Mark D. Abruzzo, J.D.

Federal and state legislators and enforcement agencies are putting more responsibility for prevention and detection of fraud and abuse on MCOs.

Mark D. Abruzzo, J.D.

In recent years, government law enforcement has stepped up its efforts to uncover fraud and abuse involving managed care organizations. Federal and state legislators are soon expected to follow suit.

Most fraud-and-abuse statutes discourage overutilization and patient referrals based on payment incentives and submission of false claims. As such, the government's historical focus on fraud and abuse has primarily been on fee-for-service providers and delivery systems.

Common areas of fraud on this level have involved improper billing practices — such as billing for services that were never provided or that were provided by unqualified personnel, upcoding, miscoding, unbundling, duplicate billing, billing for services to unqualified recipients, and medically unnecessary services.


These areas of abuse are not relevant in a capitated system.

Under capitation, the focus shifts for MCOs. The government looks for behavioral patterns or actions intended to minimize expenses. Among them are:

  • Incentives to refrain from referring patients to specialists or to limit diagnostic testing or rehabilitative services;
  • Cost-driven utilization review criteria;
  • Utilization rates that are comparatively lower than national standards;
  • Business plans with explicit goals for utilization reduction;
  • Gag orders, unreasonable preauthorization requirements, and routine denial of requested care;
  • Penalization of providers or patients who appeal denials;
  • Unreasonable denials for emergency service claims;
  • Inappropriate use of paraprofessionals;
  • Limitations on provider choice or failure to tender sufficient notice of provider network changes; and
  • Failure to add mandated benefits quickly enough.

Essentially, federal and state legislators and enforcement agencies are seeking to put the responsibility for prevention and detection of fraud and abuse on MCOs.

They will force MCOs to create compliance plans and to consider the importance of compliance in every aspect of operations.


The government is also looking at patterns of behavior designed to maximize revenues. Here are a few:

  • Contract fraud, such as financial and other misrepresentation to regulatory agencies and purchasers of services regarding the adequacy of financing, secondary insurance, financial projections, asset valuation, related-party transactions, and provider reimbursement.
  • Falsification of enrollment, such as inflating numbers through, for example, failure to notify of disenrollment;
  • Coercive marketing practices through, for example, hiding unfavorable outcomes or misrepresenting available services, accessibility of specialists, quality of provider benefits and coverage, and cost of copayments and deductibles;
  • Gifts or payments to induce enrollment in a Medicare MCO; and
  • "Cherry-picking" enrollees by overenrolling healthy people or discouraging sick individuals from signing up.

In 1998, the government settled numerous high-profile investigations of allegations of this kind of behavior.

Health Care Service, for example, allegedly falsified reports used by the Health Care Financing Administration to evaluate its Medicare contract performance. The company paid a whopping $140 million settlement and an additional $4 million in fines to boot. Highmark paid a $38.5 million settlement in the face of allegations that included failure to properly process Medicare claims and obstruction of a government audit. First Priority Health-Blue Cross of Northeastern Pennsylvania paid $250,000 to settle with the government for delaying the addition of HCFA-mandated benefits for its Medicare HMO beneficiaries.

The government also alleged that Mutual of Omaha improperly screened potential HMO enrollees for health risks. The company paid $50,000 to settle. First Option Health of New Jersey, it was alleged, failed to provide sufficient notice of provider network changes to enrollees. It paid a fine of $100,000.

Medicare rules

The Medicare+Choice regulations already require a compliance plan as a prerequisite to participation.

While prevention can take root in the form of compliance planning, the federal detection program will require MCOs to take aggressive measures to disclose patterns of underutilization (which is perceived as the greatest potential problem in government-contracted care). Such measures can include:

  • Demanding and using encounter and utilization data;
  • Scrutinizing member complaints;
  • Reviewing incentive compensation plans and allowing case-mix adjustments;
  • Gauging provider capacity;
  • Checking the utilization of paraprofessionals;
  • Tracking patterns of utilization when stop-loss is triggered or when compensation systems change (i.e., risk versus non-risk); and
  • Studying provider and MCO peer data.

You'll find that MCOs will rewrite provider contracts to detect and prevent fraud and abuse. They will be drafted in anticipation of fraudulent conduct, foreclosing loopholes, and making investigations possible.

They will need to incorporate governmental mandates, ensure provider solvency, allow for MCO access to documents and facilities, and include "self-help" sanctions for noncompliance.

The roles and responsibilities of MCO administrators figure to become increasingly clear as the legal guidelines surrounding managed care become more established. One thing is certain now, however: Managed care organizations are being forced to accept responsibility for their actions that directly or indirectly affect the standard of care that their enrollees receive.

Mark D. Abruzzo, J.D., is a partner in the Berwyn, Pa.-based law firm of Wade, Goldstein, Landau, Abruzzo, Mackarey, & Davidson. He counsels physicians, other health care providers, and other business organizations on all areas of business, corporate, and partnership law.

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