This is the second of three columns that discuss fraud in managed care programs. The first, published on Sept. 30, presented a general introduction and background; this column will discuss fraudulent practices by payors; and the last installment will cover fraudulent practices by providers.
Payor Fraud
Traditionally, government scrutiny of health insurers has been confined to a few areas. Regulation of the business of insurance is still left almost exclusively to the states, and state regulators are primarily concerned with an insurer's solvency and its ability to pay its claims. States would also review and sometimes have approval power over the terms and conditions contained in health insurance policies and, as the need arose, would scrutinize the insurer's marketing practices, its dealings with brokers and salespeople and so on.
Inappropriate business practices were usually subject to regulatory sanctions such as fines and consent orders in which the insurer agreed to correct any problems. If the insurer were under contract with the Health Care Financing Administration to be a Medicare carrier or intermediary, HCFA would also review the insurer's compliance with the Medicare regulations and applicable manuals, including whether Medicare funds were being properly spent.
Fraud in health insurance plans usually has been found in predictable forms: inaccurate or false claims submitted by hospitals, physicians and other providers; a carrier or intermediary charging Medicare for claims made by its non-Medicare subscribers, and the like. The arrival of HMOs and other managed-care organizations with their emphasis on the more cost-effective medical care has not only changed the health-care landscape but also spawned abusive practices that have attracted the attention of both regulators and prosecutors. As a result, the concept of health-care fraud has been redefined and expanded to attack these abuses.
Payor fraud in managed care begins at the beginning, when a managed-care plan markets its products to prospective customers and enrolls them as new members. Fraud at this early stage takes a number of forms. It can involve misrepresentation of the terms of the member's contract and misrepresentation of the benefits for which the member is eligible. Unfortunately, most prospective members simply never read through the terms of their contracts because of the dense and legalistic wording often contained in the printed forms. Many do not even review plan summaries or descriptions carefully and rely instead upon advertisements, oral summaries of benefits provided by commissioned brokers and agents, word-of-mouth recommendations or explanations provided by their employer's personnel or benefits department.
The opportunities in these circumstances for misunderstanding - or more often misrepresentation - are abundant, and a member who has been led to believe that his/her contract covers certain benefits often finds out too late that medical services received are only partly covered or not covered at all.
In some cases, improper inducements or incentives have been used to attract members to join a particular plan. One of the more egregious abuses occurred in New York and elsewhere in the early days of Medicaid managed care. Medicaid fee-for-service beneficiaries were lured into signing up with Medicaid managed-care plans in return for gifts such as toaster ovens, televisions and even trips to Atlantic City.
Under federal law,1 it is illegal to offer remuneration or inducements to encourage beneficiaries to enroll or disenroll in a particular Medicare or Medicaid managed-care plan.
Prospective members are not the only ones susceptible to payor misrepresentation: Providers such as physicians have also been misled into signing on to HMO panels based on false and misleading information concerning the range of services that will be paid for, the amounts of fees to be paid, the exclusivity of the arrangement, the extent of pre-treatment authorizations required and post-treatment utilization denials, the number of patients for which a provider will be responsible in a capitated payment arrangement and the scope of their medical needs and so on.
Abusive Practices
The amounts of sales commissions payable by plans to commissioned brokers and agents are regulated by the state.2 These limits were intended to help keep managed care's costs down so plans would be able to keep their premiums affordable. Plans eager to increase market share or to capture a particular group of prospective members often ignore these restrictions or engage in circumvention schemes of one kind or another and pay higher commissions to encourage brokers and agents to steer business to them.
Another abusive enrollment practice is screening potential enrollees and accepting only those with good health records or those who hold greater prospects for fewer claims. This practice, known as "cherry picking," has been a frequent problem particularly in Medicare managed care, where some plans have been found systematically rejecting older and more chronically ill Medicare beneficiaries.
The Office of Inspector General (OIG) of the U.S. Department of Health and Human Services has targeted this practice as a fraud on the Medicare program, since Medicare's regulations3 require Medicare managed-care plans to accept all applicants regardless of their health status. "Cherry-picking" undermines the fundamental purposes behind Medicare as an entitlement program and managed care itself.
In 1998, a Mutual of Omaha subsidiary, Exclusive Healthcare Inc. signed an agreement with the OIG to settle allegations that one of EHI's sales managers instructed his sales staff to screen potential Medicare enrollees in EHI's Medical managed care plan. The manager is alleged to have stated:
If a person is ill and is seeing more [than] one specialist, maybe this is not the plan they should be in.4
As part of the settlement allowing it to resume marketing to prospective Medicare HMO members, EHI paid a $50,000 civil monetary penalty, and agreed to enhance its corporate integrity program to include a formal training program, for every officer and employee, of at least two hours per year reviewing federal and state requirements with respect to contracting, marketing, enrollment, disenrollment, provider contracting, provider relations, grievances, appeals and claims payments. EHI also agreed to engage in market practices that would not "have the effect of denying or discouraging enrollment by eligible Medicare beneficiaries" and to set up an internal reporting system that allows suspected misconduct to be reported by employees directly to EHI's compliance officer.
Treatment Practices
Another type of fraud perpetrated by some managed care plans involves payment practices that are calculated to result in less care or lower quality care being provided to a patient. These take many forms: outright refusals to pay for care that is clinically justifiable based on the patient's medical condition; delaying referrals of patients to primary care physicians or specialists; placing unreasonable restrictions on payments for emergency room visits; paying for treatments for some patients but not others even when all meet similar clinical criteria; threats, inducements, bonuses, etc. to providers based on fewer medical services and fewer claims; limiting pharmaceutical benefits or pressuring providers such as doctors and pharmacies, into prescribing and dispensing cheaper pharmaceuticals and medications.
Some practices, albeit rarely encountered, are even more shocking and usually victimize the poor and the elderly: deliberately selecting providers who are inconveniently located as a disincentive to patients who either have difficulty travelling or would be put off by doing so; contracting with providers who are known incompetents or who have been excluded from Medicare or Medicaid for fraud or for providing substandard care; steering more chronically ill patients to out-of-network providers who are paid at lower out-of-network rates.
Financial Practices
In addition to treatment abuses, investigators have encountered improper or fraudulent financial practices as well: plans charging higher-than-allowed premiums; plans deliberately delaying payments; "losing," temporarily rejecting or simply denying claims in order to avoid payment as long as possible; failing to pass along to members (in the form of lower co-payments) discounts negotiated by a plan with its participating providers; arbitrary disallowances of payment for one or more days of a member's hospitalization; and unilaterally imposing rates on providers that are below those previously agreed upon.
Trade publications regularly report on the growing number of litigations, arbitrations and complaints to law enforcement and regulatory agencies over these practices.
Medicare and Medicaid managed-care plans have spawned unique varieties of payor fraud. For example, since the amount of Medicare premiums paid to a plan is dependent on the age and health status of the Medicare beneficiaries serviced by the plan, some plans have deliberately submitted incorrect or falsified information on their enrollees in order to obtain higher Medicare premiums. The OIG has also identified numerous instances where Medicare managed-care plans have misused their internal demographic enrollment, outcome and utilization records in order to obtain higher Medicare payments.
'Rogue Contractors'
Traditional Medicare intermediaries and carriers such as Blue Cross and Blue Shield plans are not immune from fraudulent conduct, and the OIG has been pursuing claims against what it refers to as "rogue contractors." The largest such fraud case thus far involved the August 1998 settlement by Health Care Services Corp. (HCSC), also known as Blue Cross Blue Shield of Illinois, which pleaded guilty in Illinois federal court to eight counts of submitting false statements about the Medicare Part B claims it processed for Illinois and Michigan, as well as covering up its poor performance in order to earn $1.3 million in bonuses.
HCSC agreed to pay $4 million in criminal fines and a civil settlement of $140 million. The investigation and subsequent prosecution were sparked by a whistle-blowing former employee, Evelyn Knoob, who earlier this year was awarded $29 million as her share of the settlement under the qui tam provisions of the federal False Claims Act.
In July 1998, the OIG issued a report that was sharply critical of what it referred to as the "highly inflated administrative costs"5 of HMOs that operate Medicare managed care plans. Such plans are reimbursed by Medicare according to what is known as the "adjusted community rating formula." Included in this formula are non-medical administrative costs, interest, taxes, profits, depreciation and amortization and marketing, and the formula was ostensibly designed to prevent overcompensation of the participating HMO.
In reviewing HMOs' audited financial statements for the three years from 1994 through 1996, however, the OIG found that inflated administrative costs enabled HMOs to collect overpayments of more than $1 billion in 1994, $1.3 billion in 1995 and $1.9 billion in 1996, and it called upon HCFA to change its methods of calculating payments to the HMOs to reflect a lower "fair share" to Medicare of the HMOs' administrative costs.
The OIG is also on the lookout for another type of fraud encountered in Medicare managed care: the situation where HCFA mandates that a plan add new benefits and pays increased premiums to the plan to cover the benefits, but the plan does not inform beneficiaries and does not add the benefits on a timely basis.
Just as managed care is redefining the economics of the health-care marketplace, the resulting changes in financial incentives are redefining fraud in the context of the delivery of health-care services under managed care arrangements. The foregoing are just some of the types of payor practices now considered to be fraudulent. No doubt there are many others that have yet to be detected or that are still in the development stage.
Francis J. Serbaroli is a partner in Cadwalader, Wickersham & Taft. He is the author of The Corporate Practice of Medicine Prohibition in the Modern Era of Health Care, recently published as part of the BNA Health Law and Business Portfolio Series.
- 42 USC § 1320a-7a.
- See, 11 NYCRR § 52.42(e).
- 45 CFR Parts 144, 146, 148.
- Quoted in 9 BNA Medicare Report, No. 27, p. 706 (July 3, 1998).
- Office of Inspector General, U.S. Department of Health & Human Services, "Administrative Costs Submitted by Risk - Based Health Maintenance Organizations on the Adjusted Community Rate Proposals Are Highly Inflated" Document No. A-14-97-00202, July, 1998.
This article is reprinted with permission from the December 3rd issue of the New York Law Journal © 1999 NLP IP Company.