Medicare Advantage and False Claims Act Liability: The D.C. Circuit Weighs In on the Relationship (or Lack Thereof) Between Actuarial Equivalence and the Overpayment Rule

The Overpayment Rule

Prior to the enactment of the Patient Protection and Affordable Care Act (PPACA) in 2010, there was ambiguity as to whether received overpayments automatically gave rise to liability under the “reverse false claim” provision of the FCA.3  Section 6402(a) of PPACA clarified the ambiguity by requiring anyone who received overpayments from Medicare (and other defined healthcare programs) to “report and return” overpayments within 60 days after the overpayment is “identified.”4  Failure to self-disclose and repay known overpayments within this 60-day period subjected covered “persons” (including insurers) to FCA liability, including treble damages and penalties.  PPACA, however, did not define when an overpayment would be deemed to have been “identified.”5

In 2014, the Centers for Medicare & Medicaid Services (CMS) issued the Overpayment Rule.6   CMS defined when an overpayment has been identified by requiring Medicare Advantage insurers7 to repay amounts once they determine or “should have determined through the exercise of reasonable diligence” that “there is no basis for that payment in the underlying medical records” or if the “payment increment . . . lacks support in their beneficiaries’ medical records.”8

United’s Challenge and the District Court’s Ruling

UnitedHealthcare (United) challenged the Overpayment Rule, arguing, inter alia, that the Overpayment Rule must comply with actuarial equivalence and that it had failed to do so.  Actuarial equivalence requires that payments made to insurers participating under Medicare Advantage be equivalent to payments made under traditional "Fee-for-Service” Medicare.9  United argued that, by “relying on audited data to identify alleged overpayments,” CMS would violate actuarial equivalence because it “cannot subject the diagnosis codes underlying Medicare Advantage payments to a different level of scrutiny than it applies to its own payments under traditional Medicare . . . .”10

In 2018, the district court agreed with United’s argument, holding that the Overpayment Rule violated actuarial equivalence because “payments for care under traditional Medicare and Medicare Advantage are both set annually based on costs from unaudited traditional Medicare records, but the 2014 Overpayment Rule systemically devalues payments to Medicare Advantage insurers by measuring overpayments based on audited patient records.”11  Essentially, the district court reasoned that without an adjustment (CMS did not use a Fee-for-Service Adjuster,12 otherwise known as an FFS Adjuster, under the Overpayment Rule), “Medicare Advantage insurers will be paid less to provide the same healthcare coverage to their beneficiaries than CMS itself pays for comparable patients,”13 and thus CMS would be violating the actuarial-equivalence requirement.

The district court’s vacatur of the Overpayment Rule was a relief for Medicare Advantage insurers as they were no longer under an obligation to report and return overpayments to CMS within 60 days to avoid FCA liability.

The D.C. Circuit Weighs In

CMS appealed the district court decision and, ultimately, the D.C. Circuit reversed the district court’s ruling, concluding that the actuarial-equivalence requirement does not apply to the Overpayment Rule at all.  The Overpayment Rule and actuarial equivalence exist separately with “nothing in the Medicare statute’s text, structure, or logic” connecting the concepts, according to the D.C. Circuit.14  The Court suggested that United’s argument – and the district court’s decision incorporating it – wrongly conflated and applied the two.  Actuarial equivalence instead, “appl[ies] to different actors, target[s] distinct issues arising at different times, and work[s] at different levels of generality.”15  In so ruling, the D.C. Circuit effectively eliminated the centerpiece of United’s defense that its application of actuarial equivalence was reasonable and negated its “report and return” obligation under the Overpayment Rule.

The D.C. Circuit concluded there would be the “potential for absurd consequences” if it upheld the lower court’s ruling.16  In fact, United explained one of those “absurd consequences” at oral argument – “a Medicare Advantage insurer could be entitled to retain payments that it knew were unsupported by medical records so long as CMS had not established that the insurer’s overall payment error rate was higher than traditional Medicare’s payment error rate.”17

The D.C. Circuit analyzed two additional arguments advanced by United in the lower court, also finding those to be without merit.  United argued that (1) the Overpayment Rule also violated Medicare’s “same methodology” requirement; and (2) CMS’s decision not to use an adjuster made the Overpayment Rule arbitrary and capricious.

The same methodology requirement “merely clarifies that, in computing the data it publishes, CMS must use the same risk-adjustment model that it already uses to set monthly payments to Medicare Advantage insurers . . . .”18  The D.C. Circuit compared the same-methodology requirement to the requirement for actuarial equivalence, stating that the “same reasons that support [the] holding regarding UnitedHealth’s actuarial-equivalence claim” are those that support the contention that the same methodology requirement does not apply to the Overpayment Rule.19

Similarly, the D.C. Circuit rejected United’s argument that CMS was obligated to use an FFS Adjuster under the Overpayment Rule to comply with “prior CMS policies and pronouncements,” and “without rationale or justification,” did not do so.20  The D.C. Circuit held that CMS was not obligated to use an “FFS Adjuster” in the context of the Overpayment Rule (or explain its reasoning for not doing so) because the actuarial-equivalence requirement does not apply.21

Going Forward

So, what does this all mean?  At first glance, the D.C. Circuit’s decision appears to be a significant blow to Medicare Advantage insurers.  While it may have been to the case-specific facts presented, it does provide guidance as to the Court’s rationale. Moreover, several other potential defenses remain in the FCA overpayment context: room to demonstrate if and when credible information was received; when a potential overpayment was identified; what level of diligence was undertaken in connection with an internal review/investigation; when and how the review/investigation was completed; and, if an overpayment was identified as a result, how and when that was reported/returned.

Given these remaining issues regarding potential overpayments, and the Department of Justice’s continued focus on ensuring robust corporate compliance programs, Medicare Advantage insurers can and should minimize their FCA exposure by having robust compliance measures in place and by viewing circumstances in real time through the lens of what they are doing and how it might be looked back upon in the future by government enforcers and qui tam relators.  Keeping careful contemporaneous records of what is learned about potential overpayments; when it is learned; what is done to investigate and make determinations; and, if necessary, to report or disclose any adverse determination, remain the key concepts to be employed in mitigating exposure under the FCA.

Footnotes

1. UnitedHealthcare Ins. Co. v. Becerra, No. 18-5326, 2021 WL 3573766 (D.C. Cir. Aug. 13, 2021).
2. Becerra, 2021 WL 3573766, at *20 (internal quotations omitted) (emphasis added).
3. See 31 U.S.C. § 3729(a)(1)(G) (the “reverse false claim” provision of the FCA, which imposes liability on any person who “knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the Government, or knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government”).
4. The Patient Protection and Affordable Care Act, Pub. L. No. 111-48, 124 Stat. 119 (2010); 42 U.S.C. § 1320a-7k(d)(2).
5. See The Patient Protection and Affordable Care Act, Pub. L. No. 111-48, 124 Stat. 119 (2010). 
6. See Medicare Program; Contract Year 2015 Policy and Technical Changes to the Medicare Advantage and the Medicare Prescription Drug Benefit Programs, 79 Fed. Reg. 29,844, 29,921 (May 23, 2014) (codified at 42 C.F.R. § 422.326).
7. Additionally, CMS published a Final Rule on February 12, 2016 which implemented Section 6402(a) of the Patient Protection and Affordable Care Act.  See Medicare Program; Reporting and Returning of Overpayments, 81 Fed. Reg. 7,654 (Feb. 12, 2016).  The Final Rule from 2016 covered Medicare “persons” under Part A and Part B in addition to those under Part C and D (which were covered by CMS’s 2014 Final Rule in 79 Fed. Reg. 29,844).
8. Becerra, 2021 WL 3573766, at *1, *2, *11; 42 C.F.R. § 422.326(c).  The district court “rejected the Overpayment Rule’s imposition of a negligence standard of liability for failure to identify and report an overpayment[]” holding that the “Rule’s negligence-based liability [was] inconsistent with the False Claims Act’s knowingly standard.” Becerra, 2021 WL 3573766, at *11 (citing UnitedHealthcare Ins. Co. v. Azar, 330 F. Supp. 3d 173, 190-91 (D.D.C. 2018), rev’d and remanded sub nom. UnitedHealthcare Ins. Co. v. Becerra, No. 18-5326, 2021 WL 3573766 (D.C. Cir. Aug. 13, 2021)) (internal quotations omitted).  The district court also held that the Rule’s “negligence-based definition of identified” differed from the proposed rule’s definition, which it found “violated the APA because it was not a logical outgrowth of the proposed rule.”  Becerra, 2021 WL 3573766, at *11 (citing Azar, 330 F. Supp. 3d at 191-92) (internal quotations omitted).  CMS’s appeal did not challenge either of those two holdings regarding the Rule’s negligence standard and thus, those rulings were not reviewed by the D.C. Circuit on appeal.  See Becerra, 2021 WL 3573766, at *11.
9. The language of Section § 1395w-23(a)(1)(C)(i) states: “Subject to subparagraph (I), the Secretary shall adjust the payment amount under subparagraph (A)(i) and the amount specified under subparagraph (B)(i), (B)(ii), and (B)(iii) 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 under paragraph (3), so as to ensure actuarial equivalence. The Secretary may add to, modify, or substitute for such adjustment factors if such changes will improve the determination of actuarial equivalence.”  42 U.S.C. § 1395w-23(a)(1)(C)(i) (emphasis added).
10. Azar, 330 F. Supp. 3d at 186.
11. Id. at 184 (internal quotations omitted).
12. “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.”  Id. at 180.  
13. Id. at 184-85.
14. Becerra, 2021 WL 3573766, at *3.
15. Id. at *14.
16. Id. at *15.
17. Id.
18.  Id. at *2.
19. Id. at *19.
20. Azar, 330 F. Supp. 3d at 188.
21. Becerra, 2021 WL 3573766, at *20.  The D.C. Circuit interpreted actuarial equivalence under § 1395w-23(a)(1)(C)(i) in a case of first impression.  Id. at *12