Managed Care Fraud

The federal government offers a managed care option for both Medicare (known as Part C or Medicare Advantage) and Medicaid (known as Medicaid Managed Care) which was designed to cost the government less than traditional Medicare and Medicaid. Through Medicare Part C and Medicaid Managed Care, the federal Centers for Medicare and Medicaid Services (CMS) authorizes private insurers to offer health insurance plans to individuals who are eligible for Medicare and Medicaid. Unlike traditional private plans, however, the Medicare Advantage and Medicaid Managed Care plans are funded in full by federal and/or state government funds.

About one-third of people in Medicare and Medicaid are enrolled in managed care plans, and the numbers are growing. As such, this is an area that the government has identified as a potential hot spot for fraud and abuse under the False Claims Act (FCA).

How Medicare and Medicaid Managed Care Work

Private insurers offering plans through Medicare Part C and Medicaid Managed Care are known as managed care organizations (MCOs). They contract with the government to administer Medicare Part C and Medicaid Managed Care benefits, i.e. to submit beneficiaries’ service claims to the government and to ensure that health care providers are paid for those services. The MCOs are required to offer only insurance plans (“Plans,” known in Medicare as “MA Plans”) that provide the same level of service to patients as available through traditional Medicare or Medicaid. Moreover, all of the protections and regulations applicable to Medicare and Medicaid apply to the MCOs’ practices.

Under these contracts, the government pays MCOs a capitated rate based on beneficiaries’ “risk scores.” CMS calculates risk scores based on several factors, including the number of Medicare and Medicaid beneficiaries enrolled in a Plan as well as those beneficiaries’ demographics and degrees of sickness. CMS makes these capitated, fixed per-member-per-month payments to the Plans regardless of the amount of services an enrollee actually uses during the Plan year; the payments also cover the MCOs’ administrative costs. Because enrollees with higher risk scores (i.e., those who are sick and have serious and/or chronic medical conditions) cost more to treat, the government pays higher capitated rates for enrollees who are projected to be sicker in the near future than for the average enrollee under traditional Medicare or Medicaid. The government adjusts the capitated rate for each beneficiary over time based on changes in demographic information and health status.

Health care providers, such as hospitals and doctors, contract with certain MCOs to provide enrollees with health care services. Providers bill MCOs for the medical services or procedures performed and receive a share of each treated beneficiary’s capitated payment. Those bills, and the underlying medical records, contain diagnoses codes that correspond to the procedures and services provided. Diagnosis codes serve as a proxy for how sick a patient will be in the near future and thus significantly impact the government’s risk adjustment calculation — and ultimately the capitated rate — for that beneficiary. Given that MCOs and providers generally receive greater compensation from CMS for beneficiaries with higher risk scores, this can create a strong incentive for both providers and MCOs to report invalid diagnosis codes.

MCOs are required to certify and submit various data to the government, including diagnosis codes. MCOs are obligated to use due diligence to ensure the accuracy, completeness, and truthfulness of all the data submitted. The MCOs and entities that contract with them are also required to have proper systems and procedures in place to ensure that they only pay for services that are determined to be medically necessary and reasonable based on objective medical criteria. In other words, the MCOs are not passive pass-throughs to the government for health care providers’ decisions, data, diagnosis codes, and bills. Rather, they have a duty to take affirmative steps to ensure that the data they submit are accurate, that the certifications they make are truthful, and that they have effective compliance programs to prevent, detect, and correct non-compliance.

Managed care was designed to reward MCOs that improve their members’ health outcomes while keeping costs down. However, managed care also creates powerful incentives for MCOs, health care providers, and others who contract with them to exaggerate the expected health care costs for the beneficiaries in their Plans and thereby increase government payments per member. Getting permission to increase Plan membership can compound such profits.  Worse, the financial structure of managed care can also incentivize MCOs and providers to increase profits by decreasing the costs actually spent in the delivery of medical services. Protecting taxpayers’ funds as well as beneficiaries’ health requires safeguarding against those who would act on these incentives.

Common Managed Care Fraud Schemes

Managed care is emerging as a robust area of health care fraud. This likely will grow as more people are enrolled in Medicare Advantage and Medicaid managed care plans instead of traditional Medicare and Medicaid. Whistleblowers and the government have already exposed many ways that MCOs and Plans, and the benefits managers and health care providers who contract with them, can and have defrauded the government and siphoned money away from legitimate government health care program costs.

Examples of schemes that can lead to FCA liability include:

• upcoding or inflating the severity or type of the diagnoses and medical conditions of patients, and submitting invalid diagnosis codes, which increase the patient’s risk score and result in an unjustified premium payment from the government.
• failing to comply with audit obligations, including to audit for and detect unsupported diagnosis codes and/or to retract invalid diagnosis codes, investigate potential errors in data discovered by an internal and/or a government audit.
• improperly avoiding their obligations to repay to the government monies to which the MCOs, Plans, or others were not entitled.
• failing to submit accurate, complete, and truthful patient encounter data, including falsely indicating that a procedure or test is reasonable, that a proper medical necessity determination has been made, and prior authorization requirements satisfied.
• failing to maintain adequate fraud and abuse prevention and compliance programs.
• causing the government to set inaccurate, inflated capitation payment rates.
• misrepresenting the MCO’s true profit margin, which may lead the government to believe that the MCO is cost efficient and should be allowed to grow and enroll more members.

Successful Managed Care Cases and Awards

The last several years have seen increasing numbers of settlements of managed care fraud cases as well as government litigation. The MCOs’ and Plans’ obligations to investigate the validity of risk adjustment data submitted by the medical professionals who treat Plan members has been a particularly fertile ground for fraud cases. Significantly, however, federal and state governments have demonstrated that they will pursue fraud throughout the Medicare Part C and the Medicaid managed care system and that they will hold all responsible parties accountable — from the largest of insurers to the individual providers — for the fraud they commit.

• Submission of and failure to correct unsupported diagnoses codes: The United States intervened in an FCA qui tam lawsuit against Sutter Health Inc. and one of its affiliates, Palo Alto Medical Foundation. The lawsuit alleges that Sutter Health and Palo Alto Medical Foundation knowingly submitted unsupported diagnosis codes for certain patient encounters. These unsupported diagnosis scores allegedly inflated the risk scores of Plan beneficiaries, resulting in inflated payments to Sutter. The lawsuit further alleges that once the Sutter entities became aware of these unsupported diagnosis codes, they failed to take sufficient corrective action to identify and delete additional potentially unsupported diagnosis codes.  In August 2021, the United States resolved these allegations as part of a $90 million settlement with Sutter Health.
• Submission of upcoded diagnoses codes: Martin’s Point Health Care Inc., a Medicare Part C Plan, engaged in chart reviews of its beneficiaries. The chart reviews were done to identify additional diagnoses codes that could be submitted to Medicare. The whistleblower, however, alleged that many of the patients’ medical records did not support these additional codes. Martin’s Point  agreed to pay $22.5 million to settle the claims. 
• Submission of false and invalid diagnoses codes: The United States intervened and later settled an FCA qui tam lawsuit against The Cigna Group, a Medicare Advantage provider, for submitting false diagnoses codes to increase their capitated payments from CMS. The Government’s Complaint alleged that the invalid diagnosis codes were based solely on forms completed by vendors retained and paid by CIGNA to conduct in-home assessments of plan members.  In 2023, CIGNA paid $172  million in settlement of the claims.
• Submission of inaccurate health status information: The United States separately settled allegations that Sutter Health and four of its other affiliates submitted inaccurate information about the health status of beneficiaries enrolled in Medicare Advantage Plans, which resulted in the plans and Sutter Health and its affiliates being over paid. Sutter Health paid $30 million to the United States to resolve those allegations as part of the larger $90 million resolution.
• Submission of inaccurate health status information and diagnosis codes and failure to remit: The United States intervened in a FCA qui tam case against UnitedHealth Group Inc. (UHG), the nation’s largest MCO with more than 50 Medicare Plans providing benefits to millions of Medicare beneficiaries. The case alleges that UHG knowingly obtained inflated risk adjustment payments based on untruthful and inaccurate information about the health status of beneficiaries enrolled in UHG’s Medicare Advantage Plans throughout the United States. Further, it allegedly ignored information about invalid diagnoses from health care providers with financial incentives to furnish such diagnoses. Despite allegedly knowing that it had been overpaid by the government, UHG has avoided repaying Medicare monies to which UHG was not entitled.
• Failure to correct unsupported diagnosis codes: HealthCare Partners Holdings LLC (HCP), doing business as DaVita Medical Holdings LLC, a large California-based independent physician association, paid $270 million under the FCA for allegedly providing inaccurate information that caused MCOs to receive inflated Medicare payments. As part of that scheme, HCP engaged in “one-way” patient chart reviews to add diagnoses that would boost its Medicare revenue without deleting any inaccurate diagnosis codes it discovered.
• Submission of inaccurate health status information, misrepresentation of spent funds, failure to remit, failure to monitor, and market abuses: WellCare Health Plans Inc. provided managed care services for approximately 2.6 million Medicare and Medicaid beneficiaries nationwide. It faced allegations that it engaged in a number of schemes to submit false claims to Medicare and Medicaid programs and thus increase its revenue. Among these were that it: (1) falsified data and misrepresented the medical conditions of patients and the treatments they received; (2) falsely inflated the amount it claimed to be spending on medical care in order to avoid returning money to Medicaid; (3) knowingly retained overpayments it had received from Medicaid; (4) operated a sham compliance program or special investigations unit; (5) engaged in marketing abuses, including the “cherry picking” of healthy patients in order to avoid future costs for less healthy patients. To resolve these FCA qui tam allegations, WellCare paid $137.5 million to the federal and certain state governments.
• Submission of unsupported diagnosis codes and misrepresentations in its application to expand enrollment: Freedom Health, Inc. and its Chief Operating Officer agreed to pay $32.5 million to settle FCA qui tam allegations under the federal and Florida FCAs that Freedom, an MCO: (1) submitted or caused others to submit unsupported diagnoses codes to the government, which resulted in inflated reimbursements in connection with two of its Medicare Advantage plans; and (2) made material misrepresentations to the government regarding the scope and content of its network of health care providers in an application to the government for permission to expand into additional geographical areas.
• Authorization of medical services without physician review: CaRECORE National LLC, a benefits management company with contracts with MCOs, paid $54 million to settle FCA qui tam allegations brought on behalf of the U.S. and 29 states. The allegations centered on CaRECORE authorizing medical diagnostic procedures for Medicare and Medicaid patients without properly assessing whether the procedures were in fact necessary or reasonable. MCOs (and anyone contracting with them) are required to have a proper system in place to ensure that the MCOs only pay for services that are determined to be medically necessary and reasonable based on objective medical criteria. To the contrary, Carecore instructed employees, who were not physicians, to “auto-approve” large batches of prior authorization requests without any review, i.e., to falsely certify the prior authorization requests as medically necessary and reasonable without physician review. The MCOs relied on the false statements made to them by CaRECORE and the MCOs, in turn, used government health care funds to pay for or reimburse the claims.
• Submission of inaccurate health status information: Walter Janke and his wife Lalita Janke owned an MCO as well as a primary care provider who served the MCO’s patients. The government alleged that they violated the FCA by falsely increasing the severity of patient diagnoses to obtain higher Medicare payments. To resolve these FCA allegations, they agreed to pay $22.6 million. 
• Submission of unsupported diagnosis codes (i.e., upcoding): Humana, an MCO, as well as Plaza Medical Centers Corp., a medical practice, and its owner entered into a $3 million FCA settlement to resolve allegations that Plaza Medical was upcoding the diagnoses of patients and that Humana either knew or deliberately ignored the upcoding while submitting false claims to Medicare for higher reimbursement.

How to Report Managed Care Fraud

The above are just some examples of the many different types of fraud that can be prosecuted under the False Claims Act. Unfortunately, fraud continues to plague Medicare, Medicaid, and other government health care programs and is not limited to the acts or settings described above. If you think that you have information related to health care fraud, please contact us for a free, confidential consultation.