Challenges to Medicare Advantage Plans Passing Sequestration Cuts Through to Contracted ProvidersBased on a 2013 memorandum by the Centers for Medicare and Medicaid Services (CMS) clarifying Sequestration payment reductions in the Medicare Advantage Part D and other programs, several healthcare providers have been successfully challenging the reduction in payments to them by Medicare Advantage Plans (MA Plans) based on the "sequestration" reductions by the Medicare program to participating providers.
On April 1, 2013, the Budget Control Act of 2011 passed by congress went into effect, which mandated a reduction in Medicare spending commonly known as "Sequestration." As a result, CMS began a two percent reduction in payments, effective April 1, 2013, to healthcare providers for items and services under Medicare Parts A and B. CMS also applied the two percent Sequestration reduction to the net capitation payments to MA Plans for enrollment periods beginning on April 1, 2013. In turn, many MA Plans passed the Sequestration payment reduction to contracted providers in the form of reduced payment rates. Several MA Plans notified contracted providers by posting notices on their web sites and some sent notices to their contracted providers.
The Sequestration reduction is generally taken from the calculated payment amount owed to providers, after the approved amount is determined and the deductible and coinsurance are applied. Depending on whether a provider accepts assignment, the payment will be issued differently. Generally, the doctor who accepts assignment would apply the normal deductible and copayment to determine the patient's share at the time of the service, but will later receive two percent less than usual from Medicare. All fee-for-service Medicare claim payments are subject to the two percent reduction. There are no exemptions for drugs provided under the fee-for-service program.
In response to questions from providers, CMS issued a Guideline Notice on May 1, 2013 clarifying that Sequestration does not mandate that a two percent reduction of reimbursement to MA Plan contracted providers. The CMS memorandum specifically provides: "Whether and how sequestration might affect an MA Plan's payments to its contracted providers are governed by the terms of the conttract between the MA Plan and the provider." CMS also commented that "MA Plans must follow the prompt pay provisions established in their contracts with providers and to pay providers under the terms of those contracts."
Healthcare providers in Pennsylvania and South Florida have challenged MA Plans in their area on reductions in payment based on the sequestration reductions. In the South Florida case, eleven providers sued Humana claiming the insurer wrongly reduced payments to them in response to the 2013 federal budget cuts based on Sequestration. An initial ruling by a federal judge held in part that Humana's payments to providers were governed by its contracts with those providers, not federal laws or programs. The judge quoted the 2013 CMS memorandum in reaching its conclusion.
In a similar case, a Pennsylvania sate court judge found on May 6, 2015 that a MA Plan had no right under its participation agreements with providers to pass along sequestration reductions to participating providers. A group of hospitals had sued Highmark, Inc. for passing along the two percent sequestration reduction. The judge had determined in response to a motion for summary judgement by the hospitals that Highmark was unable to point to a provision in their current participation agreement that would support the two percent reduction from the amount that Highmark was obligated to pay their participating providers.
Under the reasoning in these cases and the CMS memorandum, if any MA Plan is reducing payments to contracted providers without support in its provider agreements, then the MA Plan would be withholding payments in breach of the provider's existing contract. Pursuant to CMS' standard terms that must be included in MA Plan contracts, providers can demand a refund of such an underpayment and the MA Plan must pay penalties and interest calculated from the date the payment was issued.
Several of the challenges by providers to Sequestration reductions by MA Plans are in arbitration because of the terms in provider agreements. There are also a number of similar cases to the Pennsylvania and South Florida cases working their way through state and federal courts.
These cases remind providers that they should review the terms of their provider agreements with MA Plans to determine whether or not a MA Plan can pass along the Sequestration cuts to them. Although two percent may not seem like a large amount, the Sequestration reductions go through 2021 and can add up to a large sum of reductions depending on whether a physician has a large MA Plan payor mix and the types of services and items a physician practice provides to Medicare Advantage enrollees.