Escobar’s Materiality Standard Shields Organizations from the Risk in Risk Adjustment Payments

Kevin Pasciak
Executive Managing Editor
Loyola University Chicago School of Law, JD 2018

Finance Director for UnitedHealth Group brought qui tam suit against UnitedHealth Group, Inc. alleging that the organization upcoded risk adjustment data resulting in increased payments (more than $1.14 billion) to UnitedHealth Group. The Department of Justice (DOJ) intervened in the case, yet UnitedHealth Group was successful in getting the primary False Claims Act Claims dismissed by arguing that the Centers for Medicare & Medicaid Services (CMS) would not have refused to make the adjustment payments had they known of the errors in the risk adjustment. The Escobar materiality standard helps clarify threshold level of risk to Managed Care Providers in attesting to their risk adjustment payments; the falsities must have had an impact on the respective payment.

Background and complaint

In U.S. ex rel. Benjamin Poehling v. UnitedHealth Group, Inc., Michael Poehling, a finance Director at UnitedHealth Group, alleged that the Medicare Advantage Insurer made patients look sicker than they were to increase risk adjustment payments and get increased payments from Medicare. In the complaint, Poehling alleged that UnitedHealth Group did a “one-way look” into patient records for undercoded diagnoses, but ignored upcoded and invalid claims, results that demonstrated diagnoses unsupported by medical records, and submitted false risk adjustment attestations.

Motion to dismiss

DOJ argued that UnitedHealth Group’s failure to repay the risk adjustment payments after learning that the patient diagnoses codes were invalid and exaggerated was a violation of the False Claims Act.

UnitedHealth Group motioned for dismissal of the claims by arguing that the billing issues were immaterial to the payments of risk adjustments as CMS was provided notice that some of the billing codes were incorrect yet still making the payments.

Opinion and subsequent case activity

On February 12, 2018, the court ruled that the government has pled materiality of submitted diagnoses codes themselves, but has failed to allege that CMS would have refused to make the payments if it had known the attestations were in fact false. Therefore, claims made based on the falsity of attestations fail to plead the materiality standard of Escobar; the assurances would not have affected the payment of money. The following claims were dismissed:

  • Violation by knowingly presenting or causing to be presented false or fraudulent claims for payment or approval;
  • Violation by knowingly making, using or causing to be made or used, a false statement material to a false or fraudulent claim; and
  • Violation of 1st part reverse false claims provision, by knowingly making, using, or causing to be made or used, a false record or statement material to an obligation to pay or transmit money to the government.

The court held that the government did in fact plead facts to satisfy the second part of the Reverse False Claims Act (FCA) establishing liability for anyone knowingly concealing or knowingly and improperly avoiding/decreasing obligation to pay or transmit money or property to the government. Claims for unjust enrichment and payment by mistake are premised on invalid diagnoses codes, not attestations. The following claims survived the motion to dismiss:

  • Violation of the 2nd part of the reverse FCA, by knowingly making, using, or causing to be made or used, a false record or statement material to an obligation to pay or transmit money to the government;
  • Unjust enrichment; and
  • Payment by mistake.

On February 26, 2018, the period lapsed for the DOJ to submit an amended complaint to adequately plead the materiality of the attestations. The court issued a Notice of Decision regarding the Amendment of Complaint and subsequently ordered the defendants to file an answer to the three remaining complaints that survived dismissal.

What it means for insurers and managed care providers?

Risk adjustment payments are essential to the finances (and long-term survival) of managed care. Over one third of Medicare beneficiaries are part of Advantage plans. Risk adjustment payments protect organizations from the risk inherent in treating “sicker” patients. However, attesting to risk adjustment payments also can expose organizations to FCA liability; the provision or omission of false information in the risk adjustment attestation is the basis for the false claims act claims. The holding in this case shields managed care providers from some degree of risk in attesting to their risk adjustment data. False Claims Act liability is not warranted in cases that the provider’s claims do not rise to the materiality standard as laid out in Escobar, such that CMS would have refused to make the payment.