HMOs_Feb08 - American Health Lawyers Association by zhouwenjuan


									A Publication of the American Health Lawyers Association                                 Volume 11 • Issue 1 • February 2008
HMOs and Health Plans Practice Group

                                                                                                       Pla n s
       Table of Contents                              Physician Tiering Programs:
 Physician Tiering Programs:                          Holding Health Plans
 Holding Health Plans Responsible
 for Tiering Methodology and                          Responsible for Tiering
 Disclosure to Their Insureds
 Mark Joffe, Esq., and                                Methodology and Disclosure
 Kelli Back, Esq..................................1
                                                      to Their Insureds
 Re-Examining Your Medicare
 Advantage and Medicare Part D                        Mark Joffe, Esquire, and Kelli Back, Esquire
 Compliance Programs in Light                         Law Offices of Mark S. Joffe
 of the Current Governmental                          Washington, D.C.
 Enforcement Climate

                                                          n at least 100 markets around the country, health plans have introduced
 Marci Handler, Esq., and                                 programs that rank physicians; either by creating an “elite” plan that includes
 Nisha Shah, Esq................................5         only the highest ranked physicians in its network or by tiering the physi-
                                                      cians and providing for lower cost sharing for top tier physicians.1 Health plans
 Making Wellness Work:                                promote the designations as a step toward quality-based purchasing. However,
 Structuring Meaningful and                           these programs have raised the ire of physicians and some consumer advocates,
 Legal Incentives for Healthy                         who question the basis for the ranking and whether such rankings could mislead
 Behavior                                             consumers and damage physician patient relationships.

 Thomas Bixby, Esq., and                              One of the latest salvos in the battle was launched by the Fairfield County Medical
                                                      Association (FCMA) and several Connecticut physicians who filed a class action
 Jason Kim, Esq. ...............................11
                                                                                                           against UnitedHealthcare,
 Plan Counsel and the                                                                                      Oxford, and Cigna.2 The FCMA
                                                                                                           and other Plaintiffs allege that
 Compliance Imperative                                                                                     the elite physician designa-
 Mira Weiss, Esq. .............................16                                                          tion programs implemented by
                                                                                                           UnitedHealthcare, Oxford, and
 Application of Medical                                                                                    Cigna are “a sham and are based
 Billing Standards to Claims                                                                               entirely on considerations of
 Submitted by Non-Contracted                                                                               cost rather than quality.”3 The
                                                                                                           Plaintiffs assert further that the
                                                                                                           “Defendants have no reliable
 Peter Roan, Esq. and                                                                                      or coherent methodology to
 Ronald Kurtz, Esq...........................22                                                            measure the quality of care of
                                                                                                           the specialists who participate
                                                                                                           in their respective provider
                                                                                                           networks.”4 The allegation that
                                                                                                           the designation was based on
                                                                                                           cost rather than quality under-
                                                                                                           lies most of the claims in the
                                                                                                           Plaintiff’s complaint.
HMOs & Health
The Plaintiffs, representing physicians who were not desig-                  nation programs, provide for punitive and other damages, and
nated as “elite” by the Defendants, allege that UnitedHealthcare,            declare that the programs of CIGNA and UnitedHealthcare are
Oxford, and Cigna have violated a number of state and common                 based on considerations of cost and not quality of care.
law principles by implementing the elite physician designation
                                                                             A similar lawsuit was filed against Regence BlueShield (Regence)
programs and claiming such designations are based on quality.
                                                                             by the Washington State Medical Association (WSMA) and repre-
The FCMA complaint lists the Plaintiffs’ first cause of action as             sentatives of the Society of Professional Engineering Employees
libel per se and libel per quod. The libel accusations are based             in Aerospace in 2006.5 The lawsuit was filed after Regence
on the allegation that, by not including Plaintiffs in their elite           Blueshield, at the request of Boeing, announced implementation
physician networks, which the health plans have stated in writing            of a select network of physicians for certain Boeing employees.
only include top quality providers, the plans have indicated that            Boeing wanted to ensure it was paying for quality healthcare.
the Plaintiffs were not quality healthcare providers. The Plain-             Thus it requested that Regence, its largest claims administrator,
tiffs claim these defamatory statements that the Defendants have             pick the best physicians for a new network for its engineers and
published about them have diminished the esteem and respect                  their dependents.6 Boeing did not specify how Regence should
in which their patients held them. They further allege that the              measure quality or select physicians.
Defendants did not base their designations on quality but solely
                                                                             Over 500 physicians who were in Regence’s normal network
on cost considerations.
                                                                             were not included in its select network because they did not meet
The Plaintiffs also assert a claim of tortious interference with busi-       the quality criteria for the select network. While the Society of
ness expectancy. In the complaint, they explain that a business              Professional Engineering Employees in Aerospace had initially
relationship exists between each Plaintiff physician and his or              supported the development of a high quality physician network,
her patients. They claim that the Defendants were aware of these             after receiving announcements that their physicians would no
relationships and interfered in their deliberate efforts to steer            longer be included in the network due to quality issues, many
their insureds away from Plaintiffs and to physicians who were               members viewed implementation of the network as a decrease in
designated as “elite.”                                                       benefits. Moreover, as Regence provided information regarding
                                                                             the basis for its ratings, physicians believed that the ratings were
Plaintiffs further allege that the physician designation programs
                                                                             based on flawed methodology and inaccurate information.
violate the Connecticut Unfair Trade Practices Act because they
misled consumers to believe that the physicians designated as                The lawsuit, which was later joined by the American Medical
elite provide better quality of care than those who were not desig-          Association (AMA), asserted a number of causes or action
nated as elite. They claim that Defendants failed to disclose to             including violation of the Washington Unfair Business Practices
their insureds that the designations are based on cost, rather than          Act, defamation, libel, intentional interference with contract and
quality. The Plaintiffs assert that, by misrepresenting the basis            breach of contract. Responding to the lawsuit and concerns of
for the classification and providing financial incentives to see               Boeing employees Regence announced in December 2006 that
lower cost physicians, the physician designation programs violate            it would delay implementation of the Select Network. Then in
public policy because they deny insureds their choice of qualified            August 2007, the parties settled the lawsuit.
                                                                             The settlement requires Regence to engage in a number of safe-
The Plaintiff physicians have also charged that the Defendant                guards and cooperative steps before implementing performance
health plans have breached their contracts with the Plaintiffs.              measurement programs. First, prior to implementing any such
They claim that the provider                                                                            program, Regence agreed to explain
agreements do not authorize                                                                             the program and its methodology
the Defendants to discriminate                                                                          and to provide WSMA with the
between participating providers                                                                         opportunity to provide meaningful
or to establish an elite or tiered                                                                      input into the performance measure-
physician designation program.                                                                          ment program. Regence agreed
                                                                                                        to provide WSMA ten days prior
Finally, the complaint alleges
                                                                                                        notice before releasing performance
that the Defendants conspired to
                                                                                                        scores to physicians and to make
undertake these illegal actions.
                                                                                                        reasonable efforts to advise physi-
It states that the Defendants all
                                                                                                        cians that the scores will be released.
announced and implemented
                                                                                                        Regence agreed to post the scores
their elite physician designation
                                                                                                        on its provider website along with
programs within a period of six
                                                                                                        an explanation or the methodology,
                                                                                                        the data relied upon to calculate the
The Plaintiffs have requested that                                                                      score, and a means to identify the
the court enjoin the Defendant                                                                          patients included in the data. Under
plans from implementing or                                                                              the settlement, physicians will have
continuing elite physician desig-                                                                       the ability to appeal their scores, and

if they do so in a timely manner, the scores will not                             The letter included an attached list of questions
be released to plan members or the public until                                      concerning the Premium Designation program to
the appeal is completed. If the physician seeks                                          allow the Attorney General’s Office to further
review outside of the prescribed timeline,                                                  evaluate the program and its compliance with
any performance reports published on the                                                      applicable law. The Attorney General’s Office
physician will include a notation that the                                                     subsequently sent similar letters to five other
results are under appeal. If physicians are                                                      health plans, including CIGNA.
not satisfied with the result of an internal
                                                                                                  On October 29, 2007, New York Attorney
review of their scores, they may have the
                                                                                                   General Andrew Cuomo announced that
opportunity to appeal the decision to an
                                                                                                   his office entered into formal agree-
external reviewer. However, they will
                                                                                                    ments with CIGNA, Aetna, United,
not be prohibited from seeking judicial
                                                                                                    Group Health Inc./Health Insurance
review if they do not elect to have an
                                                                                                    Plan of New York (GHI/HIP), and
external review of their performance
                                                                                                    Wellpoint that define the transpar-
                                                                                                    ency standards under which the plans
The Connecticut and Washington                                                                     may engage in any physician perfor-
lawsuits reflect physicians’ and                                                                   mance measurement, reporting, and/or
consumers’ biggest concerns about                                                                tiering programs.9 CIGNA, Aetna, United,
tiering arrangements: (1) that such                                                             and Wellpoint announced they would
arrangements be based on quality rather                                                       go beyond the terms of the settlement by
than cost; (2) that the process be open to                                                   applying the model standards set forth in the
review; (3) that the methodology used be                                                  settlement agreement
appropriate; and (4) that the basis for tiering or                                      nationally.10
network participating decisions be appropriately
                                                                                    The settlement agreements set forth requirements based
disclosed to consumers.
                                                                              on model standards drafted in consultation with the AMA, the
Tiering based on cost has long been a concern for physicians              Medical Society of the State of New York, the North Shore Physi-
and consumer advocates. Such measures to rank physicians or               cian Organization, and consumer advocacy groups.11 The require-
make participating decisions based on cost are also known as              ments focus on accuracy of data, transparency of the process, and
“economic credentialing” or “economic profiling.” In June 2007,            oversight of the process.12 The plans have agreed, through the
the AMA adopted a policy to strongly oppose networks that deny            settlement, to support the development and use of standardized
patient access to, or attempt to steer patients toward, certain           cost efficiency and quality measures. With regard to performance
physicians primarily based on cost factors.7                              measurement, the settlement agreements include principals
                                                                          governing accuracy in sample size and requiring appropriate risk
Concerns about physician selection or tiering based on cost and
                                                                          adjustment. Cost efficiency and quality performance measures
the confusion such programs can cause for consumers were part
                                                                          will have to be calculated and disclosed separately in information
of the reason the New York Office of Attorney General sent a
                                                                          for consumers and public reporting.13 Moreover, the plans will be
letter to UnitedHealthcare requesting the plan to refrain from
                                                                          prohibited from conducting rankings solely on the basis of cost
introducing their “Premium Designation” program and threat-
                                                                          efficiency. Cost efficiency measures may only be used in conjunc-
ening to seek an injunction if they did not cooperate. United-
                                                                          tion with quality measures. If the plan uses a combined cost/
Healthcare had planned to introduce the program, which ranks
                                                                          quality score, it must disclose the specific measures and relative
physicians by quality of care and cost of service. In the letter to
                                                                          weights used in determining the score.14 The plans are required
UnitedHealthcare, the Attorney General’s Office expressed three
                                                                          to use the most current data to measure performance consistent
principal concerns about the program:
                                                                          with the time period needed to obtain adequate sample sizes.15
    (1) Consumers may be steered to doctors based on                      The plans will also have to make the process transparent for
    faulty data and criteria.                                             providers and furnish them with rights to review and comment
                                                                          on the ranking process and underlying data used to determine
    (2) Consumers may be encouraged to choose doctors                     their ranking. At least forty-five days prior to publishing any new
    because they are cheap rather than because they                       or revised quality or cost evaluations, plans will have to furnish
    are good. This could undermine the integrity of the                   physicians with the methodology and measures used to assess
    doctor-patient relationship.                                          them, access to the data used for the physicians, and an explana-
                                                                          tion of the physicians’ right to make corrections and appeal.16
    (3) UnitedHealthcare’s profit motive may affect the
                                                                          If a physician makes a timely appeal, the plan cannot publish
    accuracy of its quality ratings because high-quality
                                                                          the new or revised quality or cost evaluations until the appeal is
    doctors may cost UnitedHealthcare more money.
    This is a conflict of interest.8
                                                                          The agreements also require that a nationally recognized standard
                                                                          setting organization, paid for by the plans and approved by the
HMOs & Health
Attorney General’s Office, act as an oversight monitor. The stan-           George Washington University School of Public Health and
dard setting organization will conduct a review to ensure compli-          Health Services, “[t]ransparent tiering standards, a transparent
ance with the agreement and to make the results of the review              development process in setting tiers and assigning individual
publicly available.17                                                      physicians to tiers, and a clear and accessible process for iden-
                                                                           tifying and correcting any errors that might arise in the tiering
In contrast to New York’s cautious approach to physician tiering,
                                                                           process should ensure the legal soundness of physician ranking
four years ago Massachusetts began its Clinical Performance
Improvement initiative (CPI). Under the CPI, the Group Insur-
ance Commission (GIC), the organization responsible for over-              In addition, it appears that clear communication to health plan
seeing the provision of health insurance for Massachusetts state           members regarding the basis for tiering decisions should support
employees and retirees, has required all of the plans participating        the public policy aims of providing consumers with the informa-
in its state employee healthcare program, to offer a health plan           tion they need to make informed decisions about their healthcare
to state employees that tiers physicians based on cost and quality         options. Such communications should also alleviate physician
measures, and provides for less cost sharing when receiving                concerns regarding accurate representation of the meaning of the
services from the highest-ranked physicians.                               tiering assignment.
To assist the plans, the GIC required participating health plans           Without direct knowledge of state law and underlying contracts,
to provide claims data for all individuals insured under their             it is difficult to predict the outcome of any lawsuits concerning
plans. Using the data, the GIC, working with Mercer Human                  tiered and elite physician networks. However, given the signifi-
Resources Consulting, provided the health plans with measure-              cance of the issues, it is likely that health plans will move toward
ments of efficiency and quality for their participating physicians          more transparency in developing such networks.
using Symmetry Health’s Episode Treatment Group product and a
subset of Resolution Health’s Physician Quality Measures.
                                                                           1 Ellen Nakashima, Doctors Rated but Can’t Get a Second Opinion, WASH POST,
The GIC did not specify how the plans should tier providers or                July 25, 2007.
even require them to use the efficiency or quality data calculated          2 Fairfield County Medical Ass’n. v. Cigna Corp., No. DBD-CV-07-5002943-S
provided under the CPI as the basis of tiering. As a result, plans            (Danbury Super. Ct. filed Aug. 7, 2007).
                                                                           3 Id., Complaint, page 2.
vary greatly with regard to which providers are tiered, the basis          4 Id., Complaint, page 3.
for assigning them to tiers, and whether providers were tiered at          5 Washington State Medical Ass’n v. Regence BlueShield, No. 06-2-30665-1 (King
the group or individual level. For example, in 2006 some plans                Co. Super. Ct. Aug. 13, 2007) (dismissed with prejudice).
tiered only high cost specialties. Others tiered primary care physi-       6 Jeremy Smerd, Backfire at Boeing: Misadventure in High-Performance Health Care,
cians (PCPs). Some plans used the CPI quality and/or efficiency                Workforce Management, page 1, 18-23 (Feb. 26, 2007).
                                                                           7 Reining in rankings for tiered and narrow networks, (Sept. 17, 2007).
scores, others used internal quality and/or efficiency measures
                                                                           8 Letter to Thomas J. McGuire, Esq., of UnitedHealthcare from Linda Lacewell,
and data in addition to or instead of the CPI scores. One plan                Counsel for Economic and Social Justice, State of New York Office of the At-
tiered based solely on the costliness of the hospital to which the            torney General (July 13, 2007).
physicians had admitting privileges. While significant differences          9 New York AG Announces Model Settlement with CIGNA on Physician Ranking
remain between plans in implementation of the tiering directive,              Programs, BNA’s Healthcare Daily Report, Volume 12, Number 209
                                                                              (Oct. 30, 2007); United, GHI/HIP Agree to New York AG Model Standards for
as of July 1, 2007, the GIC is requiring all of the participating             Physician Rankings, BNA’s Healthcare Daily Report, Volume 12, Number 224
plans to incorporate some form of individual provider tiering.18              (Nov. 21, 2007).
                                                                           10 United, GHI/HIP Agree to New York AG Model Standards for Physician Rankings,
The tiering arrangements raised physician concerns. The Massa-                BNA’s Healthcare Daily Report, Volume 12, Number 224 (Nov. 21, 2007).
chusetts Medical Society engaged Focused Medical Analytics                 11 Id.
(FMA) of Rochester, New York, and J. William Thomas, PhD,                  12 Agreement Concerning Physician Performance Measurement, Reporting and Tiering
from the University of Southern Maine, to examine the method-                 Programs, made between the Attorney General of New York and Connecticut
                                                                              General Life and Health Insurance Company and CIGNA Healthcare of New
ologies that the GIC used to determine physician efficiency and
                                                                              York, Inc. (Oct. 29, 2007).
quality and to implement the CPI. Among FMA’s recommenda-                  13 Id. at page 4.
tions were that physicians should be tiered at a group level and           14 Id. at page 5.
not individually, until the accuracy of data is improved and the           15 Id. at pages 7-8.
methodology of the program is validated.19 They also recom-                16 Id. at page 9.
mended that physicians have the ability to review the data on              17 Id. at pages 10-11.
                                                                           18 Tanya Alteras and Sharon Silow-Carroll, Value-Driven HealthCare Purchasing:
which the scores are based and that tiering results should be
                                                                              Case Study of the Massachusetts Group Insurance Commission (Commonwealth
shared with physicians in advance of publicly reporting them.                 Fund, Aug. 2007).
                                                                           19 Robert A. Greene, Howard B. Beckman, Gregory H. Partridge, and J. William
The type of transparency that FMA recommended and that is
                                                                              Thomas, Review of the Massachusetts Group Insurance Commission Physician
called for under the Regence settlement and by the New York                   Profiling and Network Tiering Plan: A Report to the Massachusetts Medical Society
Attorney General’s Office is precisely the type of transparency                (Nov. 17, 2006).
that a recent legal assessment of tiering arrangements, spon-              20 Sara Rosenbaum, Sarah Kornblet and Phyllis Borzi, An Assessment of the
sored by the Robert Wood Johnson Foundation, concludes                        Legal Issues Raised in High Performing Health Plan Quality and Efficiency Tiering
                                                                              Arrangements: Can the Patient Be Saved? (The George Washington University
will ensure the legal soundness of physician ranking systems.20               Medical Center and Robert Wood Johnson Foundation, Sept. 2007).
According to the assessment, authored by attorneys at the                  21 Id.
Re-Examining Your                                                           It is helpful that CMS recently made publicly available corrective
                                                                            action information that pertains to MA and Part D plan organiza-
Medicare Advantage and                                                      tions. According to CMS, when it determines that an organiza-
                                                                            tion does not comply with Medicare program requirements, the
Medicare Part D Compliance                                                  organization is directed to take all actions necessary to comply
                                                                            with Medicare program requirements. These directives often take
Programs in Light of the                                                    the form of a “corrective action requirement” (CAR) directive
                                                                            from CMS. The CARs result from program audits and “ad-hoc”
Current Governmental                                                        compliance interventions by CMS. Ad-hoc compliance interven-
Enforcement Climate                                                         tions occur when CMS identifies non-compliance outside the
                                                                            audit environment. The bases for CMS’ review and findings are
                                                                            the Part C (MA) audit guide5 and the Part D (PDP) audit guide.6
Marci Handler, Esquire, and Nisha Shah, Esquire
                                                                            Plans’ responses to the CARs are referred to as correction action
Epstein Becker & Green PC                                                   plans (CAPs).
Washington, D.C.
                                                                            A quick review of the October 2007 summary report on the CMS
                                                                            website shows that there have been fifty-four MA Plans, twenty-
I. Introduction                                                             four Medicare Advantage-Prescription Drug Plans, and fourteen
                                                                            Part D Plans that have been subject to CAPs. Most common areas
Does your Part D plan’s corporate compliance program have an                of non-compliance include organization determinations, griev-
effective internal monitoring and auditing function? January 1,             ances, and appeals; marketing; provider relations, formulary,
2008, has come and gone, and for Medicare Advantage (MA)                    transition process, and pharmacy and therapeutics committee;
and Medicare Part D plans (PDPs), that date means the start of              and provider communications. Outside of the marketing area,
the next benefit year under these federal programs (we refer to              deficiencies range from failing to include required provisions in
MA and PDP sponsors and plans collectively in this discussion as            downstream provider contracts, to failing to provide required
Plans). For Plans, this means that, among other things necessary            advance notice to members and network pharmacies of changes
to prepare for 2008, now is the time to focus on your internal              to the formulary, improperly tracking member complaints, failing
compliance program monitoring and auditing work plans for the               to submit payment certifications to CMS in a timely manner,
upcoming benefit year. Clearly, at a national cost of $47 billion            failure to provide proper transition period coverage, and lacking
alone for Part D in 2006,1 the government’s interest in averting            to comply with regulatory requirements.
fraud, waste, and abuse (FWA) in these federal managed care
programs remains a significant priority.                                     When developing an updated compliance work plan for 2008,
                                                                            Plans should review the data available on the CMS website for
This article (1) discusses the scope of recent CMS2 audits of MA            the compliance areas that they are considering, so they can learn
and Part D plans; (2) summarizes the recent findings of the GAO3             from other’s mistakes.
and OIG4 concerning specific areas for improvement in the breath
and depth of CMS’ auditing and oversight of these programs,
which foreshadows the risk areas that CMS is likely to highlight
next year; (3) takes a brief look at the OIG’s Work Plan for 2008
relevant to MA and Part D, which reflects that enforcement agen-
cy’s priorities for 2008; (4) highlights recent legal developments
outside of the federal managed care programs that are relevant to
Plans, namely, in the area of potential liability for certification of
data submitted in connection with the receipt of federal health-
care program funds; and, finally, (5) includes a proposed “to do”
list for Plan compliance programs in light of the enforcement
climate reflected by these various developments.

II. Scope of Recent CMS Audits of MA and
    Part D Plans
Although CMS has been criticized for not auditing MA and Part D
Plans adequately, as discussed below, CMS has conducted audits
and ad-hoc investigations of numerous Plans. In thinking about
what a Plan should add to its compliance work plan for 2008,
a starting point is to review the types of deficiencies Plans have
been cited for in recent CMS reviews.

HMOs & Health
III. Recent GAO and OIG Findings Concerning                              requirements10 for Part D compliance programs from these mate-
     CMS Auditing and Oversight of MA and                                rials against which it assessed Plans’ programs. For the “eighth
     Part D Programs                                                     element” requiring the development of a comprehensive FWA
                                                                         program, the OIG reviewed plans according to eleven recommen-
CMS is under pressure from other federal agencies to improve             dations given by CMS regarding the detection, correction, and
its process for audits, oversight, and recoupment of funds paid          prevention of fraud, waste, and abuse.11
under the MA and Part D Programs, as evidenced by the conclu-
sions found in recent reports issued by the GAO and OIG. The             The OIG found that all of the PDP sponsors had compliance
most salient points raised by these reports are highlighted below.       plans, yet seventy-two of the seventy-nine plans reviewed had
                                                                         failed to address all of the OIG’s seventeen identified require-
• OIG Report (December 2006): Prescription Drug Sponsors’                ments. Specifically, according to the OIG, the two most common
  Compliance Plans7                                                      compliance plan elements for which OIG-identified require-
In the OIG’s December 2006 report on “Prescription Drug Spon-            ments were not addressed included: (1) the designation of the
sors’ Compliance Plans” (hereinafter the OIG’s PDP Compliance            compliance officer and compliance committee and (2) procedures
Plan Report), the OIG examined whether stand-alone prescrip-             for internal monitoring and auditing. The OIG described these
tion drug plan sponsors, as of                                                                        two compliance plan elements as
January 2006 when the Part D                                                                          “essential” to the implementation of
Program took effect: (1) had devel-                                                                   a successful compliance program and
oped compliance plans as required                                                                     specifically commented that “[o]ngoing
by the Medicare Prescription Drug,                                                                    monitoring and auditing is a critical
Improvement, and Modernization                                                                        process that enables organizations to
Act of 2003 (MMA) and (2) had                                                                         identify and respond to compliance
addressed all of the requirements                                                                     issues timely and to review whether
and selected recommendations                                                                          compliance plan elements are func-
regarding the eight compliance                                                                        tioning appropriately.”12 The OIG also
elements presented in federal regu-                                                                   found that many of the compliance
lations. By way of background, the                                                                    plans did not contain detailed informa-
eight required elements for Part D                                                                    tion about their compliance training
compliance plans are:                                                                                 programs, processes for reporting
                                                                                                      compliance violations, internal
(1) Written policies and procedures
                                                                                                      monitoring and auditing, contractor
    regarding the organization’s
                                                                                                      monitoring and auditing, procedures
    commitment to comply with all
                                                                                                      for responding to compliance viola-
    federal and state law;
                                                                                                      tions, and procedure for implementing
(2) The designation of a compliance officer and compliance                corrective actions. The OIG stated that “[d]etails about the imple-
    committee;                                                           mentation of various compliance plan requirements are essential
(3) Effective training and education for all employees, contrac-         for ensuring that a compliance plan is actually functioning within
    tors, agents, and directors;                                         an organization.”13 Many compliance plans simply restated CMS
                                                                         requirements without providing detailed information about
(4) Effective lines of communication between the compliance              implementation of the program. The OIG concluded that these
    officer and the organization’s staff;                                 compliance programs were non-compliant.
(5) Enforcement of standards through disciplinary guidelines;            Moreover, according to the report, only fifteen of seventy-nine
(6) Effective internal monitoring and auditing procedures;               plans addressed all eleven recommendations regarding fraud
                                                                         detection, correction, and prevention. Plans commonly failed to
(7) Procedures for ensuring prompt response to detected offenses
                                                                         address recommendations relating to sponsors’ fraud detection
    and development of corrective action initiatives; and
                                                                         procedures, fraud awareness training, and efforts to coordinate
(8) A comprehensive plan to detect, correct, and prevent fraud,          and cooperate with CMS and law enforcement entities regarding
    waste, and abuse.8                                                   potential fraud and abuse. The OIG also found that among the
The OIG based its review on CMS’ summary document issued in              compliance plans that addressed most recommendations, over
June 2005 entitled “Review of Sponsors’ Fraud, Waste, and Abuse          40% did not include detailed information.
Responsibilities,” which was the only document available to              The OIG concluded that CMS had not specifically audited Part D
Plans when OIG began its review. Subsequently, CMS has issued            compliance plans or Plans’ FWA programs to determine whether
a lengthy chapter in the Medicare Prescription Drug Manual               such plans had addressed the eight required elements. It urged
detailing the requirements and recommendations for Part D                CMS to ensure that sponsors address all requirements and to
compliance programs and FWA programs (this chapter is known              provide sufficient detail to clearly demonstrate how they are
as “Chapter 9” of the PDP Manual and is sometimes referred               actually implementing the requirements. In response to the OIG’s
to as the FWA Guidance).9 OIG designated seventeen specific               findings, CMS agreed, stating that routine audits beginning in
2007 will review the required compliance plan elements and that         have legal authority or contractual right to recover funds based
sponsors will be accountable for meeting all requirements.14            on the ACR proposal audit results. However, according to the
                                                                        GAO’s interpretation of the statutes, CMS did have the authority
• GAO Report (July 2007): Medicare Advantage – Required
                                                                        to pursue financial recoveries, but its rights were limited under
  Audits of Limited Value15
                                                                        contracts with organizations submitting ACR proposals, because
Under the MA Program, companies wishing to participate must             the contracts lacked provisions informing organizations about
annually submit bids, effective with contract year 2006, that           the audits and potential recoveries. Although CMS acknowledged
identify the health services the company will provide to Medicare       it had authority to impose sanctions against organizations that
members and the estimated cost and revenue requirements for             misrepresented information, CMS has not yet sanctioned an MA
providing those services. For 2001-2005, the submissions were           organization nor has CMS made any determinations that infor-
called Adjusted Community Rate (ACR) proposals. The Balanced            mation had been misrepresented in any of these audited circum-
Budget Act of 1997 (BBA) required CMS to audit at least one-            stances.
third of the financial records and/or bid submissions of MA
                                                                        The GAO recommended that CMS implement a structured audit
participating organizations. BBA also required that GAO monitor
                                                                        process to meet the one-third audit requirement and to follow up
the audits.16 In the GAO report entitled “Medicare Advantage—
                                                                        with MA organizations to ensure that they address deficiencies
Required Audits of Limited Value” in July 2007 (hereinafter GAO’s
                                                                        identified from the audits before approving the subsequent year
MA Audit Report), the GAO examined (1) whether CMS met the
                                                                        bids. Further, the GAO advised CMS to amend the implementing
one-third requirement for 2001 through 2006, (2) what informa-
                                                                        regulations for MA and Part D programs to provide that all
tion the ACR audits provided and how CMS used it, and (3) what
                                                                        contracts with Plans include terms that inform participating orga-
information the bid audits provided and how CMS used it.
                                                                        nizations of the audits and the potential of financial recoveries.
The GAO compared the total number of approved ACR proposals             CMS concurred in its response to GAO, adding that it would seek
and bid submissions for relevant years with the number of               legislative authority, if necessary, to do so.
organizations that were audited each contract year. Further, the
                                                                        • OIG Report: CMS’s Implementation of Safeguards During
GAO evaluated the audit reports to determine how CMS used
                                                                          Fiscal Year 2006 to Prevent and Detect Fraud and Abuse in
the results and the potential impact on Medicare beneficiaries.
                                                                          Medicare Prescription Drug Plans17
According to the GAO report, CMS failed to meet the statutory
requirement to audit the financial records and/or bid submissions        In the OIG’s 2006 report on “CMS’s Implementation of Safeguards
of at least one-third of the participating MA organizations for         During Fiscal Year 2006 to Prevent and Detect Fraud and Abuse
contract years 2001-2006. For contract year 2006, CMS acknowl-          in Medicare Prescription Drug Plans” (hereinafter the OIG’s FWA
edged that it would not audit the bid submissions, but rather           Safeguards Report), the OIG reviewed the extent to which CMS
review the MA organizations’ financial records. However, the             implemented safeguards during fiscal year 2006 (FY 2006) to
GAO noted that CMS has not finalized its approach in meeting             prevent and detect fraud and abuse in Part D Plans. The OIG
the one-third audit requirements for contract year 2006 and             identified six major “safeguard activities” conducted by CMS:
beyond.                                                                 (1) a complaint process; (2) data monitoring activities; (3) finan-
                                                                        cial audits, (4) monitoring PDP sponsor compliance with contract
The GAO also determined that the CMS audits occur almost
                                                                        requirements; (5) oversight of PDP efforts to reduce fraud and
three years after the bid submission date for each contract year,
                                                                        abuse; and (6) providing education and guidance to a number of
partially due to reconciliation of payment data that prescription
                                                                        stakeholders on fraud and abuse identifications.
drug plans are not required to submit to CMS until six months
after the contract year is over. According to GAO, this delay                           Although CMS implemented safeguard activi-
significantly limits the usefulness of the CMS                                                       ties throughout FY 2006, the OIG
audits and hinders CMS’ ability to timely                                                           found that further development
identify any deficiencies in the bid processes                                                     or application of these activities
that require corrective action.                                                                   was needed. For example, CMS’
                                                                                                  complaint process had been in place
A 2003 audit revealed errors
                                                                                                  since November 2006, but compli-
in ACR proposals resulting
                                                                                                   ance audits had not begun. CMS
in approximately $38
                                                                                                   responded that the first audits of
million in savings that
                                                                                                   this type were expected to begin
Medicare beneficiaries
                                                                                                    in January 2008 and that CMS
could have received in
                                                                                                       staff had undergone extensive
additional benefits, lower
                                                                                                         preparations including protocol
copayments, or lower
                                                                                                          development and staff training
premiums. When asked if
                                                                                                            for compliance audits.18
it was planning to pursue
financial recoveries from                                                                                  The OIG also found that, in
MA organizations, CMS                                                                                     FY 2006, CMS relied largely on
concluded it did not                                                                                       complaints to identify poten-
HMOs & Health
tial fraud and abuse in the Medi-                                                                        The OIG recently issued a
care Part D program. However,                                                                            memorandum report focusing on
not all complaints were inves-                                                                           whether Medicare Part D spon-
tigated timely. The OIG found                                                                            sors’ websites complied with the
that the Medicare Drug Integrity                                                                         federal regulations and Medicare
Contractor (MEDIC) charged with                                                                          guidelines regarding content and
evaluating Part D complaints had                                                                         accessibility.22 Federal regulations
insufficient staff to address all of                                                                      specifically require that all Part D
the open cases.                                                                                          sponsors’ websites include infor-
                                                                                                         mation about receipt and use of
Finally, the OIG found that limits
                                                                                                         Medicare benefits and ensure that
to CMS’ legal authority, juris-
                                                                                                         individuals with disabilities have
diction, and ability to monitor
                                                                                                         comparable access to informa-
enrollees switching Plans compli-
                                                                                                         tion as those individuals without
cate CMS’ efforts to safeguard
                                                                                                         disabilities. CMS is required to
Medicare Part D Plans. The OIG
                                                                                                         review and approve marketing
identified three impediments to
                                                                                                         materials for Part D sponsors,
effective oversight of the Part D
                                                                                                         including website content.
program in the areas of financial
auditing, Part D marketing, and                                                                            The OIG concluded that twenty-
utilization management. For                                                                                eight of eighty-four PDP spon-
example, the OIG reported that                                                                             sors’ websites did not contain all
“CMS does not have the legal                                                                               of the required information. The
right to go onto the premises of                                                                           most commonly omitted content
pharmaceutical benefit managers                                                                             included enrollee disenroll-
to verify that plans accurately                                                                            ment rights and responsibilities,
report all remuneration and must                                                                           the potential for PDP contract
rely on PDP sponsors to include                                                                            termination, and information
sufficient requirements in their                                                                            regarding the formulary. Further,
own contracts.”19 CMS regulations                                                                          most websites lacked at least one
only require that a Plan “agrees                                                                           of the accessibility requirements
to require all related entities,                                                                           that the OIG reviewed. In light of
contractors, or subcontractors” to allow CMS access to docu-            the fact that use of the Internet is increasing among the Medicare
ments and records for audit purposes.20 Further, the OIG found          beneficiary population, accessibility of useful information about
that CMS has limited authority over insurance brokers, one of           the Part D program is critical. Accordingly, the OIG urged CMS
“the most frequent subjects of fraud complaints.”21 The OIG also        to ensure that all Part D marketing materials, including websites,
found a lack of coordination of information between Plans about         include the statutorily required content and ensure accessibility
beneficiaries suspected of inappropriate utilization due to Plans’       to Medicare beneficiaries with disabilities.
privacy concerns under the Health Insurance Portability and
Accountability Act of 1996.                                             IV. Excerpts from OIG’s 2008 Work Plan
To address these impediments, the OIG recommended that CMS:                 Relevant to MA and Part D Plans
(1) develop a comprehensive safeguard strategy with specific             On October 1, 2007, the OIG released its annual Work Plan for
activities and target dates; (2) ensure that all fraud complaints       Fiscal Year 2008 which addresses the programs and operations of
receive proper and timely attention; and (3) address legal              audits, evaluations, investigations, and enforcement for this year.
concerns that may impede program integrity. Specifically, the OIG        The Work Plan revealed the OIG’s focus areas. Significantly, the
recommended that CMS require Part D Plan sponsors to include            OIG lists more Medicare Part D areas (twenty-nine areas) than
standard wording regarding requirements for record retention            any other component of the Medicare Program, i.e., more than
and accessibility in subcontractor contracts, enforce appropriate       for hospitals, home health agencies, nursing homes, physicians,
sanctions for Plans whose brokers violate permissible marketing         etc. A few of the targeted areas for Part D are summarized below:
practices and utilize the MEDICs as intermediaries for Plans to
                                                                        • Medicare Part D Duplicate Claims
share information about the beneficiaries suspected of inappro-
priate utilization.                                                     The OIG will be determining CMS’ controls to prevent duplicate
                                                                        Part D claims for the same beneficiary, especially when a benefi-
• OIG Memorandum Report (October 2007): Medicare Part D
                                                                        ciary changes Plans, tries to enroll in multiple Plans, or tries to
  Prescription Drug Plan Sponsor Internet Websites: Content
                                                                        enroll in a Plan and a retiree-subsidy covered Plan.
  and Accessibility

• Duplicate Medicare Part A and Part B Claims Included with               directed outside counsel to investigate and that outside counsel
  Part D Claims                                                           confirmed that a number of the employment contracts were
                                                                          illegal. The complaint goes on to allege that the defendant signed
The OIG will review whether payments made to Part D are
                                                                          and provided to the government declarations that falsely stated
correct, supported, and not duplicated in Part A and Part B.
                                                                          that “to the best of her knowledge” the company was in mate-
• Medicare Part D Reconciliation                                          rial compliance with all federal program legal requirements. The
The OIG will determine whether the Part D Plans submitted                 certifications were made as part of the company’s obligations
accurate and timely information within six months of the end              under a prior settlement with the government which included
of the coverage year, whether CMS accurately performed its                a Corporate Integrity Agreement (CIA) requirement for annual
calculations, and whether payments and recoveries were made as            compliance certifications. The government contends in the
required by law.                                                          civil lawsuit that the defendant’s false certifications allowed the
                                                                          company to bill Medicare for $18 million in claims to which it
• Part D Negotiated Drug Prices and Price Concessions                     was not entitled.25 Under the FCA, the government has several
The OIG will review Part D Sponsors’ implementation and                   courses of recovery, including a per-violation penalty of $5,000-
compliance with provisions associated with passing on negoti-             $10,000 and the possibility of treble damages.
ated drug prices to the Medicare program and/or beneficiaries,             Although this particular lawsuit involves a compliance officer in
consistent with regulations that define negotiated prices as prices        a hospital company subject to a CIA, the principle at issue in the
for covered services to beneficiaries at the point of sale reduced         case—the integrity of certifications made by individual corporate
by discounts, direct or indirect subsidies, rebates, other prices         officers in connection with data submitted to the federal govern-
concessions, and direct or indirect remunerations that the Part D         ment used for purposes of receiving federal program funds—
Sponsor has elected to pass through to Part D enrollees.                  applies to all MA organizations and Part D Plans.
• Prescription Drug Plan Marketing Materials                              Specifically, the Part D regulations state that as a condition of
The OIG will examine CMS’ oversight of marketing materials                payment under the program, the CEO, CFO, or an individual
for Medicare Part D Sponsors. This area of concern coincides              delegated the authority to sign on behalf of one of these officers
with the recent OIG Memorandum Report that revealed CMS’                  certifies, “based on best knowledge, information, and belief,”
shortcomings in enforcing sponsors’ compliance with federal               the “accuracy, completeness, and truthfulness of all data
regulations and Medicare marketing guidelines on content and              related to payment,” which “may include specified enrollment
accessibility.                                                            information, claims data, bid submission data, and other data
                                                                          that CMS specifies.” See 42 C.F.R. § 423.505(k)(1). Similar
• Prescription Drug Sponsors’ Detection and Reporting of
                                                                          certifications apply for enrollment and payment data, claims
  Fraud and Abuse
                                                                          data, bid submission information, allowable costs for risk
The OIG will review the extent to which PDP sponsors “detect              corridor and reinsurance information, and price comparisons.
and report” Medicare Part D fraud and abuse to CMS. This review           See 42 C.F.R. § 423.505(k)(2)-(6).
will determine the amount and types of fraud and abuse that PDP
                                                                          For Part D claims data, the regulations specifically add that if the
sponsors have identified since the inception of the Medicare Part
                                                                          data are generated by a contractor or subcontractor, the contractor
D program.
                                                                          or subcontractor must similarly certify the accuracy, completeness,
                                                                          and truthfulness of the data, as well as acknowledge that the data
V. Recent Legal Developments Involving                                    will be used for purposes of obtaining federal reimbursement.
   Liability for Certification of Data Submitted                                  .R.
                                                                          42 C.F § 423.505(k)(3). The regulations on their face address
   in Connection with the Receipt of Federal                              the degree of comfort that the Plan’s senior management should
   Healthcare Program Funds                                               have regarding data being submitted to CMS.
Recently, the U.S. Department of Justice (DOJ) filed a lawsuit             The Sulzbach case should be a reminder to the industry that
against Christi Sulzbach, the former Associate General Counsel            personal liability can attach to certifications made without
and Corporate Integrity Program Director for Tenet Healthcare             adequate basis. For Part D Plans, the issue has added complexity
Corporation. The case demonstrates how corporate officers                  if any of the data is from downstream contractors, such as a Phar-
certifying data and compliance to CMS can face personal liability.        macy Benefit Manager (PBM).
The government’s complaint states that Sulzbach violated the
False Claims Act23 (FCA) by falsely certifying to the U.S. Depart-        VI. Proposed “To Do” List for Plan Compliance
ment of Health and Human Services that Tenet was in compli-                   Programs
ance with all Medicare regulations. According to the complaint,
Sulzbach learned that one of the company’s facilities was violating       In light of the various governmental pronouncements described
the federal Stark Law by illegally billing Medicare for referrals         above, many MA and Part D Plans are in the process of updating
from certain employed physicians whose contracts with the                 their internal compliance program work plans. Here are some of
company violated the Stark Law.24 The complaint alleges that she          the areas in a nutshell that Plans might consider focusing on:

HMOs & Health
• Lessons Learned from Other Plans’ Mistakes                                            5 The MA audit guide can be found at
   1. Review the CARs available on the CMS website for areas                            6 The Part D audit guide can be found at:
      that your plan has included on its audit work plan for 2008                          CovContra/08_RxContracting_ReportingOversight.asp#TopOfPage.
      and include a review of the areas that other plans have had                       7 U.S. Dep’t of Health and Human Services, Off. of Inspector Gen., “Prescription
                                                                                           Drug Plan Sponsors’ Compliance Plans” (December 2006) OEI-03-06-00100.
      problems with.
                                                                                        8 The eight requirements for Part D compliance programs are listed at 42 C.F .R.
   2. Consider whether the corrective action plans adopted by                              § 423.504(b)(4).
      other Plans are appropriate for your compliance plan in areas                     9 U.S. Dep’t of Health and Human Servs., Ctrs. for Medicare and Medicaid
                                                                                           Servs., Prescription Drug Benefit Manual, Chapter 9 – Part D Program to Con-
      where improvement is required, or modify accordingly.                                trol Fraud, Waste, and Abuse (2006).
• Data Submission Certification and Integrity                                            10 The seventeen CMS requirements for the eight compliance plan elements are
                                                                                           listed in the OIG’s report at p. 17.
   1. Review plan policies and procedures for generating,                               11 The eleven selected CMS recommendations for FWA plans are listed in the
      submitting, and certifying data to CMS, including policies                           OIG’s report at p. 19.
                                                                                        12 OIG’s PDP Compliance Report at p. iii.
      applicable to PBMs or other downstream contractors who
                                                                                        13 OIG’s PDP Compliance Report at p. iii.
      generate required data.                                                           14 OIG’s PDP Compliance Report at p. v.
   2. Audit written contracts with contractors to confirm that                           15 U.S. Gov’t Accountability Off., “Medicare Advantage: Required Audits of
                                                                                           Limited Value” (July 2007) GAO-07-945.
      “flowdown” certification language is included for contractors
                                                                                        16 42 U.S.C. § 1395w-27(d)(1).
      that generate data that Plans use in submissions to CMS.                          17 U.S. Dep’t of Health and Human Servs., Off. of Inspector Gen., “CMS’s Imple-
   3. Consider reviewing the contractor’s policies, procedures, and                        mentation of Safeguards During Fiscal Year 2006 to Prevent and Detect Fraud
                                                                                           and Abuse in Medicare Prescription Drug Plans” (2007).
      protocols, and staff training modules relevant to the contrac-                    18 OIG’s FWA Safeguards Report at p. ii.
      tor’s collection and transmitting of data to the Plan—even                        19 OIG FWA Safeguards Report at p. ii.
      where downstream contractors certify the integrity of data                                  .R.
                                                                                        20 42 C.F § 423.505(i)2).
      sent to the Plan—to confirm the integrity of the contractor’s                      21 OIG’s FWA Safeguards Report at p. ii.
      systems that support its data certifications to the Plan.                          22 U.S. Dep’t of Health and Human Servs., Off. of Inspector Gen., Memorandum
                                                                                           Report: “Medicare Part D Prescription Drug Plan Sponsor Internet Web Sites:
• OIG Work Plan Issues                                                                     Content and Accessibility” (2007).
                                                                                        23 31 U.S.C. § 3729 et seq.
   1. Consider adding to your plan’s work plan some or all of the                       24 The Stark Law is codified at 42 U.S.C. § 1395nn.
      key risk areas identified by the OIG in its 2008 Work Plan.                        25 U.S. v. Sulzbach, S.D. Fla., No. 07-61329, complaint filed September 18, 2007.
   2. Review your plan for compliance with the seventeen
      compliance plan requirements and/or the eleven FWA plan
      elements cited by the OIG’s PDP Compliance Plan Report,
      discussed above.

VII. Conclusions                                                                                       Practice Groups Staff
The recent reports of CMS auditing and oversight of MA and Part                                                    Trinita Robinson
D Plans, combined with the issuance of the 2008 OIG Work Plan,                                             Vice President of Practice Groups
forewarn that the government will be increasing, not decreasing,                                                    (202) 833-6943
its scrutiny of these managed care programs. Plans are well-                                       
advised to be proactive by establishing conscientious internal
monitoring and auditing work plans, taking into account these                                                       Emilee Hughes
available resources.                                                                                            Practice Groups Manager
                                                                                                                    (202) 833-0776
1 2007 Annual Report of the Boards of Trustees of the Federal Hospital Insur-                        
  ance and Federal Supplementary Medical Insurance Trust Funds, p. 5.
2 The Centers for Medicare and Medicaid Services (CMS) is the agency respon-                                      Magdalena Wencel
  sible for overseeing the Medicare Program, including the Medicare Advantage                                Practice Groups Administrator
  and Medicare Part D Voluntary Prescription Drug Programs.
3 The Government Accountability Office (GAO) is the audit, evaluation, and                                           (202) 833-0769
  investigative arm of Congress, which exists to support Congress in meeting                        
  its constitutional responsibilities and to help improve the performance and
  accountability of the federal government. See statement of GAO’s mission at
                                                                                                                     Kristina Hilton
4 The Office of Inspector General (OIG) of the U.S. Department of Health and                                     Practice Groups Assistant
  Human Services has as its mission to protect the integrity of DHHS programs,                                       (202) 833-0765
  as well as the health and welfare of beneficiaries served by those programs.                        
  OIG carries out its mission through a nationwide network of audits, investiga-
  tions, and inspections. For more information, see the OIG’s website at

Making Wellness Work:                                                     or that provide participation incentives irrespective of “health
                                                                                          factors.”8 The Wellness Program Rules regu-
Structuring Meaningful                                                                            late only the former types of wellness
                                                                                                       programs, that is, wellness programs
and Legal Incentives                                                                                       that provide participation incen-
                                                                                                              tives related to “health factors.”
for Healthy                                                                                                      HIPAA Title I generally
Behavior                                                                                                           prohibits health plans
                                                                                                                     sponsored by employers
Thomas D. Bixby, Esquire, and                                                                                         or unions or under-
                                                                                                                       written by insurers
Jason C. Kim, Esquire*
                                                                                                                        from using “health
Neal Gerber & Eisenberg LLP                                                                                              factors” to discrimi-
Chicago, Illinois                                                                                                        nate against indi-
                                                                                                                          viduals with respect

        s employers and health plans                                                                                      to plan enroll-
        increasingly look for ways to                                                                                    ment, benefits, or
        reduce healthcare costs and                                                                                      premiums.9 “Health
improve employee productivity, a                                                                                        factors” include
wide range of programs intended to                                                                                     health status, claims
promote health—wellness programs—                                                                                     experience, receipt
are being tried in the workplace.1                                                                                   of healthcare, medical
Whether these “wellness programs”                                                                                  condition, genetic
have been a success is not always clear.2                                                                        information, disability, and
A key and obvious factor affecting a well-                                                                     evidence of insurability.10
ness program’s success, however, is employee
participation.3 Voluntary participation in wellness                                                         The Wellness Program Rules
programs tends to be low, but can increase dramati-                                                     establish a limited exception to this
cally when financial or other incentives are provided.4                                            anti-discrimination provision. Wellness
Meaningful financial incentives to reward healthy behaviors                                 programs that use health factors as a condition
appear, therefore, to be a necessary component for an effective           of receiving incentives—the “Regulated Wellness Programs”—
wellness program.                                                         must satisfy each of the following five criteria to qualify for the
Federal rules (Wellness Program Rules) permit employers and
health insurers to implement wellness programs with meaningful            1. The combined value of all Regulated Wellness Program incen-
financial incentives under an exception to the anti-discrimina-               tives must be no greater than 20% of the cost of coverage (i.e.,
tion provisions of Title I of the Health Insurance Portability and           combined employer and employee premium);
Accountability Act of 1996 (HIPAA Title I).5 Compliance with              2. The Regulated Wellness Program must be reasonably designed
these Wellness Program Rules does not, however, affect compli-               to promote health or prevent disease (rather than to simply
ance with the Americans with Disabilities Act of 1990 (ADA).6                reward healthy individuals for being healthy);
Thus, a wellness program that includes meaningful incentives to
                                                                          3. Enrollees must be able to qualify for the incentives available
encourage participation must be constructed to meet the require-
                                                                             under the Regulated Wellness Program at least once each year;
ments of both the ADA and the Wellness Program Rules.
                                                                          4. The incentives of a Regulated Wellness Program must be avail-
We discuss below wellness programs under the Wellness Program
                                                                             able to all “similarly situated” individuals, which means the
Rules and the ADA and the interaction of the two laws. We
                                                                             incentive must be available through a reasonable alternative
propose strategies that employers and their health insurers can
                                                                             standard to individuals for whom meeting the health-factor
consider for adopting meaningful and legal financial incentives
                                                                             standard would be unreasonably difficult or medically inadvis-
for effective wellness programs.
                                                                             able; and

I. Wellness Program Rules                                                 5. Plan materials describing the Regulated Wellness Program
                                                                             must disclose the availability of the incentives under a reason-
On July 1, 2007, the Wellness Program Rules promulgated by the               able alternative standard.11
Departments of Treasury, Labor, and Health and Human Services
went into effect.7 The Wellness Program Rules distinguish                 A Regulated Wellness Program that satisfies these requirements
between two kinds of wellness programs—wellness programs                  may include incentives linked to health factors, such as:
that provide participation incentives related to “health factors,”        • Imposing a premium surcharge on employees who cannot
and wellness programs that have no participation incentives                 certify that they have not smoked in the previous year;

HMOs & Health
• Discounting annual premiums for employees with a choles-                 benefits—a privilege of employment—contingent upon participa-
  terol level of under 200; or                                             tion in the wellness program.
• Waiving the annual deductible for employees with a body-                 B. Offer of Reasonable Accommodation
  mass index of between 19 and 26.12
                                                                           Qualified employees with disabilities18 who participate in volun-
An employer or health plan may, thus, adopt significant financial            tary wellness programs must be allowed “reasonable accom-
incentives—up to 20% of the cost of coverage—to encourage                  modations” to their known physical or mental limitations that
employees to meet health-related standards, such as smoking                allow them to meet program requirements in circumstances
status, body mass index thresholds, or cholesterol level, designed         that are similar, but not identical to, the “reasonable alternative”
to change unhealthy behaviors (or maintain healthy behaviors).             requirements for a Regulated Wellness Program. Specifically,
The employer or health plan must offer a reasonable alternative            the ADA requires an employer to make a reasonable accom-
that allows employees with medical conditions making compliance            modation for a qualified employee with a disability who cannot
with the standard unreasonably difficult or medically inadvisable           meet the wellness program requirements.19 An employer that
to receive the incentive, as well as comply with the other require-        learns of an employee’s disability must make a reasonable effort
ments of the Wellness Program Rules. Although the preamble to              to determine the appropriate accommodation through a flex-
the Wellness Program Rules suggests that one such reasonable               ible, interactive process that involves both the employer and the
alternative is simply to waive the standard, the employer may also         disabled employee.20 Determination of the reasonable accom-
provide a reasonable alternative by reasonably modifying the stan-         modation requires an individualized inquiry into the employee’s
dard or applying a different reasonable standard.13                        inability to meet a wellness program standard under the ADA.21
                                                                           Such a reasonable accommodation is likely to meet the Well-
The second type of wellness program under the Wellness
                                                                           ness Program Rules’ requirement of a “reasonable alternative
Program Rules does not condition incentives on an individual
                                                                           standard.” Accordingly, an employer should be able to devise a
satisfying a standard related to a health factor (or is a wellness
                                                                           Regulated Wellness Program that meets both the ADA and the
program that provides no incentives at all). These “Unregulated
                                                                           Wellness Program Rules’ standards for employees who cannot
Wellness Programs” are not regulated by the Wellness Program
                                                                           meet program requirements.
Rules because they do not discriminate based on health factors.
Hence, they require no exception from the HIPAA Title I anti-              C. Disclosure of Disability-Related Information Must Be
discrimination provisions.                                                    Voluntary
Examples of Unregulated Wellness Programs include:                         Except in limited circumstances, the ADA prohibits employers
                                                                           from requiring an employee (1) to take tests or provide informa-
• Reimbursing all or part of the cost of membership in a fitness
                                                                           tion that screens, or tends to screen, employees with disabilities22
                                                                           and (2) to respond to “disability-related inquiries.”23 Disability-
• Paying incentives for participation in diagnostic testing, irre-         related inquiries are questions likely to elicit information about a
  spective of test outcomes;                                               disability.24 Thus, an employer may not require participation in a
• Encouraging preventive care through waiver of copayment or               wellness program that involves medical examinations or inquiries
  deductible requirements for the cost of, for instance, prenatal          likely to elicit information about a disability. An employee may,
  care or well-baby visits; and                                            however, voluntarily furnish the employer information about a
                                                                           medical examination or respond to health-related inquiries.25
• Reimbursing employees for the cost of smoking cessation                  Thus, to pass muster under the ADA, submission to medical
  programs, without regard to whether the employees partici-               examinations, surveys, and medical inquires, like participation in
  pating quit smoking.14                                                   a wellness program, must be “voluntary.”

II. Wellness Programs and the ADA                                          III. Interaction of the ADA and the Wellness
The ADA prohibits employers from discriminating against indi-                   Program Rules
viduals with disabilities with respect to the terms, conditions,
                                                                           A. “Voluntary” Programs
and privileges of employment.15 Three aspects of the ADA affect
wellness programs.                                                         Non-binding guidance from the Equal Employment Opportunity
                                                                           Commission (EEOC) suggests that an employee’s failure to qualify
A. Programs Must Be Voluntary
                                                                           for any financial incentive—no matter how small—because of a
The ADA prohibits employers from requiring participation in                wellness program standard may make the program involuntary,
programs that have a discriminatory effect on employees with               in violation of the ADA.26 Under this interpretation, no Regulated
disabilities—participation in such programs must be “volun-                Wellness Program under the Rules promulgated by the Depart-
tary.”16 Employers require participation in a program by making            ments of Labor, Treasury, and Health and Human Services would
a term, condition, or privilege of employment contingent upon              be permitted by the ADA. In short, the EEOC’s interpretation of
participation.17 Hence, an employer “requires” participation in a          the ADA would render virtually meaningless three Departments’
wellness program, for example, by making eligibility for health            interpretation of the later-enacted provisions of HIPAA Title 1

and its implementing Well-                                                                                        provision of health-related
ness Program Rules, which                                                                                         information for a well-
expressly allow incentives to                                                                                     ness program should be
encourage and reward healthy                                                                                      considered “voluntary” for
behavior.27                                                                                                       purposes of the ADA, as
                                                                                                                  long as any incentive for
Although the Wellness
                                                                                                                  providing information does
Program Rules explicitly
                                                                                                                  not exceed the Wellness
disclaim any effect on an
                                                                                                                  Program Rules’ 20% cost-of-
employer’s obligation to
                                                                                                                  coverage threshold.
comply with the ADA,28 the
EEOC’s non-binding guidance                                                                                        An employer that collects
was issued before the final                                                                                         health-related information for
Wellness Program Rules were                                                                                        voluntary wellness programs
published and, therefore, do                                                                                       may learn of an employee’s
not address those Rules.29 In                                                                                      disability, triggering the
the absence of more specific                                                                                        duty to reasonably accom-
guidance, harmonizing the                                                                                          modate the employee, and
two regulatory schemes                                                                                             putting the employer at risk
should be possible. Specifi-                                                                                        of allegations of prohibited
cally, the Wellness Program Rules’ 20% cost-of-coverage incentive           discrimination. The employer may mitigate this risk by either (a)
threshold should be considered a “safe harbor” for “voluntary”              establishing a firewall between its employees administering the
participation in wellness programs under the ADA. That would                wellness program and its employees performing other functions or
mean that a wellness program conditioned on a health factor is              (b) by outsourcing the information processing aspects of the well-
“voluntary” for purposes of the ADA, as long as any participa-              ness program administration. In the latter situation, the outsourced
tion incentive meets the Wellness Program Rules’ 20% cost-                  vendor would gather and retain the health-related information and
of-coverage threshold. As no guidance to this effect has been               use it to design for the employer effective wellness provisions and
published, employers should assess their risk of taking this stance         incentives for them to fit the employees’ collective health profile.
before establishing a wellness program that includes incentives.            The outsourced vendor could implement education and well-
                                                                            ness processes with employees’ physicians and other healthcare
B. Reasonable Accommodation Based on an Individualized
                                                                            providers, as well as with the employees themselves, while keeping
                                                                            such information from the employer to avoid ADA exposure.
The ADA requires employers aware of an employee’s disability
to make reasonable accommodations based on an individual-                   IV. Strategies for Providing Meaningful Wellness
ized inquiry.30 The ADA and Wellness Program Rules’ standards                   Incentives
are quite similar, except that the Wellness Program Rules do not
require an individualized inquiry.31 Accordingly, a Regulated               The Wellness Program Rules are new. There is as yet little agency
Wellness Program could comply with both the ADA and the                     guidance, and no case law, about how they interact with the
Wellness Program Rules by providing one or more reasonable                  ADA. An employer adopting a wellness program with significant
alternative standards and, once an employer has information                 participation incentives therefore will be in a legal gray area,
about an employee’s disability, a reasonable accommodation                  involving risk of non-compliance. Any such wellness program
based on an individualized inquiry.                                         should, therefore, be carefully structured to ensure compliance
                                                                            with the Wellness Program Rules and to minimize risk under the
C. Disability-Related Inquiries                                             ADA. As an initial hurdle, an employer must be willing to accept
Employers’ use of health risk appraisals and other health infor-            the risk that the Wellness Program Rules’ 20% cost-of-coverage
mation-gathering techniques is widespread.32 As an employer                 limit establishes a reasonable standard for a “voluntary” program
must use health information to administer a wellness program                and for “voluntary” disclosure of health-related information
incentive based on a health factor, the Wellness Program Rules              under the ADA.
place no restrictions on the health-related information employers           A. Regulated Wellness Program
may collect and use for wellness programs. In contrast, the ADA
prohibits an employer from requiring the provision of such infor-           The Wellness Program Rules permit an employer to require
mation for the purpose of a wellness program, and the employer              verification “that a health factor makes it unreasonably difficult
raises the specter of discrimination allegations under the ADA by           or medically inadvisable for the individual to satisfy or attempt
obtaining the information.33 An employee may, however, “volun-              to satisfy the otherwise applicable standard” for earning an
tarily” provide health-related information to participate in a well-        incentive.35 Thus, for example, an employee may be required to
ness program.34 An employer should be able to rely on the same              demonstrate that becoming a non-smoker is unreasonably diffi-
meaning of “voluntary” in these circumstances: an employee’s                cult by getting verification of that fact from a physician.36

HMOs & Health
Once the employer receives the verification, the employer must           factor. Employers may therefore offer incentives to employees for
offer a reasonable alternative standard. An employer may reason-        participating in wellness activities, as long as no condition for
ably take into account the effect that meeting a standard has on        receiving the incentive is based on a health factor. For example,
an employee’s health when developing the reasonable alternative.        an employer may offer incentives for employees to:
Accordingly, the alternative standard may require the employee
                                                                        • Complete a personal wellness profile;
to engage in different healthy behaviors that approximate the
healthy effect of the original standard—such as being a non-            • Undergo biometric screening, e.g., cholesterol, blood sugar, or
smoker. Reasonable alternative standards that an employer might           blood pressure tests;
include in wellness programs include, for example:                      • Attend quarterly focus meetings on health-related topics;
• Adherence to an exercise regimen as an alternative to not             • See a physician for an annual wellness exam;
                                                                        • Take an online health quiz; or
• Enrollment in an obesity management program
  as an alternative to attaining and main-                                    • Participate in counseling, stress management classes,
  taining a healthy weight level; and                                            parenting sessions, or family dynamic programs.

• Adherence to a low-fat/low-salt diet                                                 Incentives must be offered to all similarly situated
  and appropriate medication as                                                           employees and cannot be based on health-
  an alternative to attaining and                                                          related results of participation, such as level
  maintaining normal blood                                                                   of cholesterol or blood sugar.
  pressure.                                                                                    An Unregulated Wellness Program must
The employer must offer a                                                                       use incentives that are low enough so
second reasonable alterna-                                                                       that an employee’s provision of health
tive for employees who                                                                           information to the employer is consid-
verify that meeting the first                                                                     ered “voluntary” under the ADA. Thus,
alternative standard also                                                                        to avoid violation of the ADA prohibi-
is unreasonably difficult                                                                         tion on involuntary disability-related
or medically inadvisable.                                                                        inquiries, incentives for Unregulated
Thus, an employee for whom                                                                       Wellness Programs should be limited
a physician verifies that                                                                         (at least) to the Wellness Program Rules’
both stopping smoking and                                                                       20% cost-of-coverage threshold. Alterna-
engaging in an exercise regimen                                                               tively, an employer may remain in compli-
would be unreasonably difficult                                                               ance with the ADA limitation by hiring a
or medically inadvisable, must be                                                          vendor to administer the Unregulated Well-
offered another alternative, such as                                                     ness Program and have the vendor collect and
attending a smoking cessation class.                                                  maintain all health-related information without
                                                                                   disclosure to the employer’s personnel.
Once the employer obtains information that
indicates an employee may have a disability, the                              Although the ADA individualized inquiry and reason-
employer must make an individualized inquiry into the employ-           able accommodation scheme applies to Unregulated Wellness
ee’s circumstances to determine whether a reasonable accommo-           Programs, an employer basing an incentive on completing a
dation is necessary. One approach to making the individualized          wellness profile, obtaining a wellness exam, or attending health-
inquiry would be to have the employee’s physician help develop a        related classes should have little demand for a reasonable accom-
reasonable accommodation in the form of an alternative standard         modation based on an individual’s disability.
that offers the health benefits of non-smoking and that is not
unreasonable or medically inadvisable for the employee.                 V. Conclusion
The employer should implement a firewall to prevent well-                The Wellness Program Rules give employers and health plans a
ness program information, which the ADA requires to be kept             framework for establishing wellness programs with meaningful
confidential, from being accessed by other company personnel             financial incentives. Under that framework, an employer may
and prohibit the use of the information for any other purpose.          offer meaningful financial incentives—up to 20% of the cost-
The employer may reduce exposure to ADA liability further by            of-coverage, including both employer and employee share—to
outsourcing wellness program information management and                 employees who meet a health-related standard, such as being a
requiring the outsourced vendor to withhold individualized              non-smoker, having a healthy body weight, or maintaining an
employee health information from the employer’s personnel.              appropriate blood sugar or cholesterol level. Although employees
                                                                        who cannot meet the standard because it would be unreasonably
B. Unregulated Wellness Programs                                        difficult or medically inadvisable must be offered the opportu-
The Wellness Program Rules only restrict incentives offered for         nity to qualify for the incentive under an alternative standard,
participation in programs that condition incentives on a health         the employer may require employees to have a physician verify
that meeting the original standard is unreasonably difficult or                                           .R.                              .R.
                                                                                           14 See 26 C.F § 54.9802-1(f)(1); 29 C.F § 2590.702(f)(1); 45 C.F          .R.
medically inadvisable. Moreover, the employer may select an                                   § 146.121(f)(1).
                                                                                           15 See 42 U.S.C. § 12112(a).
alternative standard that yields health benefits comparable to                                            .R.
                                                                                           16 See 29 C.F §§ 1630.7, 1630.10.
the original standard, increasing the effectiveness of the wellness                                      .R.
                                                                                           17 See 29 C.F § 1630.4.
program.                                                                                   18 A “qualified individual with a disability” is an individual with a disability who
                                                                                              satisfies the requisite skill, experience and education, and other job-related re-
An employer implementing a wellness program with meaningful                                   quirements of the employment position the individual holds, and who, with or
financial incentives takes on risks under the ADA. Employers that                              without accommodation, can perform the essential functions of that position.
establish wellness programs within the Wellness Program Rules’                                           .R.
                                                                                              See 29 C.F § 1630.2(m).
framework may reasonably argue that the programs are voluntary                                                                             .R.
                                                                                           19 See 42 U.S.C. § 12112(b)(5)(A); 29 C.F § 1630.9.
                                                                                           20 29 C.F pt. 1630, app.
and, therefore, permitted under the ADA. Nevertheless, guidance
                                                                                           21 29 C.F pt. 1630, app.
has not made clear what constitutes a voluntary program under                                                                      .R.
                                                                                           22 See 42 U.S.C. § 12112(d), 29 C.F §§ 1630.10, 1630.13.
the ADA, leaving wellness programs with financial incentives in                             23 See 42 U.S.C. § 12112(d)(4)(A); EEOC Enforcement Guidance on Disability-
a legal gray area. Employers that learn of an employee’s disability                           Related Inquiries and Medical Examinations Under the ADA (2000), available at
may be required to offer a reasonable accommodation to allow                        
                                                                                           24 42 U.S.C. § 12112(d)(4)(A). See EEOC Enforcement Guidance, supra note 23.
the employee to qualify for any wellness program incentive,
                                                                                              An employer may require medical exams that are job related and consistent
after undertaking an individualized inquiry into the employee’s                               with business necessity or make inquiries into the ability of an employee to
circumstances. One strategy for addressing this requirement is                                perform job-related functions, under a narrowly construed exception. 42
to work with the employee’s physician to develop an alternative                               U.S.C. § 12112(d)(4)(A); see 42 U.S.C. § 12112(d)(4)(A); see also Patricia A.
                                                                                              Pryer, Wellness Programs: Complying with the ADA and HIPAA, Employment Law
standard with similar health benefits under which the employee
                                                                                              Strategist (Aug. 2007). This exception does not apply to a wellness program,
could qualify for the incentive.                                                              the purpose of which is not job related.
Employers that collect and maintain health-related information                                       .R.
                                                                                           25 29 C.F §§ 1630.13, 1630.14(d).
                                                                                           26 The EEOC in its Enforcement Guidance, supra note 23, noted that a “wellness
may become aware of employees’ disabilities, creating duties                                  program is ‘voluntary’ as long as an employer neither requires participation
under the ADA. Employers may minimize this risk by limiting                                   nor penalizes employees who do not participate.” Over the years, the EEOC
access to wellness program information to employees that admin-                               has commented informally that the ADA prohibits requiring an employee
ister the program. Employers can further mitigate the risk by                                 to submit to a health-risk assessment as a condition for receipt of health
                                                                                              insurance benefits, or using punitive triggers for employees who refuse to
hiring a third-party vendor to manage the information to avoid                                participate, such as higher healthcare premiums or deductibles. This guidance
any employer access to the information.                                                       suggests that the EEOC does not consider wellness programs to be part of
                                                                                              “bona fide benefit plans” under 29 C.F § 1630,16(f), which permits employ-
* Thomas Bixby is a partner in the Health Law Practice Group and Jason Kim                    ers (and insurers, health maintenance organizations, and others on employers’
  is a partner in the Labor and Employment Practice Group of Neal Gerber &                    behalf) to administer bona fide benefit plans without running afoul of the
  Eisenberg LLP, Chicago, Illinois. Bixby’s contact information is (312) 269-8050             ADA, as long as administrative activities are not “used as a subterfuge to evade
  and; Kim’s contact information is (312) 269-8019 and                                                             .R.
                                                                                              the purposes of [the ADA].” 29 C.F § 1630.16(f)(4).                                                                         27 71 Fed. Reg. at 75017 (Wellness Program Rules permit financial incentives “in
                                                                                              return for adherence to programs of health promotion and disease prevention”).
1 Milt Freudenheim, Seeking Savings, Employers Help Smokers Quit, N.Y. TIMES,                        .R.                          .R.                       .R.
                                                                                           28 26 C.F § 54.9802-1(h); 29 C.F § 2590.702(h); 45 C.F § 146.121(h).
   Oct. 26, 2007, at A1; Robert J. Ozminkowski, et al., Long-Term Impact of
                                                                                           29 The EEOC Enforcement Guidance on Disability-Related Inquiries and Medical Ex-
   Johnson & Johnson’s Health and Wellness Program on Healthcare Utilization and
                                                                                              aminations of Employees Under the Americans with Disabilities Act, No. 915.002,
   Expenditures, 44 J. OCCUP. ENVIRON. MED. No. 1, at 21 (Jan. 2002).
                                                                                              was published July 27, 2000, whereas the Wellness Program Rules were
2 Shelia Leatherman, et al., The Business Case for Quality: Case Studies and an               published December 13, 2006, see 71 Fed. Reg. 75013.
   Analysis, 22 HEALTH AFFAIRS NO. 2, at 17 (Mar./Apr. 2003).
                                                                                           30 See 42 U.S.C. § 12112(b)(5)(A); 29 C.F § 1630.9.
3 Ozminkowski, supra note 2, at 22; Philip S. Wang, et al., Effects of Efforts to
                                                                                                               .R.                                  .R.
                                                                                           31 Compare 26 C.F § 54.9802-1(f)(2)(iv)(A), 29 C.F § 2590.702(f)
   Increase Response Rates on a Workplace Chronic Condition Screening Survey, 40
                                                                                              (2)(iv)(A), 45 C.F § 146.121(f) (2)(iv)(A) with 42 U.S.C. § 12112(b)(5)(A);
   MED. CARE No. 9, at 752, 752-53 (Sep. 2002).
                                                                                                     .R.                   .R.
                                                                                              29 C.F § 1630.9, 29 C.F pt. 1630, app.
4 Id.
                                                                                           32 Wang, supra note 4, at 752-53.
              .R.                       .R.                       .R.
5 See 26 C.F § 54.9802-1(f), 29 C.F § 2590.702(f), 45 C.F § 146.121(f);
                                                                                           33 29 C.F § 1630.13.
   Pub. L. No. 104-191 (Health Insurance Portability and Accountability Act of
                                                                                           34 29 C.F § 1630.14(d).
                                                                                                     .R.                                     .R.
                                                                                           35 26 C.F § 54.9802-1(f)(2)(iv)(B); 29 C.F § 2590.702(f)(2)(iv)(B); 45 C.F        .R.
          .R.                       .R.                        .R.
6 26 C.F § 54.9802-1(h); 29 C.F § 2590.702(h); 45 C.F § 146.121(h);
                                                                                              § 146.121(f)(2)(iv)(B).
   see 42 U.S.C. § 12101, et seq.
                                                                                           36 Title VII of the Civil Rights Act of 1964, 42 U.S.C. § 2000e et seq., prohibits
7 71 Fed. Reg. 75013, 75014 (Dec. 13, 2006).
                                                                                              discrimination based on a variety of protected classifications, including reli-
          .R.                                  .R.
8 26 C.F §§ 54.9802-1(f)(1), (2); 29 C.F §§ 2590.702(f)(1), (2); 45 C.F         .R.
                                                                                              gion. 42 U.S.C. § 2000e-2(a)(1). The term “religion” is construed very broadly,
   §§ 146.121(f)(1), (2).
                                                                                              and includes all aspects of religious observance and practice, as well as belief.
              .R.                               .R.
9 See 26 C.F §§ 54.9802-1(b), (c); 29 C.F §§ 2590.702(b), (c); 45 C.F         .R.                                                                                        .3d
                                                                                              42 U.S.C. § 2000e(j); see, e.g., Cloutier v. Costco Wholesale Corp., 390 F 126
   §§ 146.121(b), (c).                                                                        (1st Cir. 2004) (proceeding under assumption that plaintiff’s professed reli-
              .R.                            .R.
10 See 26 C.F § 54.9802-1(a)(1); 29 C.F § 2590.702(a)(1); 45 C.F         .R.                  gion, “Church of Body Modification,” was protected under Title VII). Title VII
   § 146.121(a)(1).                                                                           requires employers to make reasonable accommodations to employees based
          .R.                          .R.
11 26 C.F § 54.9802-1(f)(2); 29 C.F § 2590.702(f)(2); 45 C.F        .R.                       on their religious beliefs, unless to do so would place undue hardship on the
   § 146.121(f)(2).                                                                           conduct of the employer’s business. 42 U.S.C. § 2000e(j). Thus, to the extent
              .R.                           .R.
12 See 26 C.F § 54.9802-1(f)(2); 29 C.F § 2590.702(f)(2); 45 C.F        .R.                   any employee has religious convictions that are in conflict with any aspect
   § 146.121(f)(2).                                                                           of the wellness program, such as seeing a physician, the employer would be
13 71 Fed. Reg. at 75019.                                                                     required to make reasonable accommodations for the employee.

HMOs & Health

Plan Counsel and the
Compliance Imperative
Mira B. Weiss, Esquire*
Horizon Blue Cross Blue Shield of New Jersey
New York, New York

I. Introduction
There has been an explosion in compliance activity over the past
several years. In every legal forum—judicial, regulatory, and
legislative—compliance monitoring and oversight of health plan
operations is increasing in frequency, sophistication, and impact.
State and federal regulatory authorities regularly impose multi-
million dollar assessments on plans. The federal government
is more serious than ever about healthcare fraud, the financial
benefit of recouping Medicare dollars, and in exploring new
options for enforcement—even to expansion of the federal False
Claims Act (FCA) to include the prosecution of an individual.
It is also becoming routine for state regulators and plaintiffs to
demand complex, ongoing compliance monitoring and reporting                 are satisfied. This need for a proactive approach to compliance is
as part of settlements in court actions and regulatory disputes.            illustrated through the examples below:
As national attention increasingly focuses on healthcare issues             • State and federal enforcement activity—the recent federal case
and the relationship between and among insurers, providers,                   of United States v. Sulzbach2 in which the U.S. Department of
and their patients, even movies, as evidenced by Michael Moore’s              Justice brought suit against a General Counsel and corporate
documentary SiCKO, have become a forum for health plan over-                  compliance officer for violations of the FCA,3and two state
sight and public debate.                                                      actions, In re UnitedHealthCare Insurance Co.4 and In re Viola-
In-house and outside-counsel are being swept into the whirlwind               tions of Law by Aetna Health, Inc.5 in which state agencies levied
of compliance activity. But, there is little attention paid to plan           multi-million dollar penalties against plans;
counsel’s role in this new “compliance imperative.”1 Certainly,             • Implementation of new laws—New Jersey’s civil union law,6
compliance is considered to be a ministerial function; a “neces-              recent legislation that makes access to health insurance avail-
sary evil” that is not often viewed with high regard by legal                 able to same-sex partners on the same basis that it is available
professionals. As a consequence, we have not yet recognized the               to married couples, and Massachusetts’ universal healthcare
valuable role counsel can, and should, play in compliance plan-               coverage initiative;7 and
ning and management. This is extremely shortsighted, as every
major litigation, regulatory investigation, and high-profile legal           • The compliance impact of In re Managed Care Litigation8 and
event or “compliance event” (a legal matter that is likely to result          Love v. Blue Cross Blue and Shield Association9—class actions
in significant expenditures of plan resources on compliance obli-              filed by physicians and representative medical societies against
gations) can potentially result in significant compliance exposure.            every major U.S. health plan alleging violations of federal
                                                                              Racketeer Influenced and Corrupt Organizations Act (RICO).10
No professional association or expert offers advice on how to
incorporate “legal intelligence” (i.e., the combination of counsel’s        Included throughout the article are recommended “best practices”
legal knowledge with industry business and operational exper-               to apply when responding to compliance events.
tise) with a holistic and comprehensive compliance effort. This
article argues that inside counsel’s (and if applicable, outside            II. The Change in Federal and State
counsel’s) increased involvement in planning and management of                  Environments
compliance events is essential to a successful client defense and           Lesson 1: Anticipate Compliance Needs
implementation of new law. Expanding our practice beyond the
traditional role of advisor and advocate to incorporate legal intel-        State and federal regulatory environments are becoming increas-
ligence into pre-trial, pre-settlement, pre-order, pre-newspaper            ingly difficult for health plans. In a case that illustrates the extent
headline management of compliance events is definitely a “value-             to which federal regulators are extending their reach, the U.S.
add” service to clients.                                                    Department of Justice in United States v. Sulzbach11 (Sulzbach) filed
                                                                            suit under the FCA12 against Christi Sulzbach, General Counsel
This article demonstrates the value of counsel’s early interven-            and Corporate Integrity Program Director of Tenet Healthcare
tion and continued involvement until compliance obligations                 Corporation (Tenet).13 The government alleges that Ms. Sulzbach

is personally responsible for false declarations14 that enabled             and findings of market conduct examinations in the various
Tenet to unlawfully collect $22.5 million from the Medicare                 jurisdictions. The settlement was reached without admission of
program15 and for failure to stop Tenet from filing false claims16           fault but United still agreed to implement a very complex eight-
that violated prohibitions on referrals set forth in the Stark              page “Process Improvement Plan.” The plan requires United to
statute.17 The government’s naming a plan compliance official                improve claims adjudication practices, benefits management,
as the defendant in a false claims action is extraordinary. The             complaint processing, and provider relations, and to increase
government’s action to recover $67.5 million from Ms. Sulzbach              transparency and disclosure of operations to “mak(e) United-
personally, treble the $22.5 million allegedly paid to Tenet, is            Healthcare smaller, simpler to understand and easier to navi-
even more troubling. Certainly, this action raises the bar a notch          gate.”20 United also agreed to reimburse Signatory Regulators for
or two higher on compliance as an imperative.                               legal costs and the expense of ongoing monitoring of plan activi-
                                                                                   ties and to make restitution to six million plan members,
Tenet has a long and tortured evolution involving
                                                                                          retroactive to August 2004. Furthermore, United
Medicare billing fraud charges, shareholder
                                                                                               was assessed $20 million for alleged unfair
lawsuits, a qui tam lawsuit, and a corporate
                                                                                                   claims practices and the cost of compli-
integrity agreement. It proves that the
                                                                                                      ance monitoring for four years.21 Similar
government is more serious than ever
                                                                                                        to the practice of health maintenance
about prosecuting healthcare fraud,
                                                                                                          organization (HMO) accreditation
the financial benefit of recouping
                                                                                                            bodies, the settlement sets “bench-
Medicare dollars, and exploring
                                                                                                             marks” and “scorecards” against
new options for enforcement,
                                                                                                               which plan performance will be
including expanding the FCA
                                                                                                                measured (e.g., claim accuracy
to include prosecution of a
                                                                                                                 and timeliness, complaint and
General Counsel who also
                                                                                                                  utilization review timeliness,
serves as a Chief Compli-
                                                                                                                  and completion targets) and
ance Officer. The Sulz-
                                                                                                                   annual compliance reviews
bach case illustrates the
                                                                                                                   will be conducted.22 In what
value of counsel “getting
                                                                                                                    is becoming common prac-
in the game” as soon as
                                                                                                                    tice, additional penalties will
a compliance event is
                                                                                                                    be assessed, and the moni-
identified, i.e., long before
                                                                                                                   toring term extended, for
penalties are assessed and/
                                                                                                                   failure to meet a benchmark
or an individual is targeted
                                                                                                                  and/or reporting require-
for prosecution. Early inter-
                                                                                                                  ment.23 No doubt corporate-
vention might have saved
                                                                                                                 wide coordination was needed
millions of dollars in legal
                                                                                                                to reach a financially responsible
fees and resource expenses.
                                                                                                              settlement agreement with which
The probability of a public
                                                                                                             the defendants can comply.
relations nightmare could have
been substantially diminished,                                                                            In another recent regulatory action,
and perhaps this extraordinary                                                                          In re Violations of the Laws of New Jersey
government action could have been                                                                     by Aetna Health, Inc.,24 the New Jersey
avoided through early compliance inter-                                                            Department of Banking and Insurance
vention.                                                                                         (DOBI) assessed over $9 million against Aetna
                                                                                            Health, Inc. (Aetna), a New Jersey HMO, relating
Lesson 2: Analyze Risk
                                                                                      to Aetna’s reimbursement practices. The complaint
In re UnitedHealthcare Insurance Co.(United) is one of many                 centers on services provided by non-participating providers
cases illustrating the benefits gained by incorporating legal intel-         during an admission to a network hospital, and for services
ligence into a corporate-wide compliance effort. In this case,              rendered as the result of a referral or authorization by Aetna.25
UnitedHealthcare Co. (United), on behalf of itself and twenty-six           The swift response to provider complaints and the penalty
affiliates or subsidiaries, entered into a multi-state settlement            amount surprised New Jersey regulated insurers. In addition to
agreement18 with twenty-eight states and the District of Columbia           reprocessing and payment (with interest) of all affected claims,
(that are referred to in the agreement as “Signatory Regulators”).19        DOBI is requiring Aetna to contact all affected providers, and at
It is daunting to consider the impossible task faced by counsel in          Aetna’s expense, engage a consultant to review the reprocessing
responding to twenty-nine state regulatory authorities each with            of claims. On the heels of DOBI’s enforcement action, Cooper v.
their own alleged violations and diverse sets of laws.                      Aetna Health, Inc.26 was filed against Aetna, in which the plaintiff
United is the result of multi-state findings of compliance defi-              alleges that Aetna’s business practices, including claims payment
ciencies identified through complaint data, market analysis,                 practices, lack of transparency, and failure to provide members

HMOs & Health
full and fair review, violated its responsibilities as a plan fiduciary        Act touches upon every aspect of plan operations including
under the Employee Retirement Income Security Act (ERISA).27                  contracting, sales/customer service, systems, and actuarial.
Plaintiff’s complaint states that “Aetna violated New Jersey laws             Though the Act is state-specific, it raises many state32 and
governing Nonpar reimbursement and liability for ER                                 federal33 conflicts of law questions such as the eligibility
services, and exposed its Members to greater financial                                      of a dependent partner and/or child(ren) of an
responsibility for Nonpar services than autho-                                                 insured civil union partner to obtain federal
rized by law . . .”28 Not only is the enforcement                                                 Consolidated Omnibus Budget Reconcilia-
action by itself a matter of concern, but it                                                        tion Act (COBRA)34 continuation benefits,35
raises the specter of subsequent private                                                              or the status for health benefits coverage
actions.                                                                                                for partners in a same-sex relationship
                                                                                                          legally recognized by another juris-
In cases of the magnitude of Cooper
                                                                                                            diction.36 Implementation of such
v. Aetna Health, Inc. and United, it is
                                                                                                             complex changes is challenging,
best to perform an in-depth analysis
                                                                                                              both operationally and legally.
of the compliance event’s (CE’s)
                                                                                                              Further, such a fundamental and
impact on the plan. Arguably, the
                                                                                                               socially sensitive change in law
best practice is to establish objec-
                                                                                                               exemplifies the need to incorpo-
tive criteria with which to subjec-
                                                                                                               rate legal intelligence throughout
tively estimate the impact of the CE
                                                                                                               the compliance implementation
on the plan. The unique nature of
                                                                                                               process. Universal health coverage,
each plan should be considered in
                                                                                                              such as the recent Massachusetts
developing the criteria. These may
                                                                                                             Act Providing Access to Affordable,
include well-established criteria,
                                                                                                            Quality, Accountable Healthcare,37 is
such as litigation cost and potential
                                                                                                           another example of highly complex
penalties, but also the analysis should
                                                                                                         changes in law that are both socially
include “compliance-specific” criteria
                                                                                                        sensitive and legally challenging. In its
such as: the business complexity of the
                                                                                                      first year, the Massachusetts law requires
event (e.g., its potential impact on informa-
                                                                                                   insurers to provide residents eighteen years
tion systems, corporate operational budgets,
                                                                                                 of age and older, “guaranteed issue” access to
and other corporate resources), the probable
                                                                                              health coverage; that is, access to health coverage
compliance outcome (e.g., monitoring and reporting
                                                                                          regardless of an applicant’s health or other risk status.
obligations), the time period during which the alleged
                                                                                 The law also requires that coverage not be limited by annual
violation occurred (which may influence penalties and the length
                                                                              per-illness or benefit maximums.38 Similarly, the proposed
of compliance monitoring), potential damage to the plan’s reputa-
                                                                              California Health Security and Cost Reduction Act39 requires
tion and financial position, and the potential for “copy-cat” legal
                                                                              California residents to obtain coverage on a guaranteed issue
                                                                              basis to all qualified applicants. Without doubt, these funda-
                                                                              mental changes in law require a company-wide implementation
III. Implementation of New Law
                                                                              and compliance effort as they continue to be closely watched by
Lesson 3: Engage in a Corporate-Wide Response                                 the public.
Implementation and compliance with a new law is challenging:
the more complex the law, the more challenging the compliance.                IV. Compliance Update on Federal RICO Claims
Recently, there were a number of broad-sweeping laws enacted                  Lesson 4: Use Technology
on socially sensitive issues. On December 21, 2006, New Jersey
                                                                              In the age of the compliance imperative, defending against
became one of several states to grant same-sex couples the same
                                                                              allegations of non-compliance and successfully developing and
rights for access to health benefits afforded to mixed-gender
                                                                              implementing a sustainable compliance program is unimagin-
couples.29 The New Jersey Civil Union Act (Act)30 provides that
                                                                              ably complex. As in the RICO actions cited above,40 millions
“civil union couples shall have all of the same benefits, protec-
                                                                              upon millions of dollars are at risk. Hundreds of adminis-
tions and responsibilities under law, whether they derive from
                                                                              trative personnel are involved in defense of allegations in
statute, administrative court rule, public policy, common law
                                                                              the process of responding to allegations of non-compliance,
or any other source of civil law, as are granted to spouses in a
                                                                              negotiation, and planning and execution of resulting compli-
marriage,” and provides a list of some of the benefits, rights, and
                                                                              ance obligations. The examples below demonstrate the need to
responsibilities civil union partners and marital spouses have
                                                                              integrate legal intelligence into compliance planning through
in common, including “laws relating to insurance, health and
                                                                              the use of “targeted technology” (i.e., information systems
pension benefits.”31
                                                                              designed for compliance management of litigation and of
The Act changes the definition of a “dependent” for insurance                  implementation of new law).
purposes. With the exception of medical management, the

                                                                             includes in excess of 134 settlement provisions, including 115
                                                                             business terms with hundreds of subcomponents. The Love agree-
                                                                             ment also requires ongoing reporting, monitoring, and oversight
                                                                             by third parties for an average of four years.47 Again, the effective
                                                                             term of any obligation may be extended for failure to achieve
                                                                             benchmarks, file compliance reports, make necessary public
                                                                             disclosures, and/or breach of the settlement agreement.
                                                                             Compliance events of this magnitude cannot be managed without
                                                                             the use of targeted technology. Experience dictates that it is
                                                                             impossible to maintain the vast amounts of data necessary to
                                                                             make intelligent, well-informed legal decisions and monitor and
                                                                             report on compliance objectives without using a system specifi-
                                                                             cally designed for compliance management. The most common
                                                                             tools, such as email and spreadsheets, are not powerful or flexible
                                                                             enough to handle the massive amounts of data generated by
                                                                             a compliance event. These tools are also not secure enough to
                                                                             maintain the attorney-client privilege. The database used must be
                                                                             flexible enough to enable consulting with clients, disseminating
                                                                             information in real-time, and maintaining a repository for docu-
In re Managed Care Litigation41 is the consolidation of approxi-             mentation accessible to the plan and its clients. Using targeted
mately seventy RICO class actions filed by physicians and                     technology is essential to success.
medical societies against almost every major U.S. health plan.42
Substantially similar actions were brought against the Blue Cross            V. Best Practices
and Blue Shield Association and its members, their affiliates,
and subsidiaries in Love v. Blue Cross and Blue Shield Association.43        There is little published on best practices for use in responding
The allegations of all cases center on transparency—opening the              to a CE. The following lessons were developed from extensive
so-called “black box” into claims payment practices including                involvement in implementation of new law and class action litiga-
coding, utilization management and medical policies; fairness/               tion over the past several years.
due process-time limits on appeals, payments and adjustments;                Lesson 1: Anticipate Plan Compliance Needs
and provider rights, the right of providers to have a voice in plan
                                                                             Begin compliance planning as soon as possible, concurrent with
management practices.
                                                                             identification of a matter involving potential compliance issues.
In re Managed Care Litigation has a long history. Claims against             Enactment of law (i.e., universal health coverage), initiation of a
three plans, United; Coventry Healthcare, Inc.; and PacifiCare                high profile legal action (i.e., federal class action), or notice of a
Health Systems, and their affiliates and subsidiaries, were                   potentially significant regulatory inquiry (i.e., false claims inves-
dismissed.44 However, the remaining eight plans (Anthem,                     tigation) is the optimal time to grab management’s attention and
Inc.; Humana, Inc.; Aetna; CIGNA Health Corp.; Connecticut                   garner resources. Information learned in the compliance planning
General Life Insurance Co.; HealthNet, Inc.; Prudential Insur-               process is invaluable to subsequent defense and/or negotiations,
ance Company of America; and WellPoint Health Networks,                      and in responding to allegations of non-compliance by regulators
Inc.), their subsidiaries, and affiliates settled on substantially            and/or the press.
similar business terms.45 Within the four corners of each settle-
                                                                             Lesson 2: Analyze Risk
ment is a complex matrix of compliance obligations requiring
improvements in technology, medical management and claims                    Use objective criteria to subjectively measure, from a legal and
processing, claims adjudication and prompt payment of claims,                business perspective, corporate exposure to the CE. Measure-
operations, transparency of medical policy and claims adjudica-              ment criteria might include, for example, legal exposure, finan-
tion processes, and enhancements in relationships with physi-                cial exposure, complexity of legal issues, complexity of business
cians. The settlement agreements require ongoing reporting,                  issues, time period of alleged non-compliance, potential parties
monitoring, and oversight by third parties for an average of four            affected (individuals or corporate), potential damages (civil,
years.46 The effective term of any obligation may be extended                criminal, and reputational), the length of the time period between
for failure to achieve benchmarks, file compliance reports, make              the CE and the estimated effective date of compliance obliga-
necessary public disclosures, and/or breach of the settlement                tions, estimated length of the term during which compliance may
agreement.                                                                   be required, the probable legal outcome of the CE (if litigated,
                                                                             settled or compliance is ordered by a regulatory entity), and
The complexity of these agreements is also evident in the
                                                                             the probability of copy-cat legal actions. When measured, these
proposed settlement agreement in Love. Without taking into
                                                                             factors will help determine the priority and resources necessary to
consideration compliance obligations placed on the Blue Cross
                                                                             prepare for, and respond to, a CE.
and Blue Shield Association, the settlement agreement generally

HMOs & Health
                                                                         increasing amounts of national attention. Along with the
                                                                         publicity, the role of counsel is evolving. Every major litigation,
                                                                         regulatory investigation, and high-profile legal event has the
                                                                         potential to become a CE. The major lessons learned are: use
                                                                         your legal intelligence to your best advantage, get in the game
                                                                         early, embrace the role of counsel as a full member of the compli-
                                                                         ance team, and educate your clients that proactive compliance
                                                                         management is essential to their legal and financial health.
                                                                             Disclaimer: This article represents the personal opinions of the author and does not
                                                                             represent the opinions or policies of the author’s employer or other third parties.

                                                                         1 M. Weiss, Providers v. Health Insurers: Pro-Provider Reforms and the Growth of the
                                                                            Compliance Imperative, HMOs & Health Plans Newsletter, vol.10 - 1, 1-6 Am.
                                                                            Health Laws. Ass’n, (Feb. 2007).
                                                                         2 United States v. Sulzbach, No. 07-61329-CIV (S.D. Fla. 2007).
                                                                         3 False Claims Act, 31 U.S.C. §§ 3729-3733.
                                                                         4 In re UnitedHealthCare Ins. Co., Regulatory Settlement Agreement (Aug. 27, 2007),
                                                                            a multi-state agreement entered into by UnitedHealthCare Ins. Co. on behalf of
                                                                            itself and its affiliates.
                                                                         5 In re Violations of the Law of New Jersey by Aetna Health Inc., Order No.A-07-59
                                                                            (Dep’t. Bank. & Ins. July 2007).
                                                                         6 Civil Union Act, 37 N.J. STAT. ANN. §§ 1-31.
Lesson 3: Engage in a Corporate-Wide Response                            7 Act Providing Access to Affordable, Quality, Accountable Healthcare, Mass.
                                                                            Pub. L. c. 58 (2006).
Due to the highly complex business and legal issues arising
                                                                         8 In re Managed Care Litigation, No. 00-MDL-01334 (S.D. Fla. 2002).
from a major compliance event (such as class actions, multi-
                                                                         9 Thomas v. Blue Cross and Blue Shield Ass’n, No. 03-21296-CIV (S.D. Fla. 2002);
state regulatory actions, and implementation of legislation), a
                                                                            sub nom. Love v. Blue Cross and Blue Shield Ass’n (hereinafter Love).
corporate-wide response is needed. Subject-matter experts and            10 The lawsuits alleged violations of 18 U.S.C. § 1962(d) by conspiring to violate
functional business managers, with sufficient stature to garner              §§ 1962(a),(c); violation of 18 U.S.C. § 2 by seeking to aid and abet the viola-
resources and to plan and execute compliance obligations,                   tion of 18 U.S.C. § 1964(a),(c).
should be identified. Accountability for compliance with each             11 Supra note 3.
business term should rest with this individual. They should              12 Supra note 4.
also be available to advise counsel on business aspects of a CE,         13 Tenet HealthCare Corp. was formed in 1995 in a merger between National
respond to service implications of proposed business terms,                 Medical Enterprises, Inc. and American Medical Holdings, Inc. Among other
                                                                            commercial enterprises, Tenet operates hospitals receiving reimbursement
and be accountable for meeting the plan’s ongoing compliance                from the Centers for Medicare and Medicaid Services and the Medicare
obligations assigned to them.                                               program.
Lesson 4: Use Technology                                                 14 See 31 U.S.C.§ 3729(a)(7), prohibiting knowing creation or use of a false
                                                                            record or statement to decrease a monetary obligation to the government.
Best practices can be most successfully applied by integrating           15 See 31 U.S.C. § 3729(a)(1), prohibiting knowing presentation of a false or
applicable laws and/or compliance requirements with online                  fraudulent claim to the federal government for payment or approval.
compliance tools that are easily accessible to clients. The enor-        16 See 31 U.S.C. § 3729(a)(2), prohibiting knowing use or creation of a false
                                                                            record or statement to get a false or fraudulent claim paid by the federal
mous volume and complexity of compliance obligations stem-
ming from a CE is impossible to manage without information
                                                                         17 42 U.S.C.§ 1395nn (a/k/a; “The Stark Law”) prohibits a hospital (or other
systems support. Each CE term must be entered; distributed to               entity providing healthcare items or services) from submitting claims for pay-
functional business managers; and interpreted by counsel and                ment for certain designated health services based on referrals from physicians
its impact measured, monitored, documented and reported,                    having an improper “financial relationship” with a hospital.
as necessary. Real-time communication with clients is essential          18 In re UnitedHealthCare Ins. Co., Regulatory Settlement Agreement (Aug. 27, 2007).
to keep clients aware of emerging issues and interpretations.            19 Id. The Signatory Regulators include regulatory authorities from: Alabama,
                                                                            Arizona, Arkansas, Colorado, Connecticut, Delaware, Florida, Georgia, Il-
Information, documents, discussions, and compliance/non-                    linois, Indiana, Kansas, Kentucky, Louisiana, Maryland, Massachusetts, Mis-
compliance also need to be secured and protected (to the extent             sissippi, Missouri, Nebraska, New Jersey, New York, North Carolina, Ohio,
possible) by the attorney-client privilege. Additionally, use of            Rhode Island, Tennessee, Texas, Utah, Virginia, Wisconsin, and the District
technology in the CE process is needed for data driven analysis             of Colombia.
and accurate reporting.                                                  20 Id. at 33; see also Process Improvement Plan at 28-33.
                                                                         21 Id. at 27.
                                                                         22 Id. at 34-39.
VI. Conclusion
                                                                         23 Id. at 40-41.
It is almost impossible to keep pace with the number and                 24 In re Violations of the Law of New Jersey by Aetna Health Inc., supra note 6.
complexity of emerging CEs. The relationship between and
among insurers, providers, and the public continue to receive

25 Id. The fine relates to balance billing of members for services received from
   out-of-network providers for services rendered in a hospital with all plan
   authorization requirements having been met.
26 Cooper v. Aetna Health, Inc., Civ No 07-3541 (D.N.J. July 2007).
27 Employee Retirement Income Security Act, 29 U.S.C.§ 1002(21)(A).
28 Supra note 27 (Compl. ¶ 73).
29 See 3 Atty. Gen. Op. (N.J. 2007); R. Leiter and T. Gale, Annulment and Prohibited
   Marriage, 50 State Statutory Survey, Family Law, Divorce and Dissolution (Thomp-
   son/West, 2007).
30 Civil Union Act, 37 N.J. S. A. §§ 1-31.
31 37 N.J. STAT. ANN. § 1-32(e).
32 Supra note 30.
33 See 1 U.S.C.A. § 7, defining marriage, under the Federal Defense of Marriage
   Act, as a “legal union between one man and one woman.” See also 07-04 Bul-
   letin Dept. Bank. & Ins. (N.J. 2007), available at
   blt07_04.pdf; C. Fisk, ERISA Preemption of State and Federal Local Laws on Do-
   mestic Partnership and Sexual Discrimination in Employment, 8 UCLA WOMEN’S
   L. J. 267 (1997-1998).
34 Consolidated Omnibus Budget Reconciliation Act of 1986, Pub. L. No. 99-272.
                                                                                              HMOs and Health Plans
   The law provides continuation of group health coverage, for employees and their
   dependents who lose their health benefits, the right to choose to continue group           Practice Group Leadership
   health benefits provided by their group health plan for limited periods of time,
   under certain circumstances, such as voluntary or involuntary job loss, reduc-                            Kevin D. Gordon
   tion in the hours worked, transition between jobs, death, divorce, and other life                              Chair
   events. See also
                                                                                                           Crowe & Dunlevy PC
35 See Lewis v. Harris, 188 N.J. 415 (2006), at 459 note 25., stating: “We note that
   what we have done and whatever the Legislature may do will not alter federal
                                                                                                         1800 Mid-America Towers
   law, which only confers marriage rights and privileges to opposite-sex married                           20 North Broadway
   couples.”                                                                                          Oklahoma City, OK 73102-8273
36 See, 37 N.J. STAT. ANN. § 1-34, recognizing the legal status of government-                 (405) 239-6619 •
   sanctioned same-gender relationships from other jurisdictions both domestic
   and foreign.                                                                                             Todd M. Ebersole
37 Act Providing Access to Affordable, Quality, Accountable Healthcare, Mass.                       Vice Chair – Educational Programs
   Pub. L. c. 58 (2006).                                                                              Ovations/Prescription Solutions
38 Id.                                                                                                       2300 Main Street
39 The Healthcare Security and Cost Reduction Act, available at                         Mail Stop CS57-501
   pdf/gov/HCR-RN0729963.pdf, See also Press Release, Officer of the Governor,                               Irvine, CA 92614
   Governor Schwarzenegger Moves Forward with Healthcare Reform Legislation
   available at                                (949) 221-9989 •
40 See supra section I.                                                                                      Lisa A. Hathaway
41 In re Managed Care Litigation, No. 00-MDL-01334 (S.D. Fla. 2002).                                      Vice Chair – Membership
42 Racketeer Influenced and Corrupt Organizations Act of 1970, §§1961–1968.                        Blue Cross and Blue Shield of Florida, Inc
43 Love v. Blue Cross and Blue Shield Ass’n, No. 03-21296-CIV (S.D. Fla. 2002).                      4800 Deerwood Campus Parkway
44 Order Granting Defendant’s Motion for Dismissal of Claims, No. 00-MDL-01334                                  Building 100
   (S.D. Fla. June 2006), dismissing all claims brought against United Health
   Group, Inc. and Coventry Healthcare, Inc., and Order Granting Defendant’s
                                                                                                           Jacksonville, FL 32246
   Motion for Dismissal of Claims, (S.D. Fla. 2006), dismissing all claims brought              (904) 905-7900 •
   against PacifiCare Health Systems, Inc. But cf. In re UnitedHealthCare Insurance
   Co., supra note 5, in which United entered into a multi-state settlement agree-
                                                                                                           Stuart I. Silverman
   ment resulting from similar actions alleged in In re: Managed Care Litigation,                       Vice Chair – Publications
   supra note 42.                                                                                   Office of Inspector General for the
45 See Settlement Agreement CIGNA HealthCare and Physicians (Sept. 4, 2003);                        District of Columbia Government
   Settlement Agreement by and Among Aetna, Inc., The Representative Plaintiffs, The              5225 Pooks Hill Road, Unit 122 South
   Signatory Medical Societies and Class Counsel (May 21, 2003); CIGNA Health-
   Care and Physicians (Jan. 30, 2004); The Prudential. Insurance Company of                               Bethesda, MD 20814
   America, The Signatory Medical Societies and Class Plaintiffs (May 5, 2005); The             (202) 727-2246 •
   Signatory Medical Societies and Class Counsel and HealthNet Inc. (S.D. Fla. May
   2, 2005); Settlement Agreement WellPoint, Inc. (July 11, 2005); Settlement Agree-                Dorthula H. Powell-Woodson (Dot)
   ment, Humana Inc. and Humana Health Plan, Inc. (Aug. 3, 2006).                                          Vice Chair – Research
46 CIGNA HealthCare and Aetna have satisfied the terms of the settlement                                       Wiley Rein LLP
   agreement.                                                                                                 1776 K St NW
47 Order Preliminarily Approving Proposed Settlement Agreement, Love v. Blue Cross                     Washington, D.C. 20006-2304
   and Blue Shield Association, No. 03-21296-CIV (S.D. Fla. May 31, 2007). Supra             (202) 719-7150 •
   note 44 at 97.

HMOs & Health

Application of Medical                                                       (ASO) arrangements, and any other payment relationship where
                                                                             the benefit payable is fixed as a portion of “allowed” charges.
Billing Standards to
                                                                             I. The First State Orthopaedics Settlement
Claims Submitted by                                                          First State Orthopaedics was concluded on October 16, 2007,
Non-Contracted Providers                                                     with the issuance of a Memorandum and Order approving the
                                                                             parties’ settlement. In First State Orthopaedics, plaintiff health-
Peter Roan, Esquire, and Ronald Kurtz, Esquire                               care providers sued Concentra and its affiliates (suppliers of
                                                                             medical bill review services and software), asserting causes of
Locke Lord Bissell & Liddell LLP                                             action for breach of contract, breach of the duty of good faith and
Los Angeles, California                                                      fair dealing, tortious interference with existing and prospective
                                                                             contractual relations, and unjust enrichment, based in part on

       ayors and providers continue to fight about appropriate
                                                                             alleged improper payment recommendations made to Concentra’s
       billing and payment practices for medical and hospital
                                                                                  payor clients beginning in 1995. The improper payment
       services. Providers seek to maximize
                                                                                        recommendations were allegedly the result of an “arbi-
revenues through billing practices, and payors
                                                                                             trary and capricious” bill review system and a “stan-
scrutinize bills for adherence to medical
                                                                                                dard practice of manipulating computer codes to
billing standards. As some providers
                                                                                                   reduce provider billing submissions.”3
have developed coding methods to
maximize reimbursement, payors                                                                      The settlement approved by the court
have increasingly looked behind                                                                      in First State Orthopaedics requires
the total charge on provider bills                                                                     operational changes and reforms by
and reduced payment based                                                                               Concentra concerning its bill review
on line-item review. There has                                                                           practices, including discontinuation
been a flood of litigation over                                                                            of automatic denial of certain codes
appropriate medical billing                                                                               (such as those for management and
and payment practices, but                                                                                 evaluation services), routine down-
in the numerous reported                                                                                   coding of specified charges, as well
court decisions in this area                                                                               as requiring greater transparency
there has been little guidance                                                                             in communications with providers
about what medical billing                                                                                 and in the collection and use of data
and payment practices are                                                                                 underlying the bill review system.
permissible.                                                                                              Concentra agreed to pay approxi-
                                                                                                         mately $425,000 in attorneys’ fees
More than 100 putative class
                                                                                                        and to invest $3.7 million toward the
action cases have been filed
                                                                                                       prescribed operational changes, but the
against health, automobile, and
                                                                                                     settlement provides for no payment of
workers compensation insurers
                                                                                                    money damages to the plaintiffs. The court
by healthcare providers challenging
                                                                                                  approved the settlement, finding that it was
reductions in payments made for
                                                                                               of significant benefit to the plaintiffs and that it
healthcare services. Among the theories
                                                                                             met the standards set forth in federal class action
advanced include challenges to allegedly
                                                                                        law.4 Some of Concentra’s payor clients also have been
wrongful bill review practices by payors and
                                                                                   sued on similar theories, and the settlement does not affect
their agents. Recent developments in one federal class
                                                                             those other actions.5
action in Pennsylvania, First State Orthopaedics v. Concentra, Inc.,1
illustrate that medical bill review remains an issue of immediate            The settlement in First State Orthopaedics does not address the
significance to payors, providers, and third-party bill review                merits of plaintiffs’ claims, but as the court noted in its memo-
services alike.                                                              randum approving the settlement, Concentra has been successful
                                                                             in fending off similar allegations in other cases.6 So what supports
This article addresses but one aspect of the ongoing bill review
                                                                             reductions in payments made to healthcare providers that have
struggle exemplified by First State Orthopaedics and amplified
                                                                             no contract setting forth the rules for determining the amount of
by the proliferation of similar class action litigation: namely, the
application of billing standards to claims submitted by health-
care providers that do not have contracts with health plans
and insurers that apply to the services rendered. The issue is               II. Sources of Medical Billing Standards
important not only to providers and risk-bearing health plans or             Not all payment reductions based on bill review carry the same
insurers, but also to ERISA2 plans, administrative services only             potential for disagreement. Some, like those based on proper

  “The difference between the
  right word and the almost right
  word is the difference between
  lightning and a lightning bug.”
                              —Mark Twain (1835-1910)

application of statutory fee schedules, are effectively unassail-
able. Likewise, reductions based on appropriate application of
contract rates are also relatively uncontroversial. But what about
determining correct payment to non-contracted providers, or for
services concerning which a contract is silent? Payors commonly
apply industry bill preparation standards as part of the process of
determining the appropriate payment amount. Sources of billing
standards include the Medicare Correct Coding Initiative (CCI),
the Ingenix UB 92 Editor, the American Hospital Association’s
(AHA’s) Coding Clinic, and the Ingenix/St Anthony Hospital
Chargemaster Guide. Underlying all of these potential sources
of authority is the principle that there are rules that should be
followed in preparing bills for medical and hospital services, and
that bills violating these rules should be adjusted to conform.
The Medicare CCI, for instance, was developed to promote
national correct coding methodologies and to control improper
coding leading to inappropriate payment of Part B (physician)
claims. According to the Centers for Medicare and Medicaid
Services (CMS), these coding standards were based on coding
conventions defined in the American Medical Association’s CPT
manual, national and local policies and edits, coding guidelines            defendants. The plaintiffs alleged, among other things, that the
developed by national societies, analysis of standard medical and           defendants and their agents engaged in undisclosed automatic
surgical practices, and a review of current coding practices.7 CMS          downcoding and bundling of claims submitted by physicians in
states that CCI edits are designed to ensure the most comprehen-            order to wrongfully reduce payments to physicians.9 Plaintiffs
sive groups of codes are billed rather than their component parts.          asserted that defendants had violated the Racketeer Influenced
Additionally, CCI edits check for mutually exclusive code pairs.            and Corrupt Organizations Act,10 and violated federal criminal
These edits were implemented to ensure that only appropriate                statutes prohibiting fraud, extortion, and bribery as part of a
codes are grouped and priced.                                               pattern of racketeering activity. Plaintiffs also brought claims
                                                                            under ERISA, and alternatively for breach of contract, quantum
CCI and the other sources of billing standards were developed in            meruit, unjust enrichment, and for violations of federal and state
an effort to standardize appropriate billing and payment prac-              prompt payment laws.11 At the heart of these allegations was the
tices. That these standards exist and are applied says nothing              defendants’ use of software designed to analyze medical bills for
about the fundamental question of the bases on which they may               CPT coding irregularities. The defendants’ use of this software
be applied to bills submitted by non-contracted providers.                  allegedly saved them vast sums of money.
                                                                            Seven of the defendants—Humana, Health Net, Prudential,
III. Legal Authority for Application of Billing
                                                                            WellPoint, Anthem, Aetna, and CIGNA—settled and agreed
     Standards                                                              to alter certain of their bill review and payment practices on a
There has been much litigation directed at medical bill review              going forward basis. As part of these settlements, the defendants
activities by managed care organizations (MCOs). The most                   agreed to a variety of modifications to their bill review practices
significant of this litigation is the health maintenance organization        that included reduced downcoding of evaluation and manage-
(HMO) combined provider-subscriber multi-district class action              ment codes, recognition of separate codes for certain supervision
litigation referred to as In re Managed Care Litigation.8 There,            and interpretation services, eliminated automatic downcoding
class provider plaintiffs challenged the validity of a laundry              of service intensity, and reformed handling of certain modifier
list of alleged wrongful reimbursement practices by the MCO                 codes.

HMOs & Health
Defendants PacifiCare Health Systems, United Healthcare, and                 able value is “the terms the parties would have agreed to,” and it
Coventry Healthcare eventually obtained summary judgment                    should “bear in mind the parties’ initial goals.”23
on grounds that there was no evidence of a conspiracy by and
                                                                            In determining the reasonable value of services, “the appro-
among the defendants to violate federal racketeering laws.12 The
                                                                            priate inquiry is what [the plaintiff] would have been paid if his
district court noted that the class action was certified on the basis
                                                                            services had been bargained for by the parties.”24 Even in the
of the allegation that the defendants conspired with one another
                                                                            absence of a contract, contract prices for the same services may
to program their computer systems to systematically underpay
                                                                            itself be evidence of reasonable value, as it is “the amount for
physicians for their services.13 When plaintiffs could not produce
                                                                            which such services could have been purchased from one in the
evidence supporting the existence of the conspiracy, the court
                                                                                    plaintiff’s position at the time and place the services were
was compelled to grant summary judgment.14
                                                                                           rendered.”25 Thus, contract rates for similar services
As a result of the settlements and the summary                                                   are evidence of reasonable value.
judgments granted the remaining defendants
                                                                                                  In addition to looking to contract rates for
on the basis that a conspiracy could not be
                                                                                                     evidence of the reasonable value of a
established, In re Managed Care Litigation
                                                                                                       service, courts also consider providers’
failed to produce any binding precedent
                                                                                                         collection rates. In Temple University
on the validity of the specific medical
                                                                                                          Hospital v. Healthcare Management
bill review practices of the defen-
                                                                                                           Alternatives, Inc.,26 the appellate
dants that were being challenged.
                                                                                                            court held that the reasonable value
The authors of this article have
                                                                                                             of the services was equivalent to
found no published court decision
                                                                                                              the “average collection rate for
addressing the validity of medical
                                                                                                              each year in question.”27 In that
bill review activities as applied to
                                                                                                              case, a teaching hospital brought
services rendered by providers
                                                                                                              suit against a managed care
with which the payor had no
                                                                                                              company to recover the difference
contract. Yet bill review activi-
                                                                                                              between its published charges
ties in non-contracted situations
                                                                                                             and the amount the managed care
continue to occur.
                                                                                                             company paid it after its contract
                                                                                                           had expired. According to the court,
IV. Effect of Billing                                                                                     “services are worth what people
    Standards on Reasonable                                                                              ordinarily pay for them.”28 Likewise,
    Value Determinations                                                                               in Vencor Inc. v. National States Insurance
The basis for payment of non-contracted                                                              Co.,29 the Ninth Circuit cast doubt on an
services inevitably turns out to be one species                                                    Arizona provider’s claim that billed charges
or another of implied contract. For instance,                                                   are evidence of reasonable value, stating: “It
in Bell v. Blue Cross of California,15 Blue Cross was                                       is worth noting that in a world in which patients
found to have a duty to pay a non-contracted emergency                                 are covered by Medicare and various other kinds of
physician “a reasonable and customary amount for the services               medical insurance schemes that negotiate rates with providers,
rendered.”16 According to the court, Blue Cross insisted that,              providers’ supposed ordinary or standard rates may be paid by a
in the absence of a set rate for services like Medicare, it could           small minority of patients.”30
unilaterally set reimbursement rates. The court rejected this prac-         In Coalition for Quality Health Care v. New Jersey Dep’t of Banking
tice, saying that Blue Cross’ interpretation would mean that the            and Ins.,31 organizations of healthcare professionals appealed from
emergency care providers could be reimbursed “at a confiscatory              adoption of state regulations regarding reimbursement for certain
rate that, aside from being unconscionable, would be unconstitu-            medical services covered by personal injury protection laws. The
tional.”17                                                                  healthcare providers insisted that in basing reimbursement on
The appropriate standard for assessing damages under implied                paid fees rather than billed fees, the state exceeded the scope of
contract is the “reasonable value” of the services.18 Reason-               its legislative intent and acted arbitrarily and capriciously. The
able value is not measured by the rate or price demanded.19                 court rejected this contention, citing evidence of a historical shift
Reasonable value is not established simply by reference to a                contained in a report prepared by Ingenix that showed a move-
provider’s unilaterally set chargemaster or “full-billed” charges.20        ment away from reimbursement based on fees charged.32 This
In Unihealth v. U.S. Healthcare, Inc.,21 a federal magistrate in New        report stated, in part:
Jersey stated that: “Although plaintiff advocates this quantum
                                                                                Historically it was common for fee schedules to be
meruit theory, it fails to provide the Court with any information,
                                                                                based on charge data, however, with the assimila-
apart from its unilaterally-set Charge Master rates, from which
                                                                                tion of managed care in the industry and the influ-
to assess the reasonable value of hospital services.”22 The reason-
                                                                                ence of HCFA’s Medicare fee schedule, the basis and

    level of fee schedules has changed, in some cases
    quite dramatically, over the past several years. To
    further complicate the definition of prevailing fees,
    a provider often has various fees depending on
    the payer of the service (e.g., Medicare, Medicaid,
    managed care organization, indemnity organization,
    etc.). Consistent with this variation in provider fees
    is the variability in payment levels by the different
The court noted that because “providers routinely accept signifi-
cantly less than the amount they purport to charge, then paid
fees are a realistically more accurate measure of reasonable and
prevailing fees than billed fees.”34
Evidence going to the reasonable value determination also should
include consideration of medical billing and coding standards.
In Eagle v. Snyder,35 a Pennsylvania appellate court considered an
action by physicians against a patient for reimbursement where               information. In this way, the use of medical bill review standards
the physicians admittedly used incorrect CPT codes in their bill-            in non-contracted situations is simply part of the process of
ings. The appeals court held that it was error for the trial court to        determining the reasonable value of services provided.
reject evidence of the appropriate CPT coding practices because
that information was relevant in determining a reasonable value              1    Memorandum and Order, No. 05-4951 (E.D. Pa. Oct. 16, 2007).
of the services rendered.36 “A vehicle to provide standardization            2    Employee Retirement Income Security Act (ERISA), 29 U.S.C. § 1001, et seq.
of procedures and the concomitant prices charged for them is the             3    First State Orthopaedics, at 4-5.
C.P.T.,” the court said. CPT coding cannot be irrelevant “when               4    Id. at 36-37.
insurance carriers such as Blue Cross, Blue Shield and govern-               5    Id. at 7-9.
                                                                             6    Id. at 6-7.
ment providers such as Medicare rely on these pricing standards
                                                                             7    See, e.g., U.S. Department of Health & Human Services, Centers for Medicare
to provide payment for their insureds.”37                                         & Medicaid Services, NCCI Overview Page,
                                                                                  rectCodInitEdd (last visited Nov. 15, 2007).
If fees actually paid are a basis for determining the reasonable
                                                                             8    MDL No. 1334 (S.D. Fla.).
value of non-contracted services, then billing and coding stan-              9    135 F  .Supp.2d 1253, 1257 (S.D. Fla. 2001).
dards themselves are an important component of the analysis.                 10   18 U.S.C. § 1962(a)-(c).
Healthcare providers often tie prices to commonly used medical               11   135 F  .Supp.2d at 1257.
and hospital codes. If a substantial portion of the amount actually          12   430 F  .Supp.2d 1336, 1340 (S.D. Fla. 2006).
paid to providers is computed through application of these codes,            13                                            .3d
                                                                                  Id., citing Klay v. Humana, Inc., 382 F 1241 (11th Cir. 2004).
                                                                             14   430 F  .Supp.2d at 1357.
there is arguably no basis for computing payments for non-
                                                                             15   131 Cal. App. 4th 211 (2005).
contracted services in a vacuum devoid of these guidelines. Along            16   Id. at 220.
with contract rates, paid fees, and provider costs, medical billing          17   Id.
rules should be, and already are, among the factors to be consid-            18   Palmer v. Gregg, 65 Cal. 2d 657, 660 (1967).
ered in determining the reasonable value of services rendered by             19   Arcade County Water Dist. v. Arcade Fire Dist., 6 Cal. App. 3d 232 (1970) (court
a provider in the absence of a contract rate.                                     found an “implied agreement to pay not the demanded price but a reasonable
                                                                             20   Unihealth v. U.S. Healthcare, Inc., 14 F .Supp.2d 623, 631 (D.N.J. 1998).
V. Payment Disputes Arising from Application                                 21   Id.
   of Billing Standards Are Likely to Continue                               22   Id.
                                                                             23   Id. at 641.
Providers and payors often disagree about the correct applica-               24   Arrison v. Information Resources, Inc., 1999 WL 551232 at p. *9 .(N.D. Cal.
tion of medical billing and coding standards. The litigation that                 July 16, 1999).
has touched on the topic has centered largely on bills for profes-           25                                               .2d
                                                                                  United States v. Algernon Blair, Inc., 479 F 638, 641 (4th Cir. 1973).
sional services and not hospital services or supplies. The trend             26   832 A.2d 501 (Pa. Super. Ct. 2003).
                                                                             27   Id. at 509.
in the cases is that evidence of what providers of services are
                                                                             28   Id. at 508.
typically paid is more important to the determination of reason-             29          .3d
                                                                                  303 F 1024 (9th Cir. 2002).
able value than the full billed charge for the services in question.         30   Id. at 1029, fn. 9.
Also important to the reasonable value determination, particu-               31   358 N.J. Super. 123, 817 A.2d 347 (2003).
larly in non-contracted situations, will be the examination of               32   358 N.J. Super. at 127-131.
medical billings for adherence to appropriate standards. After               33   Id. at 127-128.
                                                                             34   Id. at 128.
all, the reasonable value determination cannot be made without
                                                                             35   412 Pa. Super. 557, 604 A.2d 253 (1992).
consideration of the scope or intensity of the services provided.            36   412 Pa. Super. at 560.
Application of standard coding conventions helps supply this                 37   Id.

HMOs & Health

                       HMOs and Health Plans
                          Practice Group
                        Mid-Year Luncheon

                                                at the
               Institute on Medicare Medicaid Payment Issues
                                       Baltimore, Maryland
                                     Friday, April 11, 2008
                         Physician Tiering by Health Plans:
                  Efforts for Greater Transparency and Rationality
                                       Mark. S. Joffee, Esquire
                                     Law Office of Mark S. Joffee
                                         Washington, D.C.

   Mr. Joffe will discuss recent litigation challenging the efforts of health plans to tier or
   rank their network physicians based on quality indicators. Increasingly, health plans have
   implemented benefit designs, such as differential cost sharing, to encourage the use of
   physicians who demonstrate higher quality. These programs have been challenged by medical
   societies that have questioned the purpose for these programs, the rationality of the criteria
   used to rank physicians, and the lack of information explaining the criteria selected. Mr. Joffe
   will also discuss several recent settlements, which have focused on assuring transparency
   in the tiering standards, the tiering development process and how individual physicians are
   assigned to tiers.

                    For more information about the program and to register,
               please call the Member Service Center at (202) 833-0766, or visit:

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