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The False Claims Act’s Next Frontier: Managed Care Fraud

As more Medicare and Medicaid patients enroll in private managed care plans, fraud by managed care organizations poses an increasing risk to taxpayers—and an opportunity for whistleblowers to receive rewards for reporting risk adjustment score and medical loss ratio fraud.

Medicare and states’ Medicaid programs have traditionally paid healthcare providers a fixed fee for each service provided to a Medicare or Medicaid beneficiary. This reimbursement model is known as “fee-for-service” and is still the most prevalent payment system for traditional Medicare beneficiaries and private insurance plans. In contrast, a managed care system involves Medicare or Medicaid paying private insurance providers, also known as managed care organizations (“MCOs”), to provide healthcare coverage to Medicare or Medicaid beneficiaries through privately run insurance plans.

The relationship between an MCO and the government healthcare program is established by a contract and governed by numerous regulations. In addition to providing healthcare services, a managed care plan is also responsible for establishing adequate provider networks, negotiating provider reimbursement arrangements, and coordinating patients’ healthcare services. Some managed care plans also directly provide healthcare services to beneficiaries—these plans are known as health maintenance or “HMO” plans.

In exchange for providing healthcare services to its beneficiaries, Medicare or Medicaid pays the managed care plan a fixed fee for each beneficiary who is enrolled with the plan. Similar to an insurance premium, this fixed fee or “capitated” payment is often adjusted to account for patients’ demographic information and current medical diagnoses. These adjustments are meant to compensate managed care plans for patients that are more likely to require expensive healthcare treatments.

The number of patients covered by managed care plans and the payments made by Medicare and Medicaid to MCOs has exploded over the last decade. Because managed care plans bear some of the responsibility and financial risk created by providers who commit healthcare fraud, government enforcement efforts and whistleblower actions under the False Claims Act have focused on fraud in fee-for-service programs. But this focus is changing as government regulators and whistleblowers continue to uncover significant fraud by managed care plans and the providers with whom the plans contract with to provide healthcare services.


In 1997, Congress added an alternative to traditional fee-for-service Medicare by allowing beneficiaries to choose a private insurance plan that would provide health insurance. This program was known as Medicare Choice or Medicare Part C. In 2003, due to low participation rates in the program, Medicare Part C was amended to add additional incentives for insurers and providers. The program was also renamed Medicare Advantage.

By 2016, almost a third of Medicare beneficiaries were enrolled in a Medicare Advantage plan.[1] Federal subsidies paid to Medicare Advantage plans exceeded $180 billion in 2016.

One reason Medicare Advantage plans have become so popular is a major push by insurance companies to expand their Medicare Advantage plans by marketing to patients and primary care providers. But as federal subsidies to Medicare Advantage plans have grown, so has the risk of fraud by Medicare Advantage plans.

The Medicare Advantage issue receiving the most scrutiny from federal prosecutors has to do with the diagnoses codes Medicare Advantage plans must report to CMS. For Medicare Advantage patients, plans receive a per-member, per-month fee from the government that is calculated using patients’ demographics—such as age, sex, and geographic location—along with patients’ current medical diagnoses. Diagnoses that indicate serious, complex condition result in a “risk adjustment score” that is higher. A higher risk adjustment score indicates that the patient is likely to require more expensive care in the next year. Several False Claims Act whistleblower or “qui tam” lawsuits have been unsealed alleging that Medicare Advantage plans have improperly inflated patients’ diagnoses and risk adjustment scores, including a case against the largest Medicare Advantage provider where the Department of Justice has joined the lawsuit.

Another issue that can arise in the Medicare Advantage context is fraud related to plans’ Medical Loss Ratio reporting. The Medical Loss Ratio rules require that healthcare insurance plans spend a certain percentage—85% for Medicare Advantage plans—on healthcare services provided to members. Failure to meet this requirement results in the plans having to refund a portion of members’ premiums back to the federal government. This rule prevents Medicare Advantage plans from unduly profiting or spending a disproportionate amount of their revenue on marketing or administrative costs like executives’ salaries. Beginning in 2014, all Medicare Advantage plans are required to report financial information to the government to determine whether they are in compliance with the Medical Loss Ratio rules. Falsifying or manipulating Medical Loss Ratio data allows Medicare Advantage plans to inflate profits and avoid spending the minimum required on patients’ medical care.

Even if plans are not outright falsifying the Medical Loss Ratio data reported to the government, it is also a potential violation to enter into financial arrangements that compensate downstream providers for providing marketing and administrative services while accounting for the payments as medical service costs. Similarly, financial arrangements that include undisclosed kickbacks between plans and providers, including paying providers to recommend or switch patients to a plan, can also violate the Medicare Advantage rules.

Last, failing to provide adequate provider networks and medically necessary healthcare services may also run afoul of the Medicare Advantage rules. Patients (and taxpayers) are entitled to healthcare coverage that is designed to provide the best health outcomes, not merely enrich Medicare Advantage plans’ shareholders.


Manage care plans have quickly taken over many states’ Medicaid programs. By 2016, Medicaid MCOs were responsible for providing healthcare to 43% of Medicaid beneficiaries and received $236 billion in combined state and federal Medicaid funding.[2]

Like Medicare Advantage, Medicaid managed care plans are paid, in part, based on the demographic information and health conditions of their members. Falsifying diagnosis codes or making Medicaid patients look sicker than they are can improperly inflate the amount of money the Medicaid plan receives from the government. Medical Loss Ratio rules have also been adopted in many states, and failure to spend the requisite percentage of revenue on patient care or falsifying Medical Loss Ratio reporting figures may result in a violation of the False Claims Act and state qui tam laws.

Provider network adequacy and ensuring that members are eligible for Medicaid are two additional areas where non-compliance can result in False Claims Act violations. Contracts between states and Medicaid MCOs often contain specific requirements related to provider networks to ensure patients have access to qualified providers. Failing to provide an adequate network improperly restricts the healthcare Medicaid beneficiaries can receive from their plans.


One other area where the government utilizes private healthcare plans to provide managed healthcare is Medicare’s prescription drug coverage, also known as “Part D.” Like Medicare Advantage, patients are able to choose a private insurance plan, known as a Part D plan sponsor, to provide prescription drug coverage. The federal government pays the Part D plan a subsidy for each patient enrolled in the plan. Unlike most other managed care plans, Part D patients must pay a monthly premium and a portion of the cost of the drugs that are covered by their Part D plan.

The plan sponsors are responsible for negotiating lower prices from drug companies through rebates and reporting these rebates to Medicare. Part D sponsors are also responsible for accurately reporting any other direct or indirect remuneration, referred to as DIR payments, to Medicare. Failure to accurately report rebates from drug companies, or fees charged to pharmacy providers, results in higher costs to the government and artificially inflated premiums paid by Medicare patients. Any undisclosed financial arrangements with pharmacy providers, pharmacy benefit managers (PBMs), prescribers, or drug companies that result in higher drug prices or avoiding rebates that are owed to Medicare is a potential False Claims Act violation.


Managed care plans are funded by federal and state taxpayers. Under a federal law called the False Claims Act, whistleblowers can report fraud against a government-funded program and receive a percentage of the government’s recovery as an incentive for stepping forward. Whistleblower or qui tam lawsuits under the False Claims Act and state qui tam laws play an important role in combating healthcare fraud: more than 70% of government recoveries are from whistleblower cases. Over $674 million was paid to whistleblowers in 2016. Given the rapid increase in managed care spending by government programs, it is certain that whistleblowers will have opportunities to step forward, stop fraud, and be rewarded for their efforts.

If you have knowledge and proof of Managed Care Fraud, give us a call today for a free consultation and case review with an experienced whistleblower attorney.





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