Beware of Your Medicare Advantage Capitated Arrangements – False Claims Act Exposure Lurks in Your Diagnosis Coding

After announcing in December that it would intervene in a qui tam action under the False Claims Act against Sutter Health and Palo Alto Medical Foundation (PAMF), the US Department of Justice filed its complaint-in-intervention in the Northern District of California on March 4, 2019.

The complaint alleges that Sutter Health, a major California health system, and PAMF, its affiliated physician medical foundation, violated the False Claims Act by submitting unsupported diagnosis codes to Medicare Advantage plans to increase Medicare reimbursement. The allegations against Sutter and PAMF are similar to those alleged against DaVita and its former corporate affiliate, HealthCare Partners, a large independent physician association. The DaVita case, also originating out of California, settled in October 2018 for $270 million.

Alleged Liability Under the False Claims Act

In the Sutter/PAMF action, DOJ has asserted that the hospital system and medical foundation violated the False Claims Act by submitting false claims and false statements relating to the Medicare Advantage (MA) program and by “knowingly and improperly avoiding their obligations to repay these overpayments to Medicare.”

For those unaccustomed to the byzantine world of Medicare Advantage reimbursement, here is the government’s theory of False Claims Act liability in a nutshell:

  • CMS contracts with MA Organizations (MAOs) to administer benefits for beneficiaries who chose to participate in the MA program. Payments to MAO’s are made on a capitated (fixed) amount for each beneficiary.

  • The capitated payments may vary, however, based on the health status of the Medicare beneficiary. Sicker beneficiaries earn the MAO higher capitation payments from CMS based on the beneficiaries’ “risk scores.” The risk score, and the higher payment, is calculated, in part, based on the diagnosis code inputted by the beneficiary’s health care provider, sometimes called a “risk adjustment factor” or “RAF.”

  • Health care providers can contract with MAOs to provide services to Medicare beneficiaries on a fee-for-service basis. However, some health care providers, such as Sutter and PAMF, contract with MAOs for capitated arrangements, where they take on financial risk for the care for the patient and, in return, receive a percentage of the capitated payments the MAO receives from CMS.

  • If a health care provider contracts to receive capitated payments from an MAO, the provider’s capitated payments could be impacted by the diagnosis codes submitted by the provider to the MAO. Sicker patients supporting higher diagnosis codes and higher RAFs would lead to higher payments from CMS to the MAO and could also result in greater payments from the MAO to the provider.

  • DOJ contends that the knowing submission of false diagnosis codes by Sutter and PAMF to the MAOs caused the submission of false diagnosis codes by the MAOs to CMS for payment to which the MAOs, Sutter, and PAMF were not entitled. Additionally, DOJ alleges that Sutter and PAMF knowingly retained overpayments from the MAOs as a result of the submission of false diagnosis codes.

The ‘Aggressive Campaign’ for Risk Adjustment Factor Codes

DOJ contends that Sutter and PAMF clearly knew how RAFs impacted Sutter’s and PAMF’s reimbursement, and consequently engaged in a multi-year “aggressive campaign” to increase Sutter’s and PAMF’s risk-adjustment scores. The alleged RAF campaign included (i) creating a physician-led team, supported by coders, to emphasize enhanced RAF diagnosis coding by physicians, (ii) scheduling additional wellness visits for Medicare beneficiaries to identify higher acuity conditions needing treatment, and (iii) prepopulating and auto-flagging potential diagnoses in electronic medical records for physician review. DOJ alleges that the campaign increased Sutter and PAMF revenue by millions of dollars in Medicare reimbursement.

Red Flag Conduct

DOJ contends there were multiple “red flags” that Sutter and PAMF ignored about the legitimacy of their diagnosis coding. The red flags include:

  • Failing Medicare Advantage Organization Audits. DOJ alleges that Sutter and PAMF failed diagnosis code audits conducted by United Health Group and Optum. Provider error rates on the audits ranged between 75 and 90 percent.

  • Ineffective Compliance and Training Programs for Risk Adjustment Coding and Problematic Internal Audit Results. According to the complaint, Sutter and PAMF originally had no compliance training program dedicated to RAF coding. And once Sutter and PAF established such a program, internal reviews showed that patient medical records “were replete with false diagnosis codes.” Internal audits results showed diagnosis error rates between 50-90 percent, leading internal auditors to conclude that millions of dollars of incorrect claims had been submitted for payment to MA plans.

  • Promoting the RAF Campaign / Ignoring Audit Results and Compliance Concerns. DOJ contends that Sutter and PAMF management ignored concerns from physicians and internal auditors that the RAF campaign was potentially causing physicians to input false diagnosis codes in the medical records. DOJ also alleges that – despite the concerns raised by the program – Sutter and PAMF management continued to push aggressive RAF diagnosis coding and discouraged the auditing of diagnosis codes submitted to MA plans.


DOJ’s scrutiny of risk adjustment payments made to MAOs is nothing new. The government is currently investigating MAOs and continues to litigate False Claims Act cases against major insurers, such as United Health Group and Anthem, regarding their risk adjustment payment practices. On the other hand, DOJ’s intervention in the False Claims Act case filed against Sutter and PAMF represents an aggressive foray by DOJ to go after the downstream capitated providers who may also benefit from inflated diagnosis coding. Health care providers who participate in such arrangements would be well-served to review them and determine if they are engaged in conduct that could draw government scrutiny.


Continue Reading