UnitedHealthcare Ins. Co. v. Azar

330 F.Supp.3d 173

UNITEDHEALTHCARE INSURANCE COMPANY, et al., Plaintiffs,

v.Alex M. AZAR II, Secretary of the Department of Health and Human Services, et al., Defendants.

Civil Case No. 16-157 (RMC)

United States District Court, District of Columbia.

Signed September 7, 2018

Daniel Meron, Benjamin W. Snyder, Graham Edward Phillips, Latham & Watkins LLP, Washington, DC, for Plaintiffs.

James O. Bickford, Matthew J.B. Lawrence, U.S. Department of Justice, Civil Division, Federal Programs Branch, Washington, DC, for Defendants.

ROSEMARY M. COLLYER, United States District Court

Health insurance is provided to most seniors and many disabled Americans through Medicare, paid for by taxes and administered by the Centers for Medicare and Medicaid Services (CMS). As amended, the Medicare statute (formally part of the Social Security Act), includes a "Medicare Advantage" program whereby Medicare-eligible individuals can elect to receive their health insurance coverage through a private insurance company. The insurance company must provide at least the same coverage as traditional Medicare, although it often expands coverage, and is to make its profit from Medicare through efficiencies and other cost-saving methods. The statute requires "actuarial equivalence" between CMS payments for healthcare coverage under Medicare Advantage plans and CMS payments under traditional Medicare. In this case, a large group of insurance companies that provide Medicare Advantage coverage challenged a Final Rule, adopted in 2014, by which the documentation used to set the rates to pay the insurance companies is inconsistent with the documentation used to determine if the insurers have been overpaid. The insurers allege that the Final Rule will inevitably fail to satisfy the statutory mandate of actuarial equivalence.

There is a history to this dispute over actuarial equivalence. The government previously had proposed an audit program for Medicare Advantage insurers and some insurers challenged its methodology for determining overpayments. Since government records for traditional Medicare payments are used to set rates but are not audited, the insurers contended that imposing a 100% accuracy requirement on their records, on pain of being required to return any "overpayment," would violate the statutory requirement for actuarially equivalent payments between traditional Medicare and Medicare Advantage. Heeding the advice of actuaries, the government ultimately adjusted its audit plan to recognize the different data sets. For the 2014 Final Rule at issue here, however, CMS has refused to make such an adjustment although the different data sets are again in use.

After full briefing and oral argument, this Court concludes that the 2014 Final Rule violates the statutory mandate of "actuarial equivalence" and constitutes a departure from prior policy that the government fails adequately to explain. The Court will grant summary judgment to the Medicare Advantage insurers and vacate the Rule.

I. BACKGROUND

This lawsuit is brought by Medicare Advantage (MA) organizations in the UnitedHealth Group family of companies, the nation's leading provider of Medicare Advantage health benefits plans (collectively, UnitedHealth).¹ Known as Medicare Part C, the Medicare Advantage program allows Medicare-eligible individuals to receive healthcare benefits through private insurance companies that have contracted with CMS, a constituent agency of the Department of Health and Human Services (HHS). Alex M. Azar II, HHS Secretary, is sued in his official capacity. CMS administers traditional Medicare and pays its benefits. However, some 20 million Americans, approximately one-third of Medicare-eligible individuals, have opted for Medicare Advantage coverage.

Medicare Parts A, B and C are relevant here. Medicare Part A is mandatory for senior Americans who take Social Security benefits; Part A provides coverage for hospital expenses. Medicare Part B is voluntary and provides partial coverage for doctor expenses. Medicare Part C offers the Medicare Advantage program through which private insurance companies replace CMS and provide full Medicare coverage to beneficiaries.

Initially, Medicare paid all "reasonable costs" ("fee for service") to a hospital caring for a Medicare beneficiary. See Methodist Hosp. of Sacramento v. Shalala , 38 F.3d 1225, 1227 (D.C. Cir. 1994). Over time, that standard has changed and Medicare now pays a hospital based on the "Diagnosis-Related Group" (DRG) shown by the patient's diagnoses at the time of discharge. Medicare Part B also started by paying doctors a reasonable "fee for service," but now pays them according to fee schedules that limit the amount they may charge and be paid for each defined service. See United Seniors Ass'n, Inc. v. Shalala , 182 F.3d 965, 968 (D.C. Cir. 1999). Under Part B, doctors must submit diagnosis codes to identify the reason a patient received treatment, but "payments depend only on the services (or durable goods) provided [office visit, examination, shot, etc.] and not in any way on the diagnoses submitted." Defs.' Mem. in Support of Their Cross-Mot. for Summ. J. and Opp'n to Pls.' Mot. for Summ. J. (CMS Mot.) [Dkt. 57-1] at 7.² In contrast, Medicare Advantage insurers are not paid based on medical services but "are paid a pre-determined monthly sum for each person they cover, based in part upon the characteristics of the particular beneficiary being covered." Id. (internal citation omitted).

A Medicare Advantage insurer must provide, at a minimum, the same level of benefits provided by traditional Medicare itself, except for hospice care. See 42 U.S.C. § 1395w-22(a). Under a Medicare Advantage policy, the insurance companies pay doctors, other healthcare providers, and hospitals for their services and are reimbursed by CMS on a per-member-per-month rate that is determined beforehand. See id. § 1395w-23(a).

By law, CMS must pay Medicare Advantage insurers in a manner that ensures "actuarial equivalence" between payments for healthcare under Medicare and Medicare Advantage plans:

[T]he Secretary shall adjust the payment amount [of fixed monthly payments to Medicare Advantage insurers] 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 ..., so as to ensure actuarial equivalence.

Id. § 1395w-23(a)(1)(C)(i). Risk factors represent the risk that a given beneficiary, or beneficiary population, will need healthcare from doctors or hospitals in the next year as it may be diagnosed. "A risk adjustment model is required to translate the diagnosis data into expected costs of coverage." CMS Mot. at 14. For this purpose, CMS relies on its model, the CMS Hierarchical Condition Category (CMS-HHC) risk-adjustment model, to "perform that conversion":

CMS-HCC is a complex regression model built to estimate the costs associated with certain characteristics of Medicare beneficiaries. The inputs to the model are data from individuals who receive their benefits through the traditional, fee-for-service Medicare system. Its outputs are a set of multipliers—that is, "coefficients"—that "represent the marginal (additional) cost" of each medical "condition or demographic factor (e.g., age/sex group, Medicaid status, disability status)." The coefficients are added together to form a "risk score," and then computed against a base payment rate (which varies depending on geography and the bid submitted by the insurer, among other things).

Id. (internal citations omitted).

By this process, CMS calculates the average monthly expenditure for an average beneficiary under traditional Medicare in the past year. The "base rate establishes ... what it would cost to treat a beneficiary of average risk in a given area." See Transcript of Aug. 8, 2018 Motions Hearing (Hearing Tr.) [Dkt. 73] at 5. CMS adds a geographical differential, based on data from the past year, to calculate an average per-capita monthly payment for each county in the nation.

This is no straightforward task. Each traditional Medicare beneficiary has a "demographic risk coefficient" which reflects that person's age, gender, institutional status, and disability status, among others. See id. at 4. Additional coefficients represent the health status of the beneficiaries in traditional Medicare, taken from their diagnosis codes as reported to CMS by their doctors. Using such CMS data, "the model estimates the marginal cost of each disease and cluster of demographic characteristics.... By mapping known expenditures ..., the model calculates the expected cost of each medical condition and demographic factor." CMS Mot. at 17. Using the data from the demographic characteristics, reported diagnoses, and Medicare expenses of the beneficiaries in traditional Medicare, the model can estimate the marginal cost of each condition, disease and cluster of demographic characteristics.

The "average beneficiary" is given a risk score of 1.0, which is then adjusted upwards or downwards according to the risk score determined by an individual's demographic and health status information. For example, if a beneficiary has a condition that CMS has determined based on its Medicare data increases average costs by 20%, that person will have an adjusted risk score of 1.2 and the Medicare Advantage payment rate applicable to that person will be set at 120% of the average benchmark rate. See, e.g. , Advance Notice of Methodological Changes for CY 2004 Part C Rates (Mar. 28, 2003) (2004 Advance Notice) at AR3895-97 (describing how CMS uses the model to "associate diseases categories with incremental costs").³ Thus, the costs in a prior year of the "risk coefficients" in the traditional Medicare system are used to determine the costs of similar risk coefficients for Medicare Advantage beneficiaries. The underlying logic is that developing risk coefficients with data from traditional Medicare,...