Providers threaten lawsuits

Healthcare providers are threatening to sue insurers that pass along a 2% rate cut imposed on their Medicare Advantage plan payments under the federal budget sequestration law.

Hospitals, physician groups and post-acute care providers accuse the Medicare Advantage plans of breaching contracts by unilaterally reducing payments. They are considering legal action by the end of this year to block the cuts, said attorneys who represent provider groups. Federal spending on the Medicare Advantage program totaled about $135 billion last year, so the dispute is over 2% of a large pot of money.

“The mere fact that premium payments have been reduced to health plans does not mean that payments to hospitals should be reduced by MA plans, unless contracts allow it,” said Jeffrey Gold, vice president of managed care and special counsel to the Healthcare Association of New York State. His association wrote an August letter signed by 17 state hospital associations asking the CMS to confirm that it did not intend for insurers to pass along the sequestration cut to providers.

Brian Foley, an attorney at Schenck, Price, Smith & King who is representing New Jersey providers on this issue, estimated that at least two-thirds of Medicare Advantage plans in that state are trying to pass along the rate cut, including plans operated by UnitedHealth Group and Aetna. “It's pervasive,” he said.

Medicare Advantage insurers say they have to pass along the cuts because they're increasingly squeezed by reduced payments because of sequestration and Medicare spending reductions included in the Patient Protection and Affordable Care Act.

Kendall Marcocci, a spokeswoman for Aetna, said plans have reduced payments to providers “where contractually allowed.” She added that “providers reimbursed on current-year Medicare allowable rate fee schedules are subject to the same reduction required under sequestration.”

UnitedHealth did not respond to a request for comment. But in a quarterly earnings filing with the Securities and Exchange Commission, the company said it has reduced provider reimbursement “for those care providers with rates indexed to Medicare Advantage revenue or Medicare fee-for-service reimbursement rates.”

In its quarterly earnings filing, UnitedHealth estimated that the sequestration cut to Medicare Advantage payments will result in about $250 million to $300 million in lost earnings for the full year. The company currently has 2.9 million Medicare Advantage members, up 17% over the previous year.

But hospitals say they face their own payment squeeze from Medicare and private-sector payers. They cite May guidance from the CMS that they say demonstrates that the sequestration cuts were intended for the insurers, not providers.

The CMS memo said Medicare Advantage plans should review their individual contracts to determine how sequestration would affect payments. Hospitals interpreted that as a sign that the plans could not automatically pass along the cuts.

While providers await a response from the CMS to the August letter, “their only other alternative is litigation,” Foley said. With so many hospitals across the country reporting similar issues, hundreds of millions of dollars could potentially be at stake, he added.

About 14.4 million people, or 28% of Medicare beneficiaries, are currently enrolled in Medicare Advantage plans, and participation has more than doubled since 2006, according to the Kaiser Family Foundation and CMS data. The government, which pays the plans on a per-beneficiary, per-month basis, spent 24% of the $562 billion Medicare budget last year, or about $135 billion, on Medicare Advantage. Because payments to providers vary by plan, it's unclear how much of that figure trickles down to hospitals.

A March report from the Government Accountability Office found overpayments to Medicare Advantage plans of up to $5.1 billion in years 2010 to 2012, heightening political pressure to reduce payments to the plans.

The plans had been facing a 2.3% cut for 2014—until the CMS reversed course in April and gave them a 3.3% rate hike. Nevertheless, the ACA still mandates a $156 billion payment reduction to Medicare Advantage plans over 10 years.

In their August letter, the representatives from 17 state hospital associations asked the CMS for confirmation that the agency did not intend to pass along the sequestration cut to providers.

“Our hospital members advise us that a significant number of other MA plans appear to have a basic misunderstanding of sequester legislation, with the result that MA plans are automatically passing along the 2% payment reduction on to network providers, regardless of the terms of the contract,” the letter said.

Further clarification from the agency, it added, “would perhaps obviate the growing likelihood that hundreds of private disputes between providers and plans will need to be individually resolved.”

Amanda Hayes-Kibreab, an attorney with the law firm Hooper, Lundy & Bookman in Los Angeles who represents healthcare providers, said providers are still trying to resolve the issue informally with Medicare Advantage plans. But she said filings for arbitration—and potentially lawsuits—could occur by the end of the year if no agreement is reached.

“I think it's probably going to end up in several arbitrations across the country,” she said.

State hospital associations do not dispute that the terms of some contracts would allow for payment reductions. “But what we've heard overwhelmingly is that the plans are not looking at the contracts,” said Sarah Lechner, general counsel for the New Jersey Hospital Association.

She added that at least 10 to 15 providers in the state have run into these issues.

In Washington state, the contract disputes have reached the state's Office of the Insurance Commissioner, which is looking into the matter, said Casey Moriarty, a healthcare attorney at Ogden Murphy Wallace.

Hayes-Kibreab said the issue is most significant in states where Medicare Advantage plans have the greatest penetration, such as Florida (34% of beneficiaries) and Arizona (37%). She added that physician groups and post-acute care providers appear to be facing the same issue as hospitals.

For their part, insurers claim the sequestration cuts along with the rate cuts and taxes under the healthcare reform law may force them to scale back their popular Medicare Advantage offerings and benefits.

“The depth of the underfunding of these benefits to seniors is causing us to exit certain market areas, reduce the number of plan offerings and reduce benefits in the majority of the local markets we serve,” UnitedHealth President and CEO Stephen Hemsley said on a second-quarter earnings call.

Aetna said in a 10-Q filing that the reduction to 2014 premiums represents “a meaningful revenue and operating results challenge.”

For the first time since 2011, health insurers will offer fewer Medicare Advantage plans in 2014 than they did the previous year. An analysis from Avalere Health found that the number of plans on offer will decline 5.3% to 2,522, from 2,664.

But the pullback is uneven, being most pronounced in the South and Midwest where about 80% of counties will have fewer plan options. In addition, insurers are replacing broader-network PPOs with HMOs.

“Beneficiaries are in a bit of a panic,” said Margaret Murphy, associate director at the Center for Medicare Advocacy. “That's causing a big disruption for people.”

Still, Murphy argues that insurers' pullback in Medicare Advantage has less do with rate cuts and ACA-related provisions than with their growing interest in the new insurance exchange market created by the ACA. Covering elderly people with chronic conditions is much more difficult and expensive than covering healthy young people.

“There are a lot of low-hanging fruits with the Affordable Care Act creating markets for people who are relatively healthy,” she said.

Follow Beth Kutscher on Twitter: @MHbkutscher