What’s the Problem?

Sequestration underpayments have been improperly withheld from provider payments by many Medicare Advantage Organizations [MAO] in violation of CMS guidelines that were issued on May 1, 2013.

History of Sequestration Withholding

The Budget Control Act of 2011 [BCA] adopted a methodology, commonly known as “sequestration,” to address Federal program spending after Congress failed to allocate reductions to remain within the approved spending limits. Congress included a provision in the BCA to limit the reduction of spending rates of the Medicare program to no more than 2% per year. These Congressional spending reductions were applied to both payments made directly to providers for Original Medicare services and to the monthly payments made to MAOs. CMS issued guidelines to MAOs to explain if and when the MAO could “pass through” the sequestration withholding to providers based on two factors: (1) participating [par] vs. non-participating [non-par] status and (2) payment terms of the contract.

The CMS Guidelines state that:

1. If a provider is non-par, the MAO may pass the sequestration reduction through to the provider.
2. If the provider is par (i.e. has executed a contract with the MAO), then the MAO must pay the provider in accordance with the terms of the contract.
   1. If the fee schedule in the contract reflects language that the provider will be paid “a percentage of the published Medicare fee schedule,” then all payments must be calculated in accordance with that provision.
   2. If the fee schedule in the contract reflects language allowing the MAO to adjust payments for sequestration, then the payment can be reduced up to 2%. An example of an adjustment provision follows:

Payment to Provider shall be ____% of the current Medicare Allowable net of any adjustments to Medicare payment methodologies, as updated or amended. The final payment amount to Provider shall be reduced in the same manner as the reduction in the final payment amount that CMS is applying to provider payments, e.g., sequestration, pursuant to the Budget Control Act of 2011, or any successor legislation. This provision shall apply for the duration of the time in which sequestration reductions are applied to provider payments.

When MAOs began operating in 2010, most them did not have a contracted provider panel, relying instead on deeming any Medicare provider as “participating.” CMS later changed that approach because Medicare beneficiaries complained about difficulty identifying providers who were willing to accept the new plans. This led to a frenzy for MAOs to formally contract a full panel in 2011 – 2012, which was prior to or concurrent with the enactment of the BCA. Because of that timing, few (if any) MAOs included provisions in the fee schedules for withholding or passing through the sequestration reductions. Sequestration withholding first appeared on EOBs issued in April 2013 when CMS began to apply its sequestration to payments made to MAOs. Vitally, few MAOs bothered to amend their contracts before applying sequestration reductions to provider payments.

What’s the Impact?

Based on a survey conducted by NCMGMA, the sequestration withholding from all MAO payments – excluding Original Medicare – is about $4,000 per year per physician. Providers should be able to determine the amount that has been withheld relatively easily using their practice management [PM] system. The difficult step is recovering the underpayment.

One Solution: Arbitration

Most MAO contracts include standard provisions that prohibit class action suits and restrict civil litigation options to arbitration between the parties. The arbitrator’s decision is then limited to a single question: Has the MAO complied with or breached the payment terms? The CMS Guidelines are in conflict with most MAO arguments about how to interpret a written fee schedule. Some MAOs argue that the payment is “supposed to be a Medicare methodology,” but that was never reduced to writing and made an official part of the contract. If arbitration results in a decision that the terms have been breached, the decision could apply to any underpayments within the standard 3-year period covered by the stature of limitations applied to most business contracts.

So, the remaining question is whether the benefit outweighs the cost of arbitration, which ranges $20-25K per filing per MAO. A solo practice might expect a recovery of about $12K [$4K times 3 years of underpayments] but at a cost of $60K, assuming 3 MAO plans / 3 arbitration cases on average. For a practice with multiple physicians, the calculation to compare recoverable revenue to arbitration costs could be much more favorable.

One point to keep in mind is that after your attorney sends a demand letter to the MAO with the amount of sequestration underpayments, the MAO can choose to resolve the matter with a settlement rather than insist on using the arbitration process. If the provider submits a complete listing of the EOB data [check date, check number, claim number, and underpayment amount], then the MAO can verify the amount being demanded and the supporting documents before opting for arbitration or settlement. My experience is that these demands seldom result in a full arbitration process, and legal costs can be minimized by using one attorney to work on multiple demands.

Final Thoughts

You should know that most state Departments of Insurance take the position that it has no jurisdiction over the MAO as a Federal contractor, the CMS Regional Administrator limits its involvement to beneficiary complaints, and the CMS Division of Payment Validations has failed to monitor MAOs for compliance with their published sequestration guidelines. After contacting each of the agencies responsible for oversight of insurance entities and MAO contractors, I’ve learned that providers are on their own. However, you do have options to fight for your practice and resolve contract breaches if you determine that the financial impact is worth it.

Good news! The most recently approved Congressional budget eliminates the sequestration reductions in the next fiscal year.