Recent Suit Highlights Medical Loss Ratio Fraud in Managed Care Programs

A lawsuit filed last week by the U.S. Department of Justice (DOJ) brought attention to a seldom-litigated allegation of fraud against the government: manipulation of a health plan’s medical loss ratio (MLR). In general, an MLR is what percentage of premiums a health plan is legally required to spend on patient care, as opposed to money that pays for certain medical expenses or is taken by the insurer as profit.

MLR requirements are common in systems administered through managed care models, which generally pay premiums based on the demographics and health status of a population (with higher premiums being paid for older and sicker individuals). Medicare Advantage (MA) and many state Medicaid programs, including California’s, which is the subject of the new case, operate on a managed care model. This is in contrast to traditional Medicare, which uses a fee-for-service model, in which claims are paid on a one-by-one basis (e.g., a doctor charges $X for an annual physical and $Y for eye surgery).

Because paying claims generally lowers the amount a health plan in a managed care model can keep in profits, there’s a natural incentive to deny claims. To combat that, the government, which pays for the MA and Medicaid programs, mandates that a certain proportion of the money must be spent on “allowed medical expenses,” to ensure that denials of claims are not lining insurers’ pockets. In most circumstances, insurers must spend 85 percent of premiums on allowed medical expenses, and if a plan spends less than MLR, it owes a rebate back to the government.

In the new suit, the government argues that an insurer, Inland Empire Health Plan, miscalculated its MLR in a scheme to rebate less money to the government than it was legally obligated to. The government alleges that the insurer funneled administrative expenses, such as paying for lawyers, consultants, and IT contractors, through healthcare providers, with the goal of disguising them as medical expenses and not administrative ones (e.g., the plan would give physicians money, account for them as payments for health claims, just for the physicians to pay it to the plan’s consultants). The government alleges that the plan failed to rebate hundreds of millions of dollars through this scheme.

Managed care programs such as MA have been an enforcement priority for years, but allegations have generally fallen into two buckets. First, there is falsely exaggerating the sickliness of the insured population to draw higher premiums from the government. Second, there has been a recent focus on kickbacks between health plans, healthcare providers, and insurance brokers that impact enrollment in the program. Fraud cases concerning trickery around the MLR calculation are not unprecedented, but have been relatively rare.

MLR fraud can be hard to detect without an insider. Plans can commit such fraud by, for example, paying provider claims that should have been denied, making duplicate payments to providers, and/or falsely classifying administrative expenses as medical ones. Uncovering any of these schemes may be impossible without insider information, heightening the need for whistleblowers to come forward.