Court Opinion

ID: 4310584
Source: CourtListenerOpinion
Date Created: 2018-09-07 14:00:38.040314+00
Date Added: 2024-06-11T14:44:07.800132
License: Public Domain

UNITED STATES DISTRICT COURT
                          FOR THE DISTRICT OF COLUMBIA
_____________________________________
                                       )
UNITEDHEALTHCARE INSURANCE )
COMPANY, et al.,                       )
                                       )
              Plaintiffs,              )
                                       )
       v.                              )   Civil Case No. 16-157 (RMC)
                                       )
ALEX M. AZAR II,                       )
Secretary of the Department of Health  )
and Human Services, et al.,            )
                                       )
              Defendants.              )
_____________________________________)

                                            OPINION

               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.
                                                 1
                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

1
 Plaintiffs are UnitedHealthcare Insurance Company, AmeriChoice of New Jersey, Inc., Arizona
Physicians IPA, Inc., Care Improvement Plus South Central Insurance Company, Care
Improvement Plus of Texas Insurance Company, Care Improvement Plus Wisconsin Insurance
Company, Health Plan of Nevada, Inc., Medica Healthcare Plans, Inc., Oxford Health Plans
(CT), Inc., Oxford Health Plans (NJ), Inc., Oxford Health Plans (NY), Inc., Pacificare Life and
Health Insurance Company, Pacificare of Arizona, Inc., Pacificare of Colorado, Inc., Pacificare
of Nevada, Inc., Physicians Health Choice of Texas, LLC, Preferred Care Partners, Inc., Sierra
Health and Life Insurance Company, Inc., UnitedHealthCare Benefits of Texas, Inc.,
UnitedHealthCare Community Plan of Ohio, Inc., UnitedHealthCare Community Plan of Texas,

                                                 2
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

LLC, UnitedHealthCare Insurance Company of New York, UnitedHealthCare of Alabama, Inc.,
UnitedHealthCare of Arizona, Inc., UnitedHealthCare of Arkansas, Inc., UHC of California,
UnitedHealthCare of Florida, Inc., UnitedHealthCare of Georgia, Inc., UnitedHealthCare of New
England, Inc., UnitedHealthCare of New York, Inc., UnitedHealthCare of North Carolina, Inc.,
UnitedHealthCare of Ohio, Inc., UnitedHealthCare of Oklahoma, Inc., UnitedHealthCare of
Oregon, Inc., UnitedHealthCare of Pennsylvania, Inc., UnitedHealthCare of the Midlands, Inc.,
UnitedHealthCare of the Midwest, Inc., UnitedHealthCare of Utah, Inc., UnitedHealthCare of
Washington, Inc., UnitedHealthCare of Wisconsin, Inc., and UnitedHealthCare Plan of the River
Valley, Inc.

                                                 3
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.

2
  Although all parties used the initials “FFS” (fee-for-service) to reference traditional Medicare
(and compare it to Medicare Advantage), this term is “now, something of a misnomer” because
CMS has changed its fee structures for hospitals and doctors. See CMS Mot. at 4. The Court
eschews the use of the acronyms for clarity, except when quoting. See D.C. Circuit Handbook of
Practice and Internal Procedures 41 (2016).
                                                 4
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

                                                 5
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, and

then adjusting a Medicare Advantage beneficiary’s risk score (and the payment to the Medicare

Advantage insurer accordingly), will render the cost to CMS under traditional Medicare and the

cost to the insurer under Medicare Advantage actuarially equivalent.

3
 CMS publishes annual Advance Notices of changes to its risk-adjustment methodology for the
coming year. See 42 U.S.C. § 1395w-23(b).
                                                  6
               In conducting these analyses, CMS relies entirely on the diagnosis codes

submitted by healthcare providers under traditional Medicare. “[T]he risk adjustment model is

built on unaudited [traditional Medicare] data . . . which must contain errors.” CMS Mot. at 37.

Indeed, doctors treating traditional Medicare patients are paid based on their services and not the

diagnosis codes they might submit to report why the patient saw the doctor. As UnitedHealth’s

counsel explained at argument, physicians bill traditional Medicare by procedure, not diagnosis

codes, so that “physicians are essentially indifferent to the diagnosis . . . . There’s no financial

incentive to be particularly careful.” Hearing Tr. at 13. “[W]hat matters is the procedure they

did.” Id. at 14; see also CMS Mot. at 7 (agreeing that traditional Medicare payments to doctors

“depend only on the services . . . and not in any way on the diagnoses submitted”). Given this

incentive scheme, it can be no surprise that diagnosis reports for Medicare Part B are considered

much less reliable than hospital diagnosis reports for Part A. See CMS Mot. at 7 (noting “the

quality of the Part B diagnosis data is generally understood to be inferior to the Part A diagnosis

data”).

               Medicare Advantage insurance companies bid annually after CMS issues notice

of each county’s benchmark rate for the forthcoming year. See 42 U.S.C. § 1395w-23(b)(1)(B).

The insurers are paid on a per-capita basis for each covered individual, including applicable risk

scores. As a result, a Medicare Advantage insurer undertakes to provide insurance coverage at

least identical to Medicare at annual fixed rates even though the health care needs of the covered

populations, mostly the elderly, vary greatly.

               Humans being human, diagnoses in healthcare records may be miscoded,

inappropriately added, or otherwise faulty by accident or mal intent. UnitedHealth suggests that

the error rate can be as high as 20%. See Compl. [Dkt. 1] ¶ 38; see also Hearing Tr. at 28. In the

                                                  7
past, neither CMS nor the insurers made efforts to review proactively the diagnosis codes

assigned by healthcare providers. Indeed, as stated above, CMS treats diagnosis codes as

categorically valid for its own purposes under traditional Medicare, including for setting rates for

Medicare Advantage. Nonetheless, CMS has long required Medicare Advantage insurers to

certify “based on best knowledge, information and belief” that the information they provide to

CMS, including all diagnosis codes, is “accurate, complete, and truthful.” 42 C.F.R.

§ 422.504(l)(2). CMS contends that this pre-existing regulation, and other existing agency

practices, have long required that diagnosis codes submitted by Medical Advantage insurers be

supported by underlying medical records (i.e., patient medical charts). UnitedHealth responds

that neither this pre-existing regulation, nor any other law or regulation, has previously obligated

the insurance companies who provide Medicare Advantage insurance to validate independently

the underlying medical records that support diagnosis codes submitted by health care providers.

               For more than a decade, CMS has conducted audits of a subsection of insurers in

the Medicare Advantage program, through which it has compared the diagnosis codes in bills

paid by the insurance companies to the underlying patient medical charts and records, which it

requires the insurers to obtain for this purpose. It has then required repayment to CMS of any

costs that were based on unsupported diagnosis codes. In 2008, CMS announced that it would

begin applying these “Risk Adjustment Data Validation (RADV)” audits to extrapolate the error

rate in the audited sample across an entire insurance contract. 4 The insurer would be responsible

for returning any overpayment to CMS, based on the extrapolated error rate.

4
 See Policy and Technical Changes to Parts C and D, 74 Fed. Reg. 54,634, 54,674 (Oct. 22,
2009) (2009 Proposed RADV Rule) at AR2409 (summarizing the history of the RADV audit
program); Policy and Technical Changes to Parts C and D, 75 Fed. Reg. 19,678, 19,742-53 (Apr.
15, 2010) (2010 RADV Rule) at AR2819; Medicare Advantage Risk Adjustment Data

                                                 8
               When CMS sought comments on its new methodology for conducting RADV

audits, Medicare Advantage insurers immediately protested that the rates paid for each diagnosis

code are based on traditional Medicare records that are not audited or verified in any way;

requiring repayment of all amounts seemingly “overpaid” to a Medicare Advantage insurer based

on audited records would ignore errors in CMS records and violate the statutory requirement of

actuarial equivalence. 5

               This argument ventures deep into the weeds of actuarial science but is not actually

disputed by the parties. Nor could CMS really debate it: as a result of the comments it received,

CMS adopted a “Fee-for-Service Adjuster” or “FFS Adjuster” to the results of RADV audits of

Medicare Advantage insurance contracts. The FFS Adjuster reflects CMS’s own estimate of the

error rate in risk factors and diagnosis codes submitted by healthcare providers and paid by CMS

for its traditional Medicare participants; applied to the results of a RADV audit of a Medicare

Advantage insurer, it is designed to achieve actuarial equivalence between the two. Thus,

Medicare Advantage providers must return to CMS any audited “overpayments” to the extent

that the insurer’s errors exceed the estimated error rate in CMS payments under traditional

Medicare. See Notice of Final Payment Error Calculation Methodology for Part C Medicare

Advantage Risk Adjustment Data Validation Contract-Level Audits (Feb. 24, 2012) (RADV

Final Methodology) at AR5311-15.

Validation (RADV) Notice of Payment Error Calculation Methodology for Part C Organizations
Selected for Contract-Level RADV Audits: Request for Comment (Dec. 20, 2010) (RADV
Methodology Request for Comment) at AR5021-22.
5
  See generally Aetna Inc. Comments (Jan. 21, 2011) at AR5036-71; Humana Inc.’s Comments
(Jan. 21, 2011) at AR5102-16; UnitedHealthCare Comments (Jan. 21, 2011) at AR5193-5220;
see also American Academy of Actuaries Comment on RADV Sampling and Error Calculation
Methodology (Jan. 21, 2011) (Academy of Actuaries Comment) at AR5235-36.
                                                9
               UnitedHealth asserts that the 2012 FFS Adjuster works to counteract the fact that

per-capita payments to Medicare Advantage insurers are based on a less precise set of data—

belonging to CMS—than that which is reviewed during an audit. Their argument, and CMS’s

eventual concurrence, are supported by the American Academy of Actuaries, which strongly

advised CMS that it was not actuarially sound to compare unaudited figures to calculate per-

capita payments and then audited figures to calculate overpayments. See Academy of Actuaries

Comment at AR5236 (“This type of data inconsistency not only creates uncertainty, it also may

create systematic underpayment, undermining the purpose of the risk-adjustment system and

potentially resulting in payment inequities.”).

               The passage of the Patient Protection and Affordable Care Act (ACA), Pub. L.

No. 111-148, 124 Stat. 119 (2010), is also directly relevant here. The ACA imposed an

obligation on Medicare Advantage insurers to report and return any overpayments that an insurer

discovers on its own. See 42 U.S.C. § 1320a-7k(d)(1) (2012). This section of the ACA defined

“overpayment” as “any funds that a person receives or retains under [Medicare Advantage] to

which the person, after applicable reconciliation, is not entitled.” Id. § 1320a-7k(d)(4)(B). The

law further required that any “overpayment . . . be reported and returned [within] 60 days after

the date on which the overpayment was identified.” Id. § 1320a-7k(d)(2). If an insurer in the

Medicare Advantage program fails to return such a discovered overpayment within 60 days of

identifying it, that failure renders the insurer’s initial but faulty claim for payment a violation of

the False Claims Act (FCA). Id. § 1320a-7k(d)(3) (“Any overpayment retained by a person after

the deadline for reporting and returning the overpayment . . . is an obligation (as defined in

section 3729 (b)(3) of title 31) for purposes of section 3729 of such title.”); cf. False Claims Act,

31 U.S.C. § 3729(b)(3). Claims for overpayments under the False Claims Act carry the potential

                                                  10
for treble damages, civil penalties, and debarment from Medicare. See 31 U.S.C.

§ 3729(a)(1)(G) (providing for civil penalties and treble damages); 42 C.F.R. § 424.535(a)

(describing grounds for revocation of enrollment in the Medicare program). Further, non-

government qui tam plaintiffs may bring FCA claims in federal court. See 31 U.S.C. § 3730(b).

               The Affordable Care Act established a basic statutory framework but left several

crucial terms undefined. It did not define at what point an insurer might be said to have

“identified” an overpayment, thus triggering the 60-day clock; nor did it outline the scope of

“applicable reconciliation” or state how “overpayments” and “actuarial equivalence” in

payments are related.

               We come to the 2014 Final Rule at issue here. CMS issued a notice of proposed

rulemaking in January 2014 and sought comments. 6 CMS proposed to “clarify the statutory

definition of overpayment” with a new regulation titled “Reporting and Returning

Overpayments,” to be codified at 42 C.F.R. § 422.326. See 79 Fed. Reg. at 1996, 2055-56 (June

29, 2000) (AR80 at AR139-40).

               CMS published its Final Rule on May 23, 2014, and in so doing finalized 42

C.F.R. § 422.326 concerning overpayments. 7 Under the 2014 Overpayment Rule, any diagnostic

code that is inadequately documented in a patient’s medical chart results in an “overpayment.”

Id. at 29,921 (AR1313). Further, an overpayment is “identified” whenever a Medicare

Advantage insurer determines, “or should have determined through the exercise of reasonable

6
  See Contract Year 2015 Policy and Technical Changes to the Medicare Advantage and the
Medicare Prescription Drug Benefit Programs, 79 Fed. Reg. 1918, 1918-2073 (Jan. 10, 2014)
(2014 Proposed Rule) at AR1 et seq.

7See Contract Year 2015 Policy and Technical Changes to the Medicare Advantage and the
Medicare Prescription Drug Benefit Programs, 79 Fed. Reg. 29,844, 29,844-968 (May 23, 2014)
(2014 Overpayment Rule) at AR1235 et seq.
                                                11
diligence,” that it had received an overpayment. Id. at 29,923 (AR1315). CMS further defined

reasonable diligence as requiring “at a minimum . . . proactive compliance activities conducted

in good faith by qualified individuals to monitor for the receipt of overpayments.” Id.

UnitedHealth alleges that these obligations apply a simple negligence standard for purposes of

False Claims Act liability, which is contrary to the standards in the False Claims Act itself. See

31 U.S.C. § 3729(b)(1) (defining “knowing” and “knowingly” to include “actual knowledge,”

“deliberate ignorance,” or “reckless disregard of the truth or falsity of the information”). At oral

argument, CMS essentially conceded that the 2014 Overpayment Rule imposed a negligence

standard with a purported False Claims Act enforcement mechanism:

               The Court: It’s a negligence standard, knew or should have known?

               [Defense Counsel]: . . . . [T]he rule does interpret the statutory
               language identified to mean not only literally knew about the
               overpayment, but also if you for instance have an entirely deficient
               compliance program and that is the reason, and your failure to have
               the appropriate compliance program is the reason you didn’t learn
               of an overpayment that you should have learned of, then we will also
               begin the clock on that . . . .

               The Court: . . . . The definition of identified doesn’t mean knew, it
               means knew or with reasonable diligence should have known or
               maybe didn’t care to look.

               [Counsel]: Yes, your Honor.

               The Court: That’s all negligence.

               [Counsel]: It bears some similarities to negligence, your Honor.

               The Court: Right. So it’s not a knowledge based thing?

               [Counsel]: Not as it has been interpreted in the overpayment rule.

Hearing Tr. at 34-36.

                                                 12
               Most critically for the present challenge, the 2014 Overpayment Rule did not

adopt something like an “FFS Adjuster” to recognize that the sources of data are not compatible,

i.e., unaudited traditional Medicare records to determine payments to Medicare Advantage

insurers and audited medical charts to determine overpayments. UnitedHealth argues that the

2014 Overpayment Rule thus fails to ensure “actuarial equivalence” between CMS’s own costs

and what CMS pays Medicare Advantage insurers to provide the same coverage. Rather, it

subjects the insurers to a more searching form of scrutiny than CMS applies to its own enrollee

data, thus resulting in a false appearance of better health among Medicare Advantage

beneficiaries compared to traditional Medicare participants and systemic underpayments for

healthcare costs to Medicare Advantage insurers. UnitedHealth also argues that the “negligence”

standard of liability imposed by the 2014 Overpayment Rule constitutes an unlawful departure

from the standard for liability under the False Claims Act.

               The original Complaint in this matter was filed January 29, 2016, and CMS filed a

motion to dismiss, which the Court denied on March 31, 2017. See 3/31/2017 Order [Dkt. 26];

Mem. Op. [Dkt. 25]. The parties proceeded to summary judgment briefing. Defendants filed the

Administrative Record on July 14, 2017, see Notice of Filing and Serv. of Admin. Record [Dkt.

40], and UnitedHealth moved to supplement it. See Mot. for Leave to File Suppl. to the Admin.

Record [Dkt. 44]. After full briefing, the Court granted the motion to supplement with two

documents related to the FFS Adjuster for RADV Audits, see Mem. Op. [Dkt. 68]; 8/1/18 Order

[Dkt. 69]; the parties filed a joint appendix to the administrative record including the additional

documents. See Notice of Submission of Suppl. Joint Appx. [Dkt. 70]; Joint Mot. for Leave to

File Corrected Joint Appx. Vol. 2 [Dkt. 71]; 8/7/18 Minute Order (granting motion to file

                                                 13
corrected volume). Summary judgment is now fully briefed, 8 with the addition of a brief amicus

curiae in support of Plaintiffs, without objection from CMS, by America’s Health Insurance

Plans. See Amicus Brief [Dkt. 62]. The Court heard oral argument from the parties on August 8,

2018. See Hearing Tr.

                                     III. LEGAL STANDARD

               Summary judgment is available when “the movant shows that there is no genuine

dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.

R. Civ. P. 56(a). A fact is material if it is capable of affecting the outcome of litigation.

Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986). A dispute is genuine if the

evidence is such that a reasonable jury could return a verdict for the non-moving party. Id.

               Summary judgment is the proper stage for determining whether, as a matter of

law, an agency action is supported by the administrative record and is consistent with

the Administrative Procedure Act (APA). Richards v. INS, 554 F.2d 1173, 1177 (D.C. Cir.

1977). The APA provides that “[t]he reviewing court shall . . . hold unlawful and set aside

agency action” that is “arbitrary, capricious, an abuse of discretion, or otherwise not in

accordance with law,” or that is “in excess of statutory jurisdiction, authority, or limitations, or

short of statutory right.” 5 U.S.C. §706(2)(A), (C). Arbitrary and capricious review is

“narrow.” Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402, 416 (1971). The

Court is not to “substitute its judgment for that of the agency.” Motor Vehicle Mfrs. Ass’n of

U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983). Rather, the Court must

determine whether the agency “examine[d] the relevant data and articulate[d] a satisfactory

8
  See Pls.’ Mot. for Summary J. (United Mot.) [Dkt. 47]; CMS Mot.; Mem. in Opp’n to Mot. for
Summ. J. [Dkt. 58]; Pls.’ Mem. in Opp’n to Cross-Mot. for Summ. J. (Pls.’ Opp’n & Reply)
[Dkt. 60]; Reply to Opp’n to Mot. for Summ. J. [Dkt. 61]; Defs.’ Reply to Opp’n to Cross-Mot.
for Summ. J. (Defs.’ Reply) [Dkt. 64].
                                                  14
explanation for its action, including a ‘rational connection between the facts found and the

choice made.’” Id. (quoting Burlington Truck Lines v. United States, 371 U.S. 156, 168 (1962)).

The Court’s review is limited to the administrative record, Holy Land Found. For Relief and

Dev. v. Ashcroft, 333 F.3d 156, 160 (D.C. Cir. 2003), and the party challenging an agency’s

action bears the burden of proof, City of Olmsted Falls v. FAA, 292 F.3d 261, 271 (D.C. Cir.

2002).

                                          III. ANALYSIS

         A. Statutory Requirement of “Actuarial Equivalence”

               The statutory provision at issue states that “the 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.” 42 U.S.C. § 1395w-23(a)(1)(C)(i). A traditional rule of statutory interpretation

renders the use of “shall” a mandatory obligation. See Anglers Conserv. Network v. Pritzker,

809 F.3d 664, 671 (D.C. Cir. 2016) (citing Antonin Scalia & Bryan A. Garner, READING LAW:

THE INTERPRETATION OF LEGAL TEXTS 112 (2012)).

               UnitedHealth argues that the 2014 Overpayment Rule violates the statutory

mandate of “actuarial equivalence.” CMS responds that Medicare Advantage insurers are paid

“a sum equal to the cost that CMS would expect to bear in providing traditional Medicare

benefits to a given beneficiary” and there is thus “equivalence between an expected cost, on the

one hand, and a known payment, on the other.” CMS Mot. at 36.

               In its briefs, CMS fails adequately to address the actuarial problem posed by the

2014 Overpayment Rule because of the different data sources on which it rests; the same

actuarial problem was recognized and mitigated by CMS in 2012 with the FFS Adjuster for
                                                  15
RADV audits but, surprisingly, omitted in 2014. The record is clear that payments for care

under traditional Medicare and Medicare Advantage are both set annually based on costs from

unaudited traditional Medicare records, but the 2014 Overpayment Rule systemically devalues

payments to Medicare Advantage insurers by measuring “overpayments” based on audited

patient records. This distinction makes an actuarial difference.

               In plain English, doctors treating patients under traditional Medicare bill CMS by

the procedure involved and not by diagnosis code(s). While the doctors are required to enter

diagnosis codes, that information is irrelevant to payment. As far as the record reveals, the

diagnosis codes in traditional Medicare are never verified because they do not matter to payment.

“[T]he risk adjustment model is built on unaudited data about traditional, fee-for-service

Medicare beneficiaries, which must contain errors.” CMS Mot. at 37. However, those very

same diagnosis codes are presumed to have been accurate when CMS inputs all the data

concerning beneficiaries of traditional Medicare into its regression model, which ultimately

computes a value for each diagnosis. In consequence, the rates at which CMS pays Medicare

Advantage insurers are based on flawed data across the millions of people in traditional

Medicare. Yet the 2014 Overpayment Rule ignores those flaws when defining an

“overpayment.”

                It is critical to appreciate that CMS does not claim that it audits traditional

Medicare patient records; to the contrary, it accepts their diagnosis codes as given. See CMS

Mot. at 7 (agreeing that traditional Medicare payments to doctors “depend only on the services . .

. and not in any way on the diagnoses submitted”). It is also critical to appreciate that CMS does

not show more errors or fraud in the charts of Medicare Advantage beneficiaries than in the

charts of traditional Medicare beneficiaries. But the effect of the 2014 Overpayment Rule,

                                                 16
without some kind of adjustment, is that Medicare Advantage insurers will be paid less to

provide the same healthcare coverage to their beneficiaries than CMS itself pays for comparable

patients. This inequity is inevitable because CMS sets Medicare Advantage rates based on costs

that are presumed, based on traditional Medicare diagnosis codes, to be associated with

particular health status information that is not verified in underlying patient records. The same

unverified diagnosis is, under the 2014 Overpayment Rule, treated as an overpayment that must

be repaid, thus reducing the reimbursement to a Medicare Advantage insurer while requiring no

such reduction in payment under traditional Medicare. Similarly auditing CMS records for

errors or fraud could resolve the difference, if the audits were timely and if CMS were able to

construct a legitimate program to carry out such audits. See Hearing Tr. at 26 (Plaintiffs’ counsel

explaining that CMS data is not audited prior to determining risk coefficients). This statement is

not made to denigrate CMS but to recognize the difficulty involved.

               Neither party cites, and the Court has not located, any case in which a court has

defined the precise meaning of “actuarial equivalence” as used in 42 U.S.C. § 1395w-

23(a)(1)(C)(i). Congress used the same language in the Employee Retirement Income Security

Act (ERISA), 29 U.S.C. § 1054(b)((1)(H)(iii)(I), (c)(3); and the D.C. Circuit has construed its

meaning in that context. In Stephens v. U.S. Airways Grp., Inc., 644 F.3d 437 (D.C. Cir. 2011),

the Circuit “assume[d]” that “Congress intended that term of art to have its established

meaning,” that “[t]wo modes of payment are actuarially equivalent when their present values are

equal under a given set of actuarial assumptions.” Id. at 440 (emphasis added). The Seventh

Circuit has found that ERISA requires “actuarial equivalence between a lump sum and an

accrued pension benefit,” and determined that this comparison was comparable to equivalence

                                                17
“between a present and a future value.” Berger v. Xerox Corp. Ret. Income Guar. Plan, 338 F.3d
755, 759 (7th Cir. 2003).

               The term also appears in the Medicare Part D statute, which provides that certain

prescription-drug coverage is subject to an “actuarial equivalence requirement” that is described

in implementing regulations as “a state of equivalent value demonstrated through the use of

generally accepted actuarial principles and in accordance with . . . CMS actuarial guidelines.” 42

C.F.R. § 423.4; see also 42 U.S.C. § 1395w-113(b)(5). According to CMS, the Medicare Part D

provision requires “actuarial equivalence to compare the expected value [of covered prescription

drugs] to the beneficiary (or, seen differently, the expected cost to the insurer) of different

benefit plans.” CMS Mot. at 29.

               Based on these references to actuarial equivalence, CMS argues that the term

“means to equate either an expected value with a known value (as in the case of an annuity and a

lump sum payment) or two expected values (as in the case of benefit plans).” Id. at 30. In

particular, CMS insists that the risk adjustment model for determining Medicare Advantage

payment rates for each diagnostic code results in actuarial equivalence between the per capita

payments to the insurers and payments for services by traditional Medicare. In this argument,

CMS happily ignores the requirements of the 2014 Overpayment Rule that an insurer repay

within 60 days any overpayment, no matter its degree, about which it knew or “should have

determined through the exercise of reasonable diligence.” 42 C.F.R. § 422.326(c).

               Of particular assistance here, the D.C. Circuit specifically noted that two figures

are actuarially equivalent only when they share “a given set of actuarial assumptions.” Stephens,
644 F.3d at 440. In the Stephens context and here, this Court interprets “given” to mean “the

same,” as in two figures are actuarially equivalent when they share the same set of actuarial

                                                  18
assumptions. Different assumptions behind the elements of a calculation would, necessarily,

result in actuarially non-equivalent results.

               CMS is the insurer for traditional Medicare. Under the 2014 Overpayment Rule,

however, the “expected cost” to the government insurer for traditional Medicare, i.e., CMS,

would be less than the “expected cost” to a private insurance company offering Medicare

Advantage coverage. The problem would immediately arise when a Medicare Advantage insurer

found its payments from CMS lower than traditional Medicare payments for comparable

patients, due to reductions for any “overpayments” as defined by the 2014 Overpayment Rule.

The use of unaudited CMS data, with its known and unknown errors, to set the rates by which

Medicare Advantage insurers are paid and then the use of audited data to define “overpayments”

will lead to this result. See Academy of Actuaries Comment at AR5235 (“An underlying

principle of risk-adjustment systems is that there needs to be consistency in the way the model

was developed and how it is used. The [model’s] risk-adjustment factors were developed with

FFS data that, to the best of our knowledge, were not validated or audited for accuracy.”).

               RADV audits, of course, are conducted for the same purpose as the 2014

Overpayment Rule: to identify those claims for medical care that are not supported by medical

diagnoses. In the context of an RADV audit, a contract-wide “error rate” is extrapolated from a

sample and extended to an entire contract; a Medicare Advantage insurer may be required to

return monies to CMS based on the extrapolated error rate. In that context, CMS heeded the

advice of actuaries and adopted the FFS Adjuster to achieve actuarial equivalence between

Medicare Advantage and traditional Medicare. Under an RADV audit, therefore, an

“overpayment” is shown when, and only when, the error rate for a Medicare Advantage contract

is greater than the CMS error rate. See RADV Final Methodology at AR5314 (“[T]o determine

                                                19
the final payment recovery amount, CMS will apply a Fee-for-Service Adjuster . . . as an offset

to the preliminary recovery amount.”).

               The base rate for the “average Medicare beneficiary” and specific rates for

diagnosis codes are determined using unverified CMS data. From this uncontested fact,

UnitedHealth argues that relying on audited data to identify alleged overpayments to Medicare

Advantage insurers is actuarially unsound and violates the statute. It contends that the statutory

mandate of actuarial equivalence requires CMS to use the “same methodology” for each. See 42

U.S.C. § 1395w-23(b)(4)(D). According to the argument, CMS cannot subject the diagnosis

codes underlying Medicare Advantage payments to a different level of scrutiny than it applies to

its own payments under traditional Medicare without impermissibly skewing the calculus: by

doing so, it ensures that there will not be actuarial equivalence between traditional Medicare

payments and Medicare Advantage payments for comparable patients.

               CMS fails to respond adequately. The agency has been explicit that the 2014

Overpayment Rule requires “proactive compliance activities” and other measures to ensure that

overpayments, defined as any unsupported diagnosis, are identified and repaid promptly. 79

Fed. Reg. at 29,923 (AR1315). Given its definitions and this proactive obligation, the

“expected” value of payments from CMS for healthcare costs under Medicare Advantage plans

will be lower than the “expected” payments CMS itself will make under traditional Medicare,

since CMS does not audit or engage in similar self-examination for accuracy of its own records.

The consequence is inevitable: while CMS pays for all diagnostic codes, erroneous or not,

submitted to traditional Medicare, it will pay less for Medicare Advantage coverage because

essentially no errors would be reimbursed. See Academy of Actuaries Comment at AR5235.

                                                20
The Court finds that the 2014 Overpayment Rule establishes a system where “actuarial

equivalence” cannot be achieved.

       B. Statutory Requirement of “Same Methodology”

               UnitedHealth argues that the 2014 Overpayment Rule violates other statutory

requirements as well. In computing expenditures for traditional Medicare (information that

determines patient risk scores and Medicare Advantage payment rates), CMS must “us[e] the

same methodology as is expected to be applied in making payments” to Medicare Advantage

plans. 42 U.S.C. § 1395w-23(b)(4)(D). UnitedHealth insists that CMS fails to comply with this

mandate because the “methodology” applied in “making payments” to the insurers involves

reconciliation based strictly on audited diagnosis codes for Medicare Advantage patients, in

sharp contrast to unverified diagnosis codes for traditional Medicare patients from which

payment rates were set. The argument also raises the question of the meaning of “applicable

reconciliation” contemplated by the statute. Id. § 1320a-7k(d)(4)(B). The logic of the earlier

discussion of “actuarial equivalence” commands the results here. 9

               For present purposes, the fly in the ointment is that CMS recognized the actuarial

need to apply an FFS Adjuster to the RADV audit program because of its failure, as proposed, to

maintain actuarial equivalence in payments between traditional Medicare and Medicare

Advantage but CMS refused to maintain such actuarial equivalence in the 2014 Overpayment

Rule. Yet without some adjustment, the entire Rule would fail. Whether analyzed as a direct

9
  The parties argue about the validity of CMS risk factors and risk scores, which, as stated, form
the basis for (unaudited) CMS payments to traditional Medicare beneficiaries and payments to
Medicare Advantage plans (subject to RADV audits and to the 2014 Overpayment Rule). Going
back to these basics and redefining all the risk factors and all the diagnostic codes to account,
within that structure, for actuarial equivalence may be the preferred approach but the very heart
quakes at the thought, if one or more actuarially-sound “adjusters” might resolve the obvious
dissonance in the 2014 Overpayment Rule.
                                                21
question of the statutory requirement of actuarial equivalence or an indirect question of the

requirements of explicit statutory language concerning “same methodology,” the result is the

same: the 2014 Overpayment Rule fails to recognize a crucial data mismatch and, without

correction, it fails to satisfy 42 U.S.C. § 1395w-23(b)(4)(D).

       C. Arbitrary and Capricious

               It is established law that an agency must provide a legitimate reason for departing

from or rejecting a previous rule. See Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm

Mutual Auto. Ins. Co., 463 U.S. 29, 42 (1983). This principle also applies to changes to an

agency’s policy. See Nat’l Cable & Telecomms. Ass’n v. Brand X Internet Servs., 545 U.S. 967,

1001 (2005) (“[T]he Commission is free within the limits of reasoned interpretation to change

course if it adequately justifies the change.”) (emphasis added). UnitedHealth complains that the

2014 Overpayment Rule departs from prior CMS policies and pronouncements without rationale

or justification and is therefore arbitrary and capricious. It identifies four categories of prior

statements by CMS that arguably established an agency position that is contrary to the 2014

Overpayment Rule.

               The first, most recent, and most apt is the stated rationale on which CMS

ultimately included the FFS Adjuster in the RADV audit process, as explained in the official

notice of the methodology CMS would use to extrapolate payment errors to a contract-wide error

rate. See RADV Final Methodology at AR5311-15. After notice and comment on the proposed

audit process, including from the American Academy of Actuaries, CMS explained:

               CMS will apply a Fee-for-Service Adjuster (FFS Adjuster) amount
               as an offset to the preliminary recovery amount. . . . The FFS
               adjuster accounts for the fact that the documentation standard used
               in RADV audits to determine a contract’s payment error (medical
               records) is different from the documentation standard used to
               develop the [MA] risk-adjustment model (FFS claims). The actual

                                                  22
               amount of the adjuster will be calculated by CMS based on a
               RADV-like review of records submitted to support FFS claims data.

RADV Final Methodology at AR5314-15 (emphasis added). 42 U.S.C. § 1395w-23(b)(4)(D).

(At oral argument, counsel for CMS stated that the anticipated audit, whose goal is to “publish[]

a finalized FFS adjuster,” is not concluded. See Hearing Tr. at 31-32.) UnitedHealth urges the

Court to find that this CMS explanation of the need for an FFS Adjuster for audits, due to the

different data sources from which pay rates and error rates are determined, is a singular and

strong demonstration of the inadequacies of the 2014 Overpayment Rule, which is based on the

same dissimilar data sources but lacks such an adjustment.

               Second, UnitedHealth points to two notices from CMS that recognized the

differences in data for traditional Medicare and Medicare Advantage healthcare coverage. It

notes the CMS rationale for applying a “Coding Intensity Adjustment” to Medicare Advantage

insurers. Medicare Advantage plans contain more diagnosis codes than does traditional

Medicare, which could lead to overpayments relative to traditional Medicare costs for the same

patient. CMS implemented a Coding Intensity Adjustment to adjust for the higher prevalence of

diagnosis codes in Medicare Advantage plans. When it did so, CMS emphasized that it was

concerned about the imbalance in the number of diagnosis codes between traditional Medicare

and Medicare Advantage and not “improper coding.” Advance Notice of Methodological

Changes for CY 2009 Parts C and D Rates and Policies (Feb. 22, 2008) (2009 Advance Notice)

at AR4231 (“We do not assume that the coding pattern differences that we found in our study are

the result of improper coding. . . . However, because MA coding patterns differ from FFS

coding patterns, the normalization factor (which is calculated based on FFS coding) does not

currently adjust for these different coding patterns.”). In addition, UnitedHealth points to a CMS

2010 rate announcement for Medicare Advantage plans which recognized that because “MA

                                                23
payment methodology is based on fee-for-service payments” by traditional Medicare, such

“plans must code the way Medicare Part A and B providers do in order for risk adjustments to be

valid.” Announcement of CY 2010 Parts C and D Rates and Policies (Apr. 6, 2009) at AR4335.

               Third, UnitedHealth argues that an Advance Notice for 2004 defined “diagnosis”

as “keyed to the presence of a diagnosis code in the claims data,” which definition is

contradicted by the 2014 Overpayment Rule that declares that a “diagnosis” must be supported

by underlying medical charts. See 2004 Advance Notice at AR3903.

               CMS dismisses these earlier statements as only “varied comments about the

purpose of the coding difference adjuster, made in an effort to explain why insurers’ search for

every supportable diagnosis would lead to overpayment.” CMS Mot. at 35. It insists that the

agency “has always understood a certification of the ‘accuracy’ and ‘truthfulness’ of risk

adjustment data to require that any reported diagnosis be substantiated” by underlying records.

Id. at 35 (citing 42 C.F.R. § 422.31(d), (e)); see also 79 Fed. Reg. at 29,921-22 (AR1313-14).

               The CMS argument does not misstate its regulations but misses the point.

UnitedHealth does not contend that Medicare Advantage insurers should be permitted knowingly

or recklessly to bill CMS for erroneous diagnosis codes. Instead, it argues that the Medicare

statute requires CMS to pay for the healthcare of Medicare Advantage beneficiaries in the same

manner, and by the same standards, by which CMS pays for traditional Medicare beneficiaries.

That means, for the millions of Americans covered by Medicare and Medicare Advantage, that

there are error rates; UnitedHealth argues that it should not be subject to lesser payments, False

Claims Act liability, or debarment for errors over these huge populations that are fewer than

those errors made by CMS itself.

                                                24
               CMS fails to address the central issue here. The question is whether the

documents cited by UnitedHealth constitute an agency policy or position from which the 2014

Overpayment Rule deviated without a reasoned explanation. More specifically, UnitedHealth

argues that the analysis in the RADV Final Methodology constituted an agency decision or

policy that recognized the necessity of an FFS Adjuster-type procedure to account for

discrepancies between the documentation for setting payments to Medicare Advantage insurers

and that used for determining whether an “overpayment” had occurred. As to this argument,

CMS is essentially silent.

               Agency policies and practices may take many forms and still be sufficiently

established so that any change in the policy must be explained. Republic Airline Inc. v. U.S.

Dept. of Transp., 669 F.3d 296 (D.C. Cir. 2012), provides a good example. That case involved

the transfer of “slot exemptions,” by which airlines operate out of high-traffic airports.

Specifically, after a corporate acquisition, the new parent corporation planned to use an existing

slot exemption exactly as it had been used before the acquisition took place. Because the

corporate entity operating the flight had “ceased to exist as a carrier,” the Department of

Transportation (DOT) decided that the new entity’s use of the predecessor’s slot exemption

would constitute a transfer in violation of federal law. Id. at 301 (quoting DOT letter). In

isolation, its reasoning was not illogical but the D.C. Circuit overruled it nonetheless. Since

DOT had previously permitted slot exemptions to continue in use after similar corporate

changes, its decision that Republic Air resulted in an impermissible “transfer” was found to be

arbitrary and capricious. Id. at 300-02.

               This Court comes to the same conclusion. Having recognized that actuarial

equivalence, mandated by statute, required an FFS Adjuster for purposes of defining

                                                 25
overpayments because of dissimilar data for RADV audits, CMS provides no legitimate reason

for abandoning that statutory mandate in the context of the 2014 Overpayment Rule. The Court

finds that CMS was arbitrary and capricious in adopting the 2014 Overpayment Rule without

explaining its departure from prior policy. 10

       D. False Claims Act Liability

               1. Negligence Standard

               UnitedHealth further complains that the 2014 Overpayment Rule unlawfully

imposes a negligence standard on Medicare Advantage insurers to identify and report

“overpayments,” which is inconsistent with the standards of the False Claims Act to which it

would otherwise align enforcement. CMS objects, contending that the standard adopted in the

2014 Overpayment Rule, including its requirement of “reasonable diligence,” is

indistinguishable from the CMS 2000 Rule that required Medicare Advantage insurers to certify

to the accuracy of risk adjustment data. See Medicare + Choice Program, 65 Fed. Reg. 40,170,

40,268 (June 29, 2000) (2000 Rule) (AR2006)). CMS insists that the 2014 Overpayment Rule

only “prevents . . . willful ignorance (or reckless disregard), but no more.” CMS Mot. at 44.

               Back to basics. The ACA requires that “[a]n overpayment must be reported and

returned” within “60 days after the date on which the overpayment was identified.” 42 U.S.C.

10
   UnitedHealth further urges the Court to find that “it is inherently arbitrary and irrational to
calibrate a payment model using one type of data and then operate the model using a different
type of data.” United Mot. at 32. As discussed above, the Court recognizes and gives substantial
weight to the American Academy of Actuaries’ analysis of why it is actuarially unsound to
“apply the risk-adjustment model in a way that is inconsistent with the way it was developed.”
Academy of Actuaries Comment at AR5235. Further, “‘unexplained departure from prior
agency determinations’ is inherently arbitrary and capricious.” Nat’l Treasury Emps. Union v.
Fed. Labor Relations Auth., 404 F.3d 454 (D.C. Cir. 2005) (quoting Am. Fed. of Gov’t Emps.,
Local 2761 v. FLRA, 866 F.2d 1443, 1446 (D.C. Cir. 1989)). The Court contents itself with
finding that the failure of the 2014 Overpayment Rule to ensure actuarial equivalence violates
the statute and its unexplained departure from prior agency policy is arbitrary and capricious.
                                                 26
§ 1320a-7k(d)(2). The 2014 Overpayment Rule provides: “The MA organization has identified

an overpayment when the MA organization has determined, or should have determined through

the exercise of reasonable diligence, that the MA organization has received an overpayment.” 42

C.F.R. § 422.326(c). In the preamble to the 2014 Overpayment Rule, CMS explained that such

reasonable diligence “at a minimum . . . would include proactive compliance activities conducted

in good faith by qualified individuals to monitor for the receipt of overpayments.” 79 Fed. Reg.

at 29,923 (AR1315). Failure to do so could place a Medicare Advantage insurer at risk of

liability under the False Claims Act.

               In contrast, the False Claims Act—which the ACA refers to for enforcement, see

42 U.S.C. § 1320a-7k(d)(3)—imposes liability for erroneous (“false”) claims for payment

submitted to the government that are submitted “knowingly.” “Knowingly” is a term of art

defined in the FCA to include false information about which a person “has actual knowledge,”

“acts in deliberate ignorance of the truth or falsity of the information,” or “acts in reckless

disregard of the truth or falsity of the information.” 31 U.S.C. § 3729(b)(1)(A). 11 In summary,

the FCA and the ACA require actual knowledge, deliberate ignorance, or reckless disregard

before liability can be found. This, indeed, is the standard CMS itself once adopted: the

preamble to the 2000 Rule required certification to the “best knowledge, information, and belief”

of an insurer, with a sanction only in cases of “[a]ctual knowledge of falsity,” “reckless

disregard,” or “deliberate ignorance.” See 2000 Rule, 65 Fed. Reg. at 40,268 (AR2006). The

11
  The ACA does not use the term “knowingly” but defines it by cross-reference to the FCA. See
42 U.S.C. § 1320a-7k(d)(4)(A) (“The terms ‘knowing’ and ‘knowingly’ have the meaning given
those terms in section 3729(b) of Title 31.”).

                                                  27
standard in the 2000 Rule (or the FCA or the ACA) is certainly not the standard in the 2014

Overpayment Rule, however much CMS might want to make it so.

               “Congress clearly had no intention to turn the FCA, a law designed to punish and

deter fraud, into a vehicle for either ‘punish[ing] honest mistakes or incorrect claims submitted

through mere negligence’ or imposing ‘a burdensome obligation’ . . . rather than a ‘limited duty

to inquire.’” United States v. Sci. Applications Int’l Corp., 626 F.3d 1257, 1274-75 (D.C. Cir.

2010) (quoting S. Rep. No. 99-345, at 6, 19 (1986)). With these proscriptions in mind, the 2014

Overpayment Rule extends far beyond the False Claims Act and, by extension, the Affordable

Care Act. Not being Congress, CMS has no legislative authority to apply more stringent

standards to impose FCA consequences through regulation.

               2. Definition of “Identified”

               UnitedHealth also notes that the proposal for the 2014 Overpayment Rule stated

that a Medicare Advantage insurer would have “identified” an overpayment when “it has actual

knowledge of the existence of the overpayment or acts in reckless disregard or deliberate

ignorance of the existence of the overpayment.” 2014 Proposed Rule at 1997 (AR81). However,

the final 2014 Overpayment Rule stated that a Medicare Advantage insurer would have

“identified” an overpayment when “it has determined, or should have determined through the

exercise of reasonable diligence, that the MA organization has received an overpayment.” 42

C.F.R. § 422.326(c). The proposed language was consistent with the 2000 Rule, the FCA and

the ACA’s reference to the FCA. The CMS proposal intimated nothing about what Medicare

Advantage insurers should have known, nor about “proactive compliance activities.” While

CMS argues that there is no new requirement, its change of standards is obvious. Cf. 2000 Rule,

                                                28
65 Fed. Reg. at 40,268 (AR2006) (providing for sanctions only if insurers certify information

despite their “actual knowledge,” “reckless disregard,” or “deliberate ignorance” of its falsity).

               A regulation “violates the APA, if it is not a ‘logical outgrowth’ of the agency’s

proposed regulations.” Ass’n of Private Sector Colleges and Univs. v. Duncan, 681 F.3d 427,

442 (D.C. Cir. 2012). In such cases, the regulated parties must be afforded “an opportunity to

comment on new regulations.” Id. “A final rule is a logical outgrowth if affected parties should

have anticipated that the relevant modification was possible.” Allina Health Servs. v. Sebelius,

746 F.3d 1102, 1108 (D.C. Cir. 2014). In point of fact, regulated insurers apparently did not

anticipate that CMS might ultimately define “identified” to include overpayments about which

an insurer should have known because of “proactive compliance activities.” In the position of

insurance companies that do not regularly see patient medical records, but only doctor bills,

Medicare Advantage insurers argued that “identified” overpayments should be identified as ones

that are “known” to the insurer. UnitedHealth draws attention to its own comment on the

Proposed Rule argued that “an identified overpayment should be limited to actual knowledge of

an overpayment.” UnitedHealth Group Comment (Mar. 7, 2014) at AR1040. Agencies may not

“pull a surprise switcheroo on regulated entities” by adopting an interpretation that significantly

departs from the one proposed. Envtl. Integrity Project v. EPA, 425 F.3d 992, 996 (D.C. Cir.

2005). The Court agrees that CMS did so here, and that 2014 Overpayment Rule imposed a

distinctly different and more burdensome definition of “identified” without adequate notice.

                                                 29
                                   IV. CONCLUSION

             For the foregoing reasons, the Court will grant UnitedHealth’s Motion for

Summary Judgment, Dkt. 47; deny CMS’s Cross-Motion for Summary Judgment, Dkt. 57; and

vacate the 2014 Overpayment Rule. A memorializing Order accompanies this Opinion.

Date: September 7, 2018
                                                  ROSEMARY M. COLLYER
                                                  United States District Court

                                             30