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D.C. Circuit Upholds Application of Overpayment Rule to UnitedHealthcare Medicare Advantage Plan

In a precedential opinion that likely have a significant impact on several large pending cases, the United States Court of Appeals for the D.C. Circuit today upheld application of the so-called Overpayment Rule, 42 C.F.R. § 422.326, to Medicare Advantage organizations. See UnitedHealthcare Insurance Co. v. Becerra, No. 18-5326 (D.C. Cir. Aug. 13, 2021) (“UHC”).

Medicare Advantage insurance plans receive a capitated per patient monthly rate that the Centers for Medicare and Medicaid Services (“CMS”) sets based on an analysis of demographic “risk factors [such] as age, disability status, gender, [and] institutional status.” 42 U.S.C. § 1395w–23(a)(1)(C)(i). As the UHC court explained, “[t]o enable CMS to apply those relative factors to pay Medicare Advantage insurers at the correct risk-adjusted rate, the insurers must report to CMS the salient demographic and health characteristics of each of their Medicare-eligible beneficiaries.” UHC, slip op. at 12-13. Under this system, “Medicare Advantage insurers have a financial incentive to code intensely—i.e., to make sure that they report to CMS their beneficiaries’ every diagnosis—given that their monthly, per-capita payments are higher to the extent that their beneficiaries have more or graver diagnoses.” Id. at 16. In many instances, CMS has found, Medicare Advantage insurers not only “code intensely,” but also code without a basis in the underlying medical records. See id. at 17 (citing CMS audit findings).

Meanwhile, under the Overpayment Rule, “if a Medicare Advantage insurer has received a payment increment for a beneficiary’s diagnosis and discovers that there is no basis for that payment in the underlying medical records, that is an overpayment that the insurer must correct by reporting it to CMS within sixty days for refund.” Id. at 3.Failure to return an overpayment within 60 days can expose the insurer to liability, including treble damages, under the False Claims Act. See 42 U.S.C. § 1320a-7k(d)(3).

The UHC court rejected UnitedHealthcare’s various objections to the Overpayment Rule. Among other things, the insurer had argued that application of the rule would be unfair, and would violate the principle of “actuarial equivalence,” because the rule effectively imposes more rigorous documentation requirements on insurers than those CMS itself follows in setting Medicare reimbursement rates. The court held that the two sets of requirements are independent and that insurers cannot escape liability by pointing to alleged infirmities in a separate rate-setting regime. See UHC, slip op. at 29. As the court observed, “under [UnitedHealthcare’s] line of thinking, a Medicare Advantage insurer could knowingly submit unsupported diagnosis codes and retain payment for them unless and until CMS established—based on fully audited data of both traditional Medicare and the Medicare Advantage insurer at issue—that the particular overpayment resulted in a net gain to the insurer relative to traditional Medicare.” Id. at 36. Such an absurd result, the court found, had no basis in the language of the Medicare statute.

In recent years, whistleblowers have filed False Claims Act qui tam cases against multiple Medicare Advantage plans alleging that they failed to return overpayments after recognizing that some of their payments from CMS were based on diagnoses that were not supported. See, e.g.United States ex rel. Poehling v. UnitedHealth Grp., Inc., No. 16-cv-8697 (C.D. Cal.); United States ex rel. Osinek v. Kaiser Permanente, No. 13-cv-3891 (N.D. Cal.). On July 30, 2021, the Department of Justice announced that it was intervening in the Kaiser Permanente case, along with five other parallel cases. According to the government, “[i]n order to increase its Medicare reimbursements, Kaiser allegedly pressured its physicians to create addenda to medical records after the patient encounter, often months or over a year later, to add risk-adjusting diagnoses that patients did not actually have and/or were not actually considered or addressed during the encounter, in violation of Medicare requirements.” While the UHC decision is not binding on courts in California, it likely will a strong influence on those courts and will significantly buttress these cases, as well as any future cases that whistleblowers may file against Medicare Advantage insurers.