District Court Vacates 2014 Medicare Advantage Overpayment Rule and Curtails Potential Avenues for DOJ to Pursue False Claims Act Damages

On September 7, 2018, the United States District Court for the District of Columbia vacated CMS’s 2014 Final Overpayment Rule,[1] applicable to the Medicare Advantage program, granting summary judgment to UnitedHealthcare that the Final Rule violated the Medicare statute, was inconsistent with the Affordable Care Act (ACA) and the False Claims Act (FCA), and violated the Administrative Procedures Act (APA).  In broad strokes, the District Court confronted two statutory issues.  The first centered on the undisputed fact that the Final Rule did not account for known errors in the data (from traditional Medicare) used to calculate payments to Medicare Advantage plans.  The court found that this failure violates the statutory mandate of “actuarial equivalence” because, although “payments for care under traditional Medicare and Medicare Advantage are both set annually based on costs from unaudited traditional Medicare records,” the Final Rule “systematically devalues payments to Medicare Advantage insurers by measuring ‘overpayments’ based on audited patient records.”  As a result, the court concluded that the Final Rule “establishes a system where ‘actuarial equivalence’ cannot be achieved.”  On the same basis, the court found that the Final Rule violates the statutory requirement to use the “same methodology” in calculating expenditures in traditional Medicare and determining payments to Medicare Advantage plans.  The Final Rule “fails to recognize a crucial data mismatch and, without correction, it fails to satisfy [the Medicare statute].” 

The second issue, which is perhaps the most significant for readers of this blog, pertains to how overpayments are identified.  The Final Rule said that an overpayment is identified, thus triggering the ACA’s statutory mandates to return the overpayment and potential damages under the FCA for failure to do so, when a Medicare Advantage plan determines “or should have determined through the exercise of reasonable diligence,” that it had received an overpayment.  The Final Rule further stated that reasonable diligence requires “at a minimum . . .  proactive compliance activities conducted in good faith by qualified individuals to monitor for the receipt of overpayments.”  The court held that this aspect of the Final Rule was inconsistent with both the FCA and the ACA because it unlawfully imposes a negligence standard on MA insurers to identify and report overpayments:  the “2014 Overpayment Rule extends far beyond the False Claims Act, and by extension the Affordable Care Act.  Not being Congress, CMS has no legislative authority to apply more stringent standards to impose FCA consequences through regulation.”

In addition to the statutory violations, the court also agreed with UnitedHealthcare that the Final Rule was arbitrary and capricious under the APA.  The court noted that CMS had “recognized that actuarial equivalence, mandated by statute, required a [Fee-For-Service] Adjuster for purposes of defining overpayments because of dissimilar data for RADV audits” but that CMS had provided “no legitimate reason for abandoning that statutory mandate in the context of the 2014 Overpayment Rule.”  In reaching this conclusion, the court emphasized that UnitedHealthcare was not seeking permission to “knowingly or recklessly” bill CMS for erroneous diagnosis codes, but rather it argued that “it should not be subject to lesser payments, False Claims Act liability, or debarment for errors…that are fewer than those errors made by CMS itself.”

Finally, the court found that the Final Rule violated the APA’s “logical outgrowth” requirement by departing from the knowledge standard in the proposed rule.  Whereas the proposed rule had adopted the familiar definition of “knowing” from the FCA, the Final Rule had imposed a “distinctly different and more burdensome definition of ‘identified’ without adequate notice.”  As a result, the court found that CMS “pull[ed] a surprise switcheroo on regulated entities” in violation of the APA.

Because the decision vacates the overpayment provisions of the Final Rule entirely, further rulemaking may be necessary.  The court, in footnotes noted that one option would be to overhaul the entire Medicare Advantage HCC model before going on to suggest a more reasonable response might be to propose an Overpayment Rule that incorporates a FFS adjuster and thus achieves actuarial equivalence.  The court’s decision should also have a significant impact on DOJ’s efforts to bring FCA cases on the basis of potentially unsupported diagnosis codes for Medicare Advantage beneficiaries.

A copy of the court’s opinion can be found here.

[1] See Contract Year 2015 Policy and Technical Changes to the Medicare Advantage and the Medicare Prescription Drug Benefit Programs, 79 Fed. Reg. 29,844, 29844-968 (May 23, 2014) (2014 Overpayment Rule).