oral argument, this Court concludes that the 2014 Final Rule violates the statutory mandate of “actuarial equivalence” and constitutes a departure from prior policy that the government fails adequately to explain. The Court will grant summary judgment to the Medicare Advantage insurers and vacate the Rule.

         I. BACKGROUND

         This lawsuit is brought by Medicare Advantage (MA) organizations in the UnitedHealth Group family of companies, the nation's leading provider of Medicare Advantage health benefits plans (collectively, UnitedHealth).[1] Known as Medicare Part C, the Medicare Advantage program allows Medicare-eligible individuals to receive healthcare benefits through private insurance companies that have contracted with CMS, a constituent agency of the Department of Health and Human Services (HHS). Alex M. Azar II, HHS Secretary, is sued in his official capacity. CMS administers traditional Medicare and pays its benefits. However, some 20 million Americans, approximately one-third of Medicare-eligible individuals, have opted for Medicare Advantage coverage.

         Medicare Parts A, B and C are relevant here. Medicare Part A is mandatory for senior Americans who take Social Security benefits; Part A provides coverage for hospital expenses. Medicare Part B is voluntary and provides partial coverage for doctor expenses. Medicare Part C offers the Medicare Advantage program through which private insurance companies replace CMS and provide full Medicare coverage to beneficiaries.

         Initially, Medicare paid all “reasonable costs” (“fee for service”) to a hospital caring for a Medicare beneficiary. See Methodist Hosp. of Sacramento v. Shalala, 38 F.3d 1225, 1227 (D.C. Cir. 1994). Over time, that standard has changed and Medicare now pays a hospital based on the “Diagnosis-Related Group” (DRG) shown by the patient's diagnoses at the time of discharge. Medicare Part B also started by paying doctors a reasonable “fee for service, ” but now pays them according to fee schedules that limit the amount they may charge and be paid for each defined service. See United Seniors Ass'n, Inc. v. Shalala, 182 F.3d 965, 968 (D.C. Cir. 1999). Under Part B, doctors must submit diagnosis codes to identify the reason a patient received treatment, but “payments depend only on the services (or durable goods) provided [office visit, examination, shot, etc.] and not in any way on the diagnoses submitted.” Defs.' Mem. in Support of Their Cross-Mot. for Summ. J. and Opp'n to Pls.' Mot. for Summ. J. (CMS Mot.) [Dkt. 57-1] at 7.[2] In contrast, Medicare Advantage insurers are not paid based on medical services but “are paid a pre-determined monthly sum for each person they cover, based in part upon the characteristics of the particular beneficiary being covered.” Id. (internal citation omitted).

         A Medicare Advantage insurer must provide, at a minimum, the same level of benefits provided by traditional Medicare itself, except for hospice care. See 42 U.S.C. § 1395w-22(a). Under a Medicare Advantage policy, the insurance companies pay doctors, other healthcare providers, and hospitals for their services and are reimbursed by CMS on a per-member-per-month rate that is determined beforehand. See Id. § 1395w-23(a).

         By law, CMS must pay Medicare Advantage insurers in a manner that ensures “actuarial equivalence” between payments for healthcare under Medicare and Medicare Advantage plans:

[T]he Secretary shall adjust the payment amount [of fixed monthly payments to Medicare Advantage insurers] for such risk factors as age, disability status, gender, institutional status, and such other factors as the Secretary determines to be appropriate, including adjustment for health status . . ., so as to ensure actuarial equivalence.

Id. § 1395w-23(a)(1)(C)(i). Risk factors represent the risk that a given beneficiary, or beneficiary population, will need healthcare from doctors or hospitals in the next year as it may be diagnosed. “A risk adjustment model is required to translate the diagnosis data into expected costs of coverage.” CMS Mot. at 14. For this purpose, CMS relies on its model, the CMS Hierarchical Condition Category (CMS-HHC) risk-adjustment model, to “perform that conversion”:

CMS-HCC is a complex regression model built to estimate the costs associated with certain characteristics of Medicare beneficiaries. The inputs to the model are data from individuals who receive their benefits through the traditional, fee-for-service Medicare system. Its outputs are a set of multipliers-that is, “coefficients”-that “represent the marginal (additional) cost” of each medical “condition or demographic factor (e.g., age/sex group, Medicaid status, disability status).” The coefficients are added together to form a “risk score, ” and then computed against a base payment rate (which varies depending on geography and the bid submitted by the insurer, among other things).

Id. (internal citations omitted).

         By this process, CMS calculates the average monthly expenditure for an average beneficiary under traditional Medicare in the past year. The “base rate establishes . . . what it would cost to treat a beneficiary of average risk in a given area.” See Transcript of Aug. 8, 2018 Motions Hearing (Hearing Tr.) [Dkt. 73] at 5. CMS adds a geographical differential, based on data from the past year, to calculate an average per-capita monthly payment for each county in the nation.

         This is no straightforward task. Each traditional Medicare beneficiary has a “demographic risk coefficient” which reflects that person's age, gender, institutional status, and disability status, among others. See Id. at 4. Additional coefficients represent the health status of the beneficiaries in traditional Medicare, taken from their diagnosis codes as reported to CMS by their doctors. Using such CMS data, “the model estimates the marginal cost of each disease and cluster of demographic characteristics. . . . By mapping known expenditures . . ., the model calculates the expected cost of each medical condition and demographic factor.” CMS Mot. at 17. Using the data from the demographic characteristics, reported diagnoses, and Medicare expenses of the beneficiaries in traditional Medicare, the model can estimate the marginal cost of each condition, disease and cluster of demographic characteristics.

         The “average beneficiary” is given a risk score of 1.0, which is then adjusted upwards or downwards according to the risk score determined by an individual's demographic and health status information. For example, 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. See, e.g., Advance Notice of Methodological Changes for CY 2004 Part C Rates (Mar. 28, 2003) (2004 Advance Notice) at ¶ 3895-97 (describing how CMS uses the model to “associate diseases categories with incremental costs”).[3]Thus, the costs in a prior year of the “risk coefficients” in the traditional Medicare system are used to determine the costs of similar risk coefficients for Medicare Advantage beneficiaries. The underlying logic is that developing risk coefficients with data from traditional Medicare, and then adjusting a Medicare Advantage beneficiary's risk score (and the payment to the Medicare Advantage insurer accordingly), will render the cost to CMS under traditional Medicare and the cost to the insurer under Medicare Advantage actuarially equivalent.

         In conducting these analyses, CMS relies entirely on the diagnosis codes submitted by healthcare providers under traditional Medicare. “[T]he risk adjustment model is built on unaudited [traditional Medicare] data . . . which must contain errors.” CMS Mot. at 37. Indeed, doctors treating traditional Medicare patients are paid based on their services and not the diagnosis codes they might submit to report why the patient saw the doctor. As UnitedHealth's counsel explained at argument, physicians bill traditional Medicare by procedure, not diagnosis codes, so that “physicians are essentially indifferent to the diagnosis . . . . There's no financial incentive to be particularly careful.” Hearing Tr. at 13. “[W]hat matters is the procedure they did.” Id. at 14; see also CMS Mot. at 7 (agreeing that traditional Medicare payments to doctors “depend only on the services . . . and not in any way on the diagnoses submitted”). Given this incentive scheme, it can be no surprise that diagnosis reports for Medicare Part B are considered much less reliable than hospital diagnosis reports for Part A. See CMS Mot. at 7 (noting “the quality of the Part B diagnosis data is generally understood to be inferior to the Part A diagnosis data”).

         Medicare Advantage insurance companies bid annually after CMS issues notice of each county's benchmark rate for the forthcoming year. See 42 U.S.C. § 1395w-23(b)(1)(B). The insurers are paid on a per-capita basis for each covered individual, including applicable risk scores. As a result, a Medicare Advantage insurer undertakes to provide insurance coverage at least identical to Medicare at annual fixed rates even though the health care needs of the covered populations, mostly the elderly, vary greatly.

         Humans being human, diagnoses in healthcare records may be miscoded, inappropriately added, or otherwise faulty by accident or mal intent. UnitedHealth suggests that the error rate can be as high as 20%. See Compl. [Dkt. 1] ¶ 38; see also Hearing Tr. at 28. In the past, neither CMS nor the insurers made efforts to review proactively the diagnosis codes assigned by healthcare providers. Indeed, as stated above, CMS treats diagnosis codes as categorically valid for its own purposes under traditional Medicare, including for setting rates for Medicare Advantage. Nonetheless, CMS has long required Medicare Advantage insurers to certify “based on best knowledge, information and belief” that the information they provide to CMS, including all diagnosis codes, is “accurate, complete, and truthful.” 42 C.F.R. § 422.504(1)(2). CMS contends that this pre-existing regulation, and other existing agency practices, have long required that diagnosis codes submitted by Medical Advantage insurers be supported by underlying medical records (i.e., patient medical charts). UnitedHealth responds that neither this pre-existing regulation, nor any other law or regulation, has previously obligated the insurance companies who provide Medicare Advantage insurance to validate independently the underlying medical records that support diagnosis codes submitted by health care providers.

         For more than a decade, CMS has conducted audits of a subsection of insurers in the Medicare Advantage program, through which it has compared the diagnosis codes in bills paid by the insurance companies to the underlying patient medical charts and records, which it requires the insurers to obtain for this purpose. It has then required repayment to CMS of any costs that were based on unsupported diagnosis codes. In 2008, CMS announced that it would begin applying these “Risk Adjustment Data Validation (RADV)” audits to extrapolate the error rate in the audited sample across an entire insurance contract. [4]The insurer would be responsible for returning any overpayment to CMS, based on the extrapolated error rate.

         When CMS sought comments on its new methodology for conducting RADV audits, Medicare Advantage insurers immediately protested that the rates paid for each diagnosis code are based on traditional Medicare records that are not audited or verified in any way; requiring repayment of all amounts seemingly “overpaid” to a Medicare Advantage insurer based on audited records would ignore errors in CMS records and violate the statutory requirement of actuarial equivalence.[5]

         This argument ventures deep into the weeds of actuarial science but is not actually disputed by the parties. Nor could CMS really debate it: as a result of the comments it received, CMS adopted a “Fee-for-Service Adjuster” or “FFS Adjuster” to the results of RADV audits of Medicare Advantage insurance contracts. The FFS Adjuster reflects CMS's own estimate of the error rate in risk factors and diagnosis codes submitted by healthcare providers and paid by CMS for its traditional Medicare participants; applied to the results of a RADV audit of a Medicare Advantage insurer, it is designed to achieve actuarial equivalence between the two. Thus, Medicare Advantage providers must 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. See Notice of Final Payment Error Calculation Methodology for Part C Medicare Advantage Risk Adjustment Data Validation Contract-Level Audits (Feb. 24, 2012) (RADV Final Methodology) at ¶ 5311-15.

         UnitedHealth asserts that the 2012 FFS Adjuster works to counteract the fact that per-capita payments to Medicare Advantage insurers are based on a less precise set of data- belonging to CMS-than that which is reviewed during an audit. Their argument, and CMS's eventual concurrence, are supported by the American Academy of Actuaries, which strongly advised CMS that it was not actuarially sound to compare unaudited figures to calculate per-capita payments and then audited figures to calculate overpayments. See Academy of Actuaries Comment at ¶ 5236 (“This type of data inconsistency not only creates uncertainty, it also may create systematic underpayment, undermining the purpose of the risk-adjustment system and potentially resulting in payment inequities.”).

         The passage of the Patient Protection and Affordable Care Act (ACA), Pub. L. No. 111-148, 124 Stat. 119 (2010), is also directly relevant here. The ACA imposed an obligation on Medicare Advantage insurers to report and return any overpayments that an insurer discovers on its own. See 42 U.S.C. § 1320a-7k(d)(1) (2012). This section of the ACA defined “overpayment” as “any funds that a person receives or retains under [Medicare Advantage] to which the person, after applicable reconciliation, is not entitled.” Id. § 1320a-7k(d)(4)(B). The law further required that any “overpayment . . . be reported and returned [within] 60 days after the date on which the overpayment was identified.” Id. § 1320a-7k(d)(2). If an insurer in the Medicare Advantage program fails to return such a discovered overpayment within 60 days of identifying it, that failure renders the insurer's initial but faulty claim for payment a violation of the False Claims Act (FCA). Id. § 1320a-7k(d)(3) (“Any overpayment retained by a person after the deadline for reporting and returning the overpayment . . . is an obligation (as defined in section 3729 (b)(3) of title 31) for purposes of section 3729 of such title.”); cf. False Claims Act, 31 U.S.C. § 3729(b)(3). Claims for overpayments under the False Claims Act carry the potential for treble damages, civil penalties, and debarment from Medicare. See 31 U.S.C. § 3729(a)(1)(G) (providing for civil penalties and treble damages); 42 C.F.R. § 424.535(a) (describing grounds for revocation of enrollment in the Medicare program). Further, nongovernment qui tam plaintiffs may bring FCA claims in federal court. See 31 U.S.C. § 3730(b).

         The Affordable Care Act established a basic statutory framework but left several crucial terms undefined. It did not define at what point an insurer might be said to have “identified” an overpayment, thus triggering the 60-day clock; nor did it outline the scope of “applicable reconciliation” or state how “overpayments” and “actuarial equivalence” in payments are related.

         We come to the 2014 Final Rule at issue here. CMS issued a notice of proposed rulemaking in January 2014 and sought comments.[6] CMS proposed to “clarify the statutory definition of overpayment” with a new regulation titled “Reporting and Returning Overpayments, ” to be codified at 42 C.F.R. § 422.326. See 79 Fed. Reg. at 1996, 2055-56 (June 29, 2000) (AR80 at ¶ 139-40).

         CMS published its Final Rule on May 23, 2014, and in so doing finalized 42 C.F.R. § 422.326 concerning overpayments.[7] Under the 2014 Overpayment Rule, any diagnostic code that is inadequately documented in a patient's medical chart results in an “overpayment.” Id. at 29, 921 (AR1313). Further, an overpayment is “identified” whenever a Medicare Advantage insurer determines, “or should have determined through the exercise of reasonable diligence, ” that it had received an overpayment. Id. at 29, 923 (AR1315). CMS further defined reasonable diligence as requiring “at a minimum . . . proactive compliance activities conducted in good faith by qualified individuals to monitor for the receipt of overpayments.” Id. UnitedHealth alleges that these obligations apply a simple negligence standard for purposes of False Claims Act liability, which is contrary to the standards in the False Claims Act itself. See 31 U.S.C. § 3729(b)(1) (defining “knowing” and “knowingly” to include “actual knowledge, ...

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