Publisher Health

The Biden administration announced a rule Monday cracking down on Medicare private plans that have overcharged the federal government. The rule calls for a more aggressive approach to how plans are audited in the Medicare Advantage program, which enrolls nearly half of all Medicare beneficiaries.

The administration said it expects to collect as much as $4.7 billion over a decade from its heightened oversight. The rule strengthens the ability of the government to audit plans and recover the overpayments. It is the government’s strongest action against the practices in more than a decade.

At a news conference announcing the change, Xavier Becerra, the health and human services secretary, acknowledged that Medicare had been criticized for not taking a hard enough stand against the plans’ pattern of overcharging. “Today, we are taking some long-overdue steps to move us in the direction of accountability,” he said.

As Medicare Advantage has become increasingly popular with older Americans, he said the agency needed to make sure it was properly overseeing the private plans. “We want to encourage correct reporting across the program,” he said.

Health insurers had lobbied heavily against the policies in the rule, which relate to a system of risk adjustment, and are likely to bring legal action against the government. Mr. Becerra said he could not speculate on any potential litigation, but he emphasized he thought the new rule was ready “for prime time.”

Insurers were upset by the rule. “This rule is unlawful and fatally flawed, and it should have been withdrawn instead of finalized,” said Matt Eyles, president of AHIP, a large insurer trade group, in a statement.

Evidence from government audits, fraud lawsuits and academic analysis has shown that many plans have been systematically overcharging the federal government for years by exaggerating the health problems of their customers to collect extra payments. But the Centers for Medicare and Medicaid Services, which regulates the plans, has been reluctant to tackle the overcharging in the face of industry opposition, technical complexity and the plans’ popularity.

Under current rules, regulators have been closely reviewing a small subset of patient medical records to compare them with billing codes sent to the federal government. Under the new policy, the error rate found in the sample will be extrapolated across all the records in the plans since 2018, a change that would substantially increase the magnitude of possible repayments. Officials said plans owe the government $479 million in overpayments from 2018 alone.

The extrapolation approach was first proposed in 2018 by the Trump administration. Monday’s regulation makes the new audit system final. But the original proposal would not have made the payments retroactive. “It’s appropriate to have extrapolation going forward,” said Seema Verma, who was the C.M.S. administrator when the rule was first proposed in 2018. But she said the retroactive nature of the rule was “extremely unfair and problematic.”

“They’re likely to get sued,” she said

But some industry critics had been calling for Medicare to go even further, applying the broader penalties as far back as 2011, when the audits began.

“At least we’re on the right track now,” said Ted Doolittle, a former senior Medicare official, who said he was disappointed the agency had gone back only to 2018. But he commended federal officials for their decision to extrapolate from the results of the audits.

The rule also does not include a formula adjustment that insurers had asked for, which would have reduced the penalty amounts in some cases. Medicare officials said the change was not necessary.

Medicare Advantage plans have become popular and are expected to cover the majority of Medicare beneficiaries by the end of this year. They often offer customers lower premiums than the government Medicare plan, and they cover additional benefits like dental care. Plans have warned that regulations that reduce payments to the plans could erode their ability to offer such extra benefits.

The plans have become a major profit center for insurance companies. They earn more gross profit on Medicare plans than other types of insurance, according to a study from the Kaiser Family Foundation, a research group unaffiliated with the insurer Kaiser.

In the press call, Dara Corrigan, the C.M.S. director of the center for program integrity, emphasized that even the billions in estimated recoveries from the plans were small compared with the scope of the program. She said the estimated $4.7 billion in recovered overpayments represented one fifth of one percent of federal payments to the plans over the period.

The audits will focus on extra payments the plans receive when they care for patients who have serious health conditions. The extra payments are meant to compensate the companies for the additional costs associated with treating sicker patients, as part of risk adjustment. But identifying additional diagnoses in order to collect the extra payments has become a major strategic goal of industry players, which use software, home health visits and other measures to maximize the number of diagnoses for each patient, evidence has shown.

Three of the five largest insurers in the industry have been accused of fraud by the Justice Department for inflating diagnoses.

Medicare has come under particular criticism for its handling of audits. The audit details were secret until Kaiser Health News was able to review summaries of the examinations from 2011 to 2013 after it settled a three-year Freedom of Information Act lawsuit against the agency last fall. The reporting estimated there were millions of dollars in overpayments that would mean billions of dollars in penalties if they were extrapolated broadly.

Insurance companies have long defended the current system of risk adjustment as essential to making sure health plans do not discriminate against older adults with potentially expensive illnesses. “Risk adjustment is critical in providing broad and equitable access to care for seniors,” said Tim Noel, UnitedHealthcare’s C.E.O. for Medicare and retirement, before the rule was announced.

AHIP warned in a 2019 letter outlining its objections that “seniors and hardworking taxpayers might see higher costs, reduced benefits, and fewer” Medicare Advantage plan options.

The group went on to question whether Medicare officials had the legal authority to extrapolate widespread errors from a limited audit and collect overpayments from mistakes made years before.

The rule was released Monday after the closing of markets. Many of the major insurers are public companies, and investors have been awaiting its release.

“The managed care companies will challenge the rule but, in any event, it’s only a slight negative for the stocks,” said Les Funtleyder, a health care portfolio manager at E Squared, which holds shares of UnitedHealth Group, in an email. “It could have been worse.”