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Risk Adjustment Litigation Developments Signal Uncertainty for Transfer Payments and Increased Fraud and Abuse Risk

Risk Adjustment Litigation Developments Signal Uncertainty for Transfer Payments and Increased Fraud and Abuse Risk

ABA Health eSource
(October 26, 2016)

Risk adjustment is a key component of government-administered managed care. Fundamentally, risk adjustment is an actuarial tool used to calibrate payments to health plans based on the relative health of the insured population.1 Medicare Advantage has long employed risk adjustment to compensate plans for the higher cost of care to individuals with complex health conditions.2 Similarly, because the Patient Protection and Affordable Care Act (hereafter "Affordable Care Act" or "ACA") prohibits health insurers from denying coverage or increasing premiums on the basis of an enrollee's health status, the enrollment of relatively unhealthy individuals would tend to drive up the insurers' cost for providing care without allowing them to increase premiums (referred to as "adverse selection"), and insurers would therefore have an incentive to avoid enrolling those individuals (referred to as "risk selection").3 Accordingly, risk adjustment is integral to the ACA's premium stabilization measures designed to avoid the effect of adverse selection on Qualified Health Plans sold via state exchanges.4 Also, under Medicaid managed care, Centers for Medicare & Medicaid Services (CMS) regulations allow (but do not require) states to incorporate risk adjustment in the capitated rates paid to managed care organizations.5

Recent developments in two types of managed care risk adjustment litigation signal increased risk for managed care plans and their provider networks. First, several pending civil suits seek to invalidate the ACA risk adjustment transfer formula; second, a recent federal court ruling recognizes potential False Claims Act (FCA) liability for plans' and providers' internal auditing of risk adjustment data.

I. Challenges to the Affordable Care Act Risk Adjustment Transfer Formula

The ACA risk adjustment transfer formula aims to reduce the effect of adverse selection by requiring payments from ACA plans with lower-risk (healthier) enrollees to those with higher-risk (less healthy) enrollees. CMS designed the formula to calculate offsetting, or balanced, transfers to or from plans equal to the difference between the premium with risk selection and the premium without risk selection.6

Since June 2016, three ACA exchange plans have filed civil lawsuits in U.S. District Courts challenging the ACA risk adjustment transfer formula: Evergreen Health Cooperative in Maryland,7 New Mexico Health Connections in New Mexico,8 and Minuteman Health in Massachusetts.9 The plaintiffs each ask the courts to declare CMS's risk adjustment methodology invalid and to enjoin CMS from collecting the risk adjustment payments. They allege that several aspects of CMS's risk adjustment methodology are contrary to the language of the ACA because they improperly quantify enrollees' actuarial risk and include factors not expressly required by statute. As a result, the plaintiffs contend that the risk adjustment methodology improperly subsidizes larger, established, and more expensive plans at the expense of new and lower-cost plans; they also contend that excessive risk adjustment payments endanger their survival and that of other smaller plans contrary to the purposes of the ACA to foster competition and low-cost insurance options for consumers.

The plans challenge the transfer formula on the following bases:

Reliance on the Statewide Average Premium - All three plaintiffs contend that CMS's risk adjustment transfer formula improperly "normalizes" the difference between each plan's risk adjustment score and that of other plans using a statewide average premium to calculate transfers, instead of plans' actual premiums. Because the transfer formula assumes that each plan charges the state average premium, in effect the formula calculates the payment required from lower-cost, lower-premium plans as if they were receiving more premiums than they actually are. The plaintiffs argue that the formula subsidizes more expensive and higher-cost plans at the expense of less expensive, lower-cost plans contrary to the legislative intent to promote competition and low-cost health insurance.

Although CMS uses the statewide average premium in the transfer formula to ensure budget neutrality for risk adjustment payments, the plans allege that the ACA does not require budget neutrality and that the use of the statewide average premium is unlawful.

Partial-Year Enrollees - All three plaintiffs claim that the ACA risk adjustment methodology improperly accounts for the health status of partial-year enrollees. Since the methodology adjusts an individual enrollee's "risk score" based on diagnoses made while the enrollee is enrolled with the plan, the risk score commonly fails to account for existing diagnoses of people who enroll midway through the year. As a result, the plaintiffs claim that the aggregate risk scores of newer plans with more partial-year enrollees are lower than they should be.

Prescription Drug Data - The plaintiffs also contend that the risk adjustment methodology should account for prescription drug data to support elevated risk scores. Currently, the methodology requires a diagnosis during enrollment to support a higher risk score, but does not currently allow drug data to support the same adjustment.10 This disparity disadvantages newer providers, for example, when a new enrollee is on diabetes medication but has not seen a primary care provider since her enrollment. As a result, she has no documented diagnosis of diabetes, and her risk score would incorrectly assume that she has no significant health condition.

Adjustment Factors - In addition, New Mexico Health Connections and Minuteman Health argue that certain adjustment factors used in the transfer formula (the plan actuarial value factor and the risk score factor for enrollees with no hierarchical condition categories) are set improperly. They argue that these erroneous adjustment factors result in grossly excessive risk transfer payments from "bronze" tier (low-cost/high-deductible) plans11 and for enrollees with no qualifying diagnoses, such that the plans lose money on every such enrollee, and lose money on all bronze plans, since their low premiums attract healthier consumers who do not anticipate significant healthcare needs.

Under the Administrative Procedure Act (APA), the plaintiffs have a high bar to overcome.12 Because Congress directed the Secretary of the Department of Health and Human Services (HHS) to establish criteria and standards to carry out the risk adjustment transfers required by the ACA,13 and because CMS adopted its risk adjustment methodology via public rulemaking,14 the APA requires any Court considering such challenges to give the risk adjustment methodology great deference and to uphold the methodology so long as it not clearly contrary to the law, arbitrary or capricious. Consequently, while the courts rarely reverse administrative agencies' exercise of their rulemaking authority such as the ACA risk adjustment methodology, they will do so on occasion where they agree that the agency acted contrary to the statutory purpose or based on impermissible considerations.15

All three cases remain pending. In the Maryland lawsuit (the first to be filed) the district court denied Evergreen's motion for a temporary restraining order and preliminary injunction,16 but it has not yet ruled on the merits of Evergreen's claims. CMS answered and moved to dismiss Evergreen's complaint for lack of subject matter jurisdiction and failure to state a claim on August 15, 201617 and Evergreen's response has not yet been filed as of this writing (response currently due on October 11, 2016).18 Answers have not yet been filed in the New Mexico Health Connections and the Minuteman Health cases, and are currently due on October 3, 2016.

If successful, these challenges to the ACA transfer formula will have major implications. For ACA plans on state exchanges, if the risk adjustment methodology were invalidated and transfer payments were delayed or halted, plans serving lower-risk enrollees could benefit, but other ACA plans could fold, and more insurers may abandon the state health insurance exchanges altogether because of increased uncertainty or delay in risk adjustment transfers, further limiting choice for healthcare consumers and limiting competition among plans that might benefit providers.

For Medicaid managed care plans, risk adjustment methodologies are determined by the states. Nevertheless, if these lawsuits are successful, Medicaid managed care organizations (MCOs) might bring similar suits challenging state transfer formulas, which could create tremendous uncertainty for MCOs and providers, discouraging potential bidders for Medicaid managed care contracts and further stressing Medicaid budgets.

Plans should monitor the litigation closely and plan for the contingency that risk adjustment transfer payments could be significantly delayed and/or that the transfer methodology could significantly change if the pending actions are successful.

II. Fraud and Abuse Enforcement Based on Risk Adjustment Data and Documentation

In the Medicare Advantage program, each plan's capitated reimbursement is a function of enrollees' health status, as documented by their diagnoses. Individual and plan risk scores are based on hierarchical condition categories (HCCs) derived from diagnoses reported and documented by providers.19 Similarly, ACA risk adjustment payments depend on diagnosis data collected by providers and reported by plans.20

This creates a strong incentive to maximize reimbursement by reporting all possible diagnoses. Accordingly, Medicare Advantage regulations require plans to certify that their risk adjustment data is accurate, complete and truthful, and that the data is subject to audit;21 ACA plans are required to undergo yearly data validation audits;22 and Medicaid managed care regulations require MCOs to maintain compliance plans to monitor for fraud, waste and abuse, and also require certification of the data submitted, which is subject to audit.23

But a recent court ruling raises the stakes for plans and providers. In August 2016, the U.S. Court of Appeals for the Ninth Circuit issued a decision in US ex. rel. Swoben v. United Healthcare, et al.,24 holding that a plan or provider's internal audit program for its risk adjustment data can result in liability under the federal FCA. Under the FCA, any person who knowingly presents a false or fraudulent claim for payment to the U.S. government (or who knowingly makes or uses a false record or statement that is material to such a claim for payment) can be liable for civil penalties of thousands of dollars per violation, plus two to three times the actual damages sustained by the government.25

In Swoben, a qui tam relator alleged that four Medicare Advantage plans (and one physician practice with a sub-capitation arrangement with one of the plans) had internal audit programs designed to discover only under-reporting of diagnoses (and thus opportunities to increase the plan's risk score), and not to discover over-reported diagnoses (which, if corrected, would decrease the plan's risk score). Importantly, the relator also alleged that all four plans were on notice of significant over-reported, erroneous diagnoses by virtue of previous CMS risk adjustment data validation (RADV) audits26 indicating error rates over 20 percent, yet continued to certify that their data were accurate, complete and truthful to the best of their knowledge.27

In an opinion issued August 10, 2016, the court held that the relator pled a valid legal theory, and therefore vacated the lower court's dismissal and remanded the case, which will proceed toward trial. The court held that, based on the facts alleged, the Medicare Advantage plans cannot certify the accuracy, completeness and truthfulness of the risk adjustment data submitted to CMS. Further, even though the physician practice defendant was not required to certify risk adjustment data to CMS, the court allowed the claims against it to proceed as well, noting that the practice shared in the reimbursement paid to the plans via a sub-capitation arrangement, and that it conducted retrospective medical record reviews designed to find only under-reported diagnoses.

The Swoben case has important implications for managed care plans and providers. Even though the Court expressly stated that "one-sided" internal audit programs would not necessarily result in a false certification, it confirmed that they can result in FCA liability if designed to skew risk adjustment data reported to CMS.28 As a practical matter, the opinion makes any one-sided audit process risky, since the intent for its design is generally subjective and can be so alleged by a relator. Further, in light of the court's reliance on CMS RADV audits as having put the defendants on notice of previous unsupported diagnoses, plans and providers should take swift corrective action if an audit indicates significant over-reporting of diagnoses, since a failure to correct ongoing over-reporting could arguably render a certification under 42 C.F.R. § 422.504(l) false.

The ruling will likely encourage more qui tam suits against Medicare Advantage plans and/or providers since the court allowed the claims to proceed based on the alleged design of the audit programs alone, without allegations that specific patient diagnoses were unsupported. Further, the fact-dependent nature of the ruling will likely result in more FCA claims surviving motions to dismiss and proceeding to trial, which may lead some defendants to settle rather than risk a large verdict. Further afield, the Swoben opinion may also encourage fraud and abuse enforcement and qui tam litigation in ACA risk adjustment, and Medicaid managed care risk adjustment, both of which also rely on data reported by providers and plans.29


The litigation developments discussed above may have major implications for plans and providers participating in risk adjusted managed care models. Accordingly, plans and providers are well advised to monitor these cases and consult with counsel to evaluate any implications on them. Moreover, providers must be especially vigilant to ensure the accuracy and integrity of the data they report to government payors.

  1.  See American Society of Actuaries Issue Brief, May 2010 (
  2.  42 U.S.C. § 1395w-23(a)(1)(C)(i).
  3.  See Explaining Health Care Reform: Risk Adjustment, Reinsurance, and Risk Corridors, Kaiser Family Foundation, Aug. 17, 2016 (
  4.  ACA, Pub. L. No. 111-148 § 1343 (codified at 42 U.S.C. § 18063), 78 Fed. Reg. 15410.  PPACA created Qualified Health Plans and Exchanges.  See Pub. L. No. 111-148 §§ 1301, 1311(b) (codified at 42 U.S.C. §§ 18021, 18031(b)).
  5.  42 C.F.R. § 438.
  6.  78 Fed. Reg. 15410, 15430-35.
  7.  Evergreen Health Cooperative, Inc. v. U.S. Dep't. of Health and Human Services et al, D. MD, Case No. 16-CV-2039 (filed June 13, 2016).
  8.  New Mexico Health Connections v. U.S. Dep't. of Health and Human Services et al, D. NM., Case No. 16-CV-00878 (filed July 29, 2016).
  9.  Minuteman Health Inc., v. U.S. Dep't. of Health and Human Services et al, D. MA, Case No. 16-CV-11570 (filed July 29, 2016).
  10.  CMS has indicated that is considering including prescription drug data and diagnoses in a "hybrid" risk adjustment model, but concluded that further consideration is required before including prescription drug data because the potential gains in predictive power, accuracy and fairness would come at a cost of increased potential for gaming, increased prescription drug utilization, volatility and added administrative burden.  See CMS, March 31, 2016, HHS-Operated Risk Adjustment Methodology Meeting: Discussion Paper (Mar. 24, 2016) at 69 (
  11.  See ACA, Pub. L. No. 111-148 § 1302 (codified at 42 U.S.C. § 18022) (defines "platinum," "gold," "silver," and "bronze" benefit tiers for Qualified Health Plans).
  12.  See 5 U.S.C. § 706.
  13.  ACA, Pub. L. No. 111-148 § 1343 (codified at 42 U.S.C. § 18063).
  14.  See 78 Fed. Reg. 15410-15541.  All three plaintiffs allege that most or all of their concerns were raised in comments and other communications with HHS during the rulemaking process.
  15.  See, e.g., Miami-Dade Co. v. U.S. E.P.A., 529 F. 3d 1049, 1064 (11th Cir. 2008).
  16.  See Evergreen Health Cooperative, Inc. v. U.S. Dep't. of Health and Human Services et al, D. MD, Case No. 16-CV-2039, DE 40 (Order dated August 1, 2016).
  17.  See Evergreen Health, DE 41 (Answer and Motion to Dismiss filed 8/15/16).
  18.  See Evergreen Health, DE 44 (Order filed 8/25/16).
  19.  See 74 Fed. Reg. 54634, 54673-74 (October 22, 2009).
  20.  45 C.F.R. §§ 153.610, 153.630(b)(7).
  21.  See 42 C.F.R. §§ 422.504(l), 422.503(d)(2).
  22.  45 C.F.R. § 153.610.
  23.  42 CFR §§ 438.604, 438.606, 438.608.
  24.  US ex. rel. Swoben v. United Healthcare, et al., ___ F.3d ___, No. 13-56746 (9th Cir. Aug. 10, 2016).
  25.  See 31 U.S.C. § 3729, et seq.
  26.  RADV audits are payment audits of Medicare Advantage organizations administered by HHS to ensure the integrity and accuracy of risk adjustment payment data.  See 42 C.F.R. §§ 422.2, 422.310(e).
  27.  See Swoben, No. 13-56746, Slip Op. at 14-17.
  28.  See Swoben, No. 13-56746, Slip Op. at 25.
  29.  However, it is less clear whether ACA risk adjustment transfer payments would be within the scope of the FCA, because ACA plans are not subject to the same certification requirements, and because ACA risk adjustment transfers are not a payment of government funds to insurers or contractors, but are instead a redistribution of privately-paid insurance premiums.  See 31 U.S.C. § 3729(a)(1).

Copyright 2016, ABA Health eSource, Vol. 13 No. 2. Reprint permission granted.

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