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.
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
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
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, Amednews.com (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).
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
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.
• 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
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 www.cms.hhs.gov/HealthPlansGen-
1. Review the CARs available on the CMS website for areas 6 The Part D audit guide can be found at: www.cms.hhs.gov/PrescriptionDrug-
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.
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,
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- email@example.com
advised to be proactive by establishing conscientious internal
monitoring and auditing work plans, taking into account these Emilee Hughes
available resources. Practice Groups Manager
1 2007 Annual Report of the Boards of Trustees of the Federal Hospital Insur- firstname.lastname@example.org
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 email@example.com
its constitutional responsibilities and to help improve the performance and
accountability of the federal government. See statement of GAO’s mission at
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. firstname.lastname@example.org
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.
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
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 www.eeoc.gov/policy/docs/guidance-inquiries.html.
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 email@example.com; Kim’s contact information is (312) 269-8019 and .R.
the purposes of [the ADA].” 29 C.F § 1630.16(f)(4).
firstname.lastname@example.org. 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
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).
29 C.F § 1630.9, 29 C.F pt. 1630, app.
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).
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);
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-
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.
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-
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
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
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
Mira B. Weiss, Esquire*
Horizon Blue Cross Blue Shield of New Jersey
New York, New York
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
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
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.
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-
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 www.state.nj.us/dobi/bulletins/
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 www.dol.gov/ebsa/pdf/cobraemployee.pdf.
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 • email@example.com
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 http://gov.ca.gov/ 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 http://gov.ca.gov/index.php?/press-release/7648/. (949) 221-9989 • firstname.lastname@example.org
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 • lisa.hathaway@bcbsﬂ.com
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 • Stuart.Silverman@dc.gov
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 • email@example.com
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, www.cms.hhs.gov/NationalCor-
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
Institute on Medicare Medicaid Payment Issues
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
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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