Health System Challenges Humana Medicare Advantage for Sequestration Reimbursement Reductions

Beginning in April 2013, the Centers for Medicare & Medicaid Services (“CMS”) applied a payment reduction, referred to as sequestration, to the Net Capitation payment (“NCP”) made to health plans, including Medicare Advantage Organizations (“MAOs”). CMS clearly instructed that sequestration did not directly affect or change Medicare rates and fee schedules. Furthermore, CMS directed that contractual agreements between a provider and an MAO govern the impact of sequestration on the provider’s reimbursement from the MAO. Despite the clear instructions from CMS, many MAOs improperly apply the sequestration payment cut to providers with contracts that provide for reimbursement based on Medicare rates and fee schedules. Some providers have identified the reimbursement reductions and subsequently challenged MAOs on their improper practices.

A recent decision from the United States District Court serves as an example of a hospital challenging an MAO for improperly passing the sequestration reduction to the hospital. On August 19, 2015, the United States District Court of the Southern District of Florida (“federal court”) issued an order granting the Plaintiffs’, Baptist Hospital of Miami, Inc. et. al., Motion to Remand the case to Florida state court. Although the case is still pending, the motions and the federal court’s order provide insight into the arguments parties will likely offer in the event a hospital challenges an MAO’s improper reimbursement reductions.

In its complaint, Baptist Hospital of Miami, Inc. et. al. (“Baptist”) alleged that Humana Health Insurance Company of Florida, Inc. et. al (“Humana”) breached the Hospital Participation Agreement (“Participation Agreement”) that Baptist and Humana entered into in November 2001 which also included subsequent amendments, joinders, and addenda. Baptist stated in the complaint that Humana breached the Participation Agreement in three material ways including failing to pay Baptist the proper rate for reimbursement as specified in the Participation Agreement and improperly passing the Medicare sequestration 2 percent payment reduction to Baptist despite the fact that the Participation Agreement based reimbursement on Medicare rates, not payments.

In May 2015, Humana removed the action to federal court and Baptist subsequently moved to remand the action to state court. In its August 19 order, the federal court agreed that the claims raised by Baptist are appropriately addressed in a state court forum and federal court lacks subject matter jurisdiction. In its decision, the federal court disagreed with Humana’s contention that the case should be removed to federal court because Humana was acting as a MAO. The federal court explained its rationale stating,

“…Plaintiffs’ breach of the HPA [Participation Agreement] claim is not brought based on Defendant’s administration of Medicare plans. Instead, Plaintiffs allege that Defendants arbitrarily and unilaterally reduced payments for services by 2% based on CMS’ reduced payments made to MAOs, despite having negotiated rates based on Medicare specific facility rates.” Baptist Hospital of Miami, Inc. et al v. Humana Health Insurance Company of Florida, Inc. et al, Case No: 1:15-cv-220099-UU (August 19, 2015), pgs. 9-10.

The federal court continued that the issue of whether Humana improperly reduced payment to Baptist is governed by the terms of the Participation Agreement and not an issue as to whether Humana properly administered the Medicare plan.

Furthermore, Humana also argued that the case offered a federal question that could only properly be addressed in federal court. Humana based this argument on the contention that the complaint requires the court to determine the proper application of Medicare sequestration reductions and to determine the proper construction and effect of the Medicare sequestration. The court rejected this argument stating the following,

“That is simply not true. As CMS and the Department for Health and Human Services made clear in multiple letters, CMS was “prohibited from interfering in the payment arrangements between MAOs and contracted providers…Thus, whether and how reductions to plan payments due to sequestration might affect an MAO’s payments to its contracted providers are governed by the terms of the contract between the MAO and the provider.” Id. at 11 (internal quotations and references omitted).

Although the merits of the case must still be addressed in state court, the federal court’s order provides insight for providers that believe an MAO has improperly passed the Medicare sequestration to a provider’s reimbursement. The federal court’s order reinforces the clear instructions from CMS that Medicare sequestration does not apply to Medicare Advantage providers directly, and rather, the contractual language between an MAO and a provider will determine whether an MAO may properly reduce reimbursement to providers. Providers should review their contracts with MAOs to determine if the payment reduction violates the contractual terms and whether their contract provides appeal rights to challenge the improper payment reduction. While providers may need to ultimately engage in litigation, similar to Baptist, to enforce the terms of the contract, other MAO contracts may have alternative approaches to resolve the contractual dispute as outlined in their contracts. These may include, for example, alternative dispute resolution processes including arbitration. Providers should carefully review their contractual language in order to take the necessary steps to prevent MAOs from improperly passing the 2 percent Medicare sequestration to the provider’s reimbursement.