Health Law Daily Overpayment final rule failed to achieve actuarial equivalence
Friday, September 7, 2018

Overpayment final rule failed to achieve actuarial equivalence

By Sheila Lynch-Afryl, J.D., M.A.

A federal district court invalidated CMS’ 2014 overpayment Final rule, finding that it violates the statutory mandate of "actuarial equivalence" between payments under the Medicare Advantage (MA) program and traditional Medicare. In addition, the Final rule constituted a departure from prior policy that CMS failed to adequately explain (UnitedHealthcare Insurance Company v. Azar, September 7, 2018, Collyer, R.).

Actuarial equivalence. Soc. Sec. Act §1853(a)(1)(C) requires CMS to adjust the payment amount to MA insurers for such risk factors as age, disability status, gender, and institutional status to "ensure actuarial equivalence" (see also 42 C.F.R. §422.308(c)(1)). In an attempt to achieve actuarial equivalence, CMS uses risk coefficients from traditional Medicare, which rely entirely on diagnosis codes submitted by providers. CMS not does audit these diagnosis codes, which are irrelevant to payment under traditional Medicare.

In 2014 CMS issued a Final rule (79 FR 29844, May 23, 2014) promulgating Sec. 6402(a) of the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148), which imposed a requirement on MA insurers to report and return overpayments within 60 days. Under 42 C.F.R. §422.326, as added by the Final rule, any diagnostic code that is inadequately documented results in an overpayment. The rule, however, did not adopt an adjuster to recognize that the sources of data are not compatible—unaudited traditional Medicare records are used to determine payments to MA insurers and audited medical charts are used to determine overpayments. The rule, argued insurers, resulted in a false appearance of better health among MA beneficiaries compared to traditional beneficiaries and underpayments to MA insurers.

The court concluded that the Final rule failed to achieve actuarial equivalence. CMS pays MA insurers at rates based on flawed data from traditional Medicare. The effect of the 2014 Final rule is that MA insurers are paid less to provide the same coverage than CMS pays for comparable patients: "while CMS pays for all diagnosis codes, erroneous or not, submitted to traditional Medicare, it will pay less for Medicare Advantage coverage because essentially no errors would be reimbursed."

Prior policies. The 2014 overpayment rule also deviated from prior CMS policies without justification. For example, CMS previously applied "fee-for-service" adjusters in the Risk Adjustment Data Validation (RADV) audit process to account for different data sources. In addition, two notices from CMS recognized the differences in data for traditional Medicare and MA coverage. CMS was, therefore, arbitrary and capricious in adopting the 2014 overpayment rule without explaining its departure from prior policy.

FCA. The Final rule was invalidated on the additional ground that it could punish "honest mistakes" or incorrect claims submitted through mere negligence. The False Claims Act (FCA) and the ACA require actual knowledge, deliberate ignorance, or reckless disregard before liability can be found. However, the Final rule—which provides an overpayment is identified when the insurer determines "or should have determined through the exercise of reasonable diligence" that it received an overpayment—applies a negligence standard for purposes of FCA liability.

The case is No. 16-157 (RMC).

Attorneys: Daniel Meron (Latham & Watkins LLP) for UnitedHealthcare Insurance Co., AmeriChoice of New Jersey, Inc. and Arizona Physicians IPA, Inc. James O. Bickford, U.S. Department of Justice, for Alex M. Azar, II.

Companies: UnitedHealthcare Insurance Co.; AmeriChoice of New Jersey, Inc.; Arizona Physicians IPA, Inc.

MainStory: TopStory CaseDecisions AgencyNews AuditNews BillingNews FCANews HealthReformNews PartCNews ProgramIntegrityNews

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