FCA Origins and Amendments
The FCA was enacted in 1863 in response to concerns by the United States Congress that suppliers of goods to the Union Army during the Civil War were defrauding the government. Under the FCA, persons who knowingly submitted false claims to the federal government could be fined double the government’s damages plus a penalty of $2,000 for each false claim.
Beginning with the passage of the False Claims Reform Act of 1985, the first significant amendment to the FCA since its enactment in 1863, the FCA has continued to be tweaked and bent to adjust to contemporary needs. For example, the Fraud Enforcement and Recovery Act of 2009 (FERA) broadened the definition of a “claim” to be a request or demand for money by a contractor, grantee, or other recipient, if the federal government provides any portion of the requested money or property or reimburses the contractor or grantee. FERA also expanded civil liability for knowingly concealing or improperly avoiding an obligation to pay money to the federal government. A common example of such avoidance is the failure to return overpayments made by the federal government. As per the Patient Protection and Affordable Care Act (PPACA), Medicare, Medicaid, and commercial plans operating on the Health Insurance Marketplace are required to promptly return identified overpayments within 60 days or be potentially subject to FCA liability.
FCA Liability and Damages
Currently, there are three forms of conduct that most commonly result in findings of false claim liability. First, the FCA imposes liability for any person who knowingly submits a false claim to the federal government, causes another to submit a false claim to the federal government, or knowingly makes a false record or statement to get a false claim paid by the federal government. Second, the FCA provides liability where one acts to avoid having to pay money to the federal government (a reverse false claim). Third, the FCA creates liability for those who conspire to violate the FCA.
In addition to attaching FCA liability based on the submission of false claims, courts increasingly hold liable claimants who falsely certify compliance with any statutory, regulatory, or compliance provision.
With the passing of FERA, FCA damages are now calculated as treble government damages plus an inflation-adjusted per claim penalty (2022 calendar year adjusted range: $11,803-to-$23,607 per claim).
Federal recoveries from FCA violations have totaled over $64 billion since 1986, with over $5.6 billion recovered during 2021 alone. Of the $5.6 billion, over $5 billion was recovered from the healthcare industry. This $5 billion figure does not include FCA recoveries by state Medicaid Fraud Control Units (MFCUs), which totaled over $1.7 billion in 2021. Because a portion of monies, ranging between 50 to 78.31 percent recovered from MFCU-initiated FCA actions are required to be returned to the Centers for Medicare & Medicaid Services (CMS), total federal recoveries from healthcare FCA actions more likely ranged between $5.8 billion and $6.3 billion in 2021.
The Issue
Based on the above recovered amounts alone, the FCA appears to have been, and continues to be, an effective tool for recovering monies from bad actors who seek to defraud federal healthcare programs. However, a clear contradiction begins to appear when looking beyond the recovered amounts and evaluating the federally funded programs from which many of the recoveries have been collected.
While FCA liability was originally contingent on a person knowingly submitting, or conspiring to submit, a false claim, and damages under every form of fraud recovery under the FCA were in part based upon a per claim penalty, no claims are ever submitted for reimbursement by fully capitated federal healthcare programs such as Medicare Advantage. This presents two interesting questions: why is the FCA being broadly applied to non-claims-based healthcare programs, and, more importantly, how have courts held FCA liability in the absence of physical claims?
Origins of FCA Liability in Medicare
With the enactment of the Health Insurance For The Aged Act (Medicare Act) in 1965, persons aged 65 and older, as well as persons with recognized disabilities, were able to obtain federally subsidized Hospital (Part A) and Supplementary Medical Services (Part B) insurance. This construction of Medicare, commonly referred to as “traditional” Medicare, reimburses Part A and Part B services on a fee-for-service (FFS) basis, whereby claims for services are submitted to the federal government for payment.
The FCA likely got a foothold in federal healthcare programs partly because the standard reimbursement model for earlier programs, such as traditional Medicare, bore a close resemblance to that of the wartime suppliers in 1863, whereby claims are submitted to the federal government for reimbursement. Accordingly, there is straightforward utility in applying FCA liability to bad actors operating as healthcare services providers within the traditional Medicare program.
Introduction of Medicare Capitated Plans in 1972
As part of a federal initiative to restructure the medical care delivery system to offer more comprehensive care at lower costs than conventional claims-based FFS, focus began shifting towards prospective (prepayment or capitated) payment models in the early 1970s. First coined by the Secretary of Health, Education, and Wellness (HEW, the predecessor to CMS) Robert Finch in 1970, and further promoted by the Social Security Act Amendments of 1972 and the federal Health Maintenance Organization Act of 1973, health maintenance organizations (HMOs) were private medical insurance groups that received a fixed payment, based either on a per enrollee basis in advance of care delivery (capitated payments), or the reasonable cost incurred (cost-based payments) for a specified range of medical services. For capitated payments, HMOs generally assumed full financial risk for the cost and quality of all covered services.
With the passage of the Social Security Act Amendments of 1972, Medicare beneficiaries were allowed to purchase combined Part A and Part B insurance from capitated or cost-based HMOs as an alternative to traditional Medicare. This marked the earliest prototype of what would become formalized as Medicare+Choice (Part C) plans, which were later retitled as Medicare Advantage plans by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA)
Judicial Precedence for Capitated Plans
While the foundation for capitated health plans was laid in 1972, precedent for FCA application to Medicare Advantage was not firmly established until 1990, when a case involving the acceptance of substantial overpayments by an HMO was held by a Florida district court to have violated the FCA.
Finding fraud in instances where persons or entities knowingly and intentionally withhold the return of overpayments is relatively straightforward. A few recent examples of these from across the spectrum of managed care providers include the knowing and intentional facilitation of COVID-19 vaccinations of ineligible donors by a nursing home health system, a scheme to bill for substance abuse services that were either never provided or not medically necessary,and the submission of claims for durable medical equipment that were not medically necessary.
More interesting, however, is how overpayments in a capitated environment occur in the first place. In theory, because capitated plans are reimbursed prospectively based on estimated averages of future services to their enrollees, not retrospective payments based on actual services provided, such overpayments are somewhat paradoxical. How can an overpayment occur if it is based on forecasted utilization estimates?
The overpayment can occur by treating the data submitted by capitated plans to the federal government, which the government then uses to calculate global payments, as quasi-claims for the purpose of satisfying the claims submission requirement of the FCA. Using this rationale, courts have successfully attached FCA liability based upon the knowing and intentional false certification of data accuracy.
Medicare Advantage Rate Setting: Risk Adjustment and Actuarial Equivalence
Global payments by CMS to Medicare Advantage plans are the result of the competitive bidding process that each Medicare Advantage plan must complete annually. The bidding process is primarily comprised of the aggregation of plan-based data used to forecast costs of providing medical services to projected enrollment. Once a Medicare Advantage plan submits its bid, the bid is then reviewed, adjusted, and accepted by CMS. This process generally must be completed before any healthcare services can be provided to a Medicare Advantage enrollee.
Regarding adjustments by CMS, the Medicare statute requires that Medicare Advantage plans are reimbursed at a per enrollee rate that is actuarially equivalent to what traditional Medicare would pay for the same enrollee. To achieve this, CMS compares Medicare Advantage bids to county-specific benchmarks for traditional Medicare beneficiaries. Additionally, to account for the difference in diagnosis coding patterns between traditional Medicare and Medicare Advantage plans, CMS applies a coding intensity factor to each Medicare Advantage plan enrollee’s risk score. The purpose of the coding intensity factor is to effectively bring down the normalized risk score of a population to reflect the cost of care more accurately for a given population.
An enrollee’s risk score is the aggregate riskiness or anticipated costliness of the enrollee, and is based on risk factors such as the enrollee’s health, age, or other factors that are indicators of the level and scope of services that an enrollee will require. Because certain diagnoses lend themselves to costlier treatments and outcomes, the presence or absence of International Classification of Diseases (ICD) diagnosis codes attached to provider claims for services the enrollee receives is a risk factor that can be highly influential on an individual’s overall risk score. For example, a person with an ICD code for diabetes within that person’s medical record will likely be assessed a higher risk factor than a non-diabetic because a diabetic is at greater risk of requiring additional and costly services to manage the condition, as well as at greater risk of requiring costly hospital inpatient stays if the diabetes is uncontrolled.
Coding intensity adjustments are simply downward per enrollee adjustments by CMS based on the average intensity of diagnosis coding audits conducted by Medicare Advantage plans as compared to traditional Medicare. Essentially, because Medicare Advantage plans receive higher reimbursement for more complex, higher risk enrollees, the plans are incentivized to ensure that all diagnosis codes supported by an enrollee’s medical record are properly recorded during each medical visit. The more diagnosis codes associated with an enrollee, the greater the likelihood that the enrollee will be assessed a higher risk score for the subsequent plan year. Consequently, because CMS does not audit traditional Medicare enrollees as intensely as Medicare Advantage plans do their enrollees, CMS artificially adjusts Medicare Advantage plan reimbursement downwards to maintain statutory actuarial equivalence.
Accordingly, the global payments that a Medicare Advantage plan receives are based on (1) the plan’s anticipated costs, (2) the average cost of providing services to each enrollee within the geographic region where the plan exists, (3) the risk score of each enrollee, which is heavily influenced by diagnosis codes, and (4) the coding intensity adjustment. The combined effect of the bid process and the capitated global payment that a Medicare Advantage plan receives arguably should bypass claims-based FCA liability because what is provided in the capitated reimbursement model by Medicare Advantage plans is limited to data and documentation associated with known and forecasted enrollment and encounters.
Applying the Overpayment Rule and False Certification to Medicare Advantage
After the passage of PPACA in 2010, CMS promulgated the Overpayment Rule, which includes, in relevant part, that Medicare Advantage plans must return within 60 days any payment increments paid based on an enrollee’s diagnosis that is later discovered by the plan to not be supported by the enrollee’s medical record.
Because it is nearly impossible to audit every medical record annually and there exists some subjectivity in coding standards that can be affected by differing best practices, it is often beyond the reach of many Medicare Advantage plans to identify, catch, and correct all coding errors. Over time, courts have increasingly relied on common law false certification as the test to discern mistake from fraud.
Under the FCA, to prove a violation based on a false record or statement, thereby creating the standard of review for adjudicating cases based on false certification, the statement or record must be material to a false or fraudulent claim.
In a 2016 decision, the U.S. Supreme Court defined “material” as something that has a “natural tendency to influence or be capable of influencing” the government’s decision to pay a claim. The Court held that a false certification is material only if (1) “a reasonable man would attach importance to [it]” or (2) “the defendant knew or had reason to know that the recipient of the representation attaches importance to the specific matter ‘in determining his choice of action,’ even though a reasonable person would not.”
The Court emphasized that no one factor can determine whether the false certification is material. Instead, courts must determine from all of the facts if “the effect on the likely or actual behavior of the recipient of the alleged misrepresentation.”
This likely means that prior to attaching FCA liability based on incorrect diagnosis codes, a court would need to consider not only the diagnosis code with respect to an enrollee’s medical record but additionally compare other relevant documents and processes such as compliance policies and procedures, contract requirements for auditing and monitoring, and audit staff training. Accordingly, the underlying conduct must demonstrate by a preponderance of the evidence that an actor knew or should have known of the error(s) resulting in overpayment.
For example, in a 2018 settlement resulting from an earlier case appealed to the Ninth Circuit Court that was predicated on a False Certification theory, a Medicare Advantage provider was alleged to have (1) reviewed enrollee medical records to find, and report, missed diagnosis codes to Medicare Advantage plans to help improve the risk scores of the plans’ enrollees, but (2) failed to find and correct inaccurate diagnosis codes in the same records. Because the provider was diligent in finding missed diagnoses, but not in seeking out and correcting inaccurate diagnoses, and because the Medicare Advantage plan was alleged to have also intentionally constructed a retrospective review process designed to not reveal erroneously reported diagnosis codes for the purpose of causing inflated risk scores, and therefore higher reimbursement, the United States intervened in 2017. The case was later dismissed.
Can Current FCA Law Adequately Address Fraud in Medicare Advantage?
If looking incrementally at the timeline of both FCA revisions and its application to health plans, it is easy to see how courts have been able to find FCA liability in heavily capitated environments, such as Medicare Advantage. However, when viewed cumulatively, the timeline may more accurately describe a story of the legislature and courts walking in lockstep down a slippery slope.
First, Congress expanded the term “claim” to include any demand or request for monies that are at least in part funded by the federal government, thereby opening the door for claims to include requests in addition to those made strictly by contractors to the federal government. Second, courts expanded FCA liability to include false certification of compliance with statutory, regulatory, and contract requirements by entities and grantees participating in federal programs, thereby opening the door for finding liability based upon evidence tangential to claims. Third and last, courts use the Overpayment Rule to justify the attachment of FCA liability to data used to calculate capitated rates, thereby opening the door to liability where no claim is ever submitted. Together, these have resulted in the formulation of a separate standard for finding FCA liability in managed care models, including the submission of falsified or unreasonably inaccurate enrollee data used for making risk adjustment calculations.
While the courts have figured out a method for attaching FCA liability in a managed care model, one may quickly wonder how long this practice can last. It is unlikely that the original drafters of the FCA could have foreseen its application in instances where no claim is submitted for reimbursement, nor the ways it would be interpreted to comport with the rapidly changing healthcare environment. Maybe it would be better for a new law to be enacted that directly addresses fraud risks in managed care models, rather than force the courts to configure innovative ways to fill the void with the FCA.