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This is the largest Medicare Advantage fraud settlement involving a hospital group.

Late last month, Sutter Health, a healthcare giant operating more than 20 hospitals in the Western United States, reached a $90 million settlement with whistleblower Kathy Ormsby and the U.S. Department of Justice (DOJ), resolving allegations that Sutter defrauded the Medicare Advantage (MA) program by improperly inflating risk scores.

Unlike traditional Medicare, which pays healthcare providers based on the services they provide, otherwise known as a fee-for-service model, MA pays private insurance companies called Medicare Advantage Organizations, or MAOs, premiums to cover Medicare beneficiaries. Those premiums are “risk adjusted,” with certain demographic and health variables resulting in higher premiums. Generally, the more diseases a beneficiary is diagnosed with, or the older they are, the higher the payment from Medicare. Human nature and profit motive being what they are, there are huge incentives for exaggerating the disease state of MA beneficiaries.

Medicare Advantage was introduced roughly 18 years ago and has exploded in popularity since, now accounting for roughly 40 percent of all Medicare beneficiaries… and that rate is growing! The MA program is especially popular out West, where Sutter is based.

Sutter Health contracted with MAOs to provide certain services to their beneficiaries. In exchange, MAOs generally paid Sutter a capitated rate, i.e., a percentage of the total amount of money Medicare paid for a beneficiary. This generally aligning Sutter’s incentives to increase risk scores with MAOs.

Ormsby was employed as a risk adjustment manager at Sutter Health’s affiliate, Palo Alto Medical Foundation (PAMF), where she discovered the alleged wrongdoing. Ormsby alleged that Sutter submitted unsupported diagnosis codes for beneficiaries under its care to MAOs, and those diagnoses were then passed onto Medicare. These unsupported diagnosis codes caused Medicare to make improperly inflated payments to the MA plans, and also to Sutter. Once Sutter Health became aware of these unsupported diagnosis codes, it allegedly failed to take sufficient corrective action to identify and delete additional unsupported diagnosis codes.

In 2019, the government intervened in the part of Ormsby’s case related to alleged wrongdoing by PAMF, while Ormsby continued to pursue the rest of her case against other Sutter affiliates on a non-intervened basis. The $90 million settlement resolves both parts of the case, and follows Sutter’s unsuccessful effort to dismiss both the government’s and whistle blower’s complaints. That effort led to a critically important 2020 court decision in the U.S. District Court for the Northern District of California, finding that the plaintiffs’ allegations properly alleged a False Claims Act (FCA) violation and denouncing any effort by Medicare Part C participants to avoid FCA liability for inflated risk adjustment factor (RAF) scores.

Our law firm, Constantine Cannon, along with co-counsel Keller Grover and Kleinman Rajaram, represented Ormsby, who first brought this case forward in 2015 under the FCA, a law that allows whistleblowers to fight fraud against the government by suing in the name of the United States and sharing in any potential recovery.

This $90 million result is the largest MA fraud settlement involving a hospital group, and the second-largest MA fraud settlement ever reached.

Despite the fact that MA now covers over 40 percent of Medicare beneficiaries, DOJ’s fraud actions have not tracked and seem to be lagging behind. However, this summer has proved to be a turning point in that trend. Along with this Sutter settlement, the government has intervened in cases against Kaiser, with a government complaint filed last week, and it continues to pursue litigation against UnitedHealth Group (UHG) and Anthem. Except for the Anthem matter, all other cases were brought by whistleblowers. Additionally, also in August, the U.S. won an important case in the D.C. circuit, UnitedHealthcare Insurance v. Becerra, regarding a rule requiring MA plans to return erroneously collected premiums to the Medicare program (also known as the overpayment rule). 

Part C risk adjustment is clearly a hot area of both fraud and litigation. We will be sure to keep RACmonitor readers apprised of future developments.

Programming Note: Listen to Mary Inman’s exclusive whistleblower report this coming Monday on Monitor Mondays, 10 Eastern.

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