- Major California hospital system Sutter Health is settling whistleblower allegations of risk adjustment fraud for $90 million, the largest False Claims Act settlement against a hospital system for alleged fraud in the Medicare Advantage program.
- The payment, announced by the Department of Justice on Monday to settle allegations of MA fraud over six years, is also the second-largest reported MA fraud settlement ever, according to the whistleblower's legal team.
- The suit, which was filed in 2015, has already been partially resolved. Sutter paid out $30 million in April 2019, but under the follow-on agreement, the Sacramento-based nonprofit will pay an additional $60 million to resolve the allegations. Sutter did not admit fault in the proceedings.
The settlement comes as the government increasingly cracks down on rising fraud in the privately run MA program. In MA, CMS pays plans on a per-member basis, then adjusts payments based on the acuity or severity of their member's health status, as supported by provider data like diagnostic codes.
Generally, the sicker the member, the higher the plan's reimbursement.
But as MA becomes more popular, swelling to a $350 billion market annually covering more than 40% of all Medicare beneficiaries, watchdogs have been reporting higher incidence of fraud and abuse, alleging plans are hiking risk scores to nab higher payments from CMS.
Whistleblower Kathy Ormsby, a risk adjustment factor manager for Sutter, filed a lawsuit in 2015 accusing the operator, through several affiliates including physician group the Palo Alto Medical Foundation, of intentionally submitting inaccurate diagnosis codes that inflated Sutter's MA payments for roughly six years.
The lawsuit also alleged that, once the 24-hospital system became aware of the unsupported diagnosis codes, it didn't identify and delete additional incorrect coding for its beneficiaries.
Under the False Claims Act's whistleblower reward provision, Ormsby can receive anywhere from 15% to 30% of the overall settlement — some $13.5 million to $30 million, according to a statement from her lawyers.
Also as part of the settlement, Sutter has entered into a five-year Corporate Integrity Agreement with HHS Office of the Inspector General. The CIA, among other stipulations, requires Sutter to implement a centralized risk assessment program as part of its compliance program and hire an independent reviewer to annually audit a sample of its MA patients' medical records and diagnoses data, according to the DOJ.
Sutter said it "looks forward to collaborating with OIG over the term of the agreement" in a statement Monday.
"Today's agreements bring closure to a long-running dispute, allowing Sutter to avoid the uncertainty and further expense of protracted litigation, and enabling a constructive relationship with the government as we work together under the CIA," Sutter said.
It's the latest in a spate of high profile clashes between healthcare operators and regulators in the roughly two-decade-old insurance program. Earlier this month, CVS Health reported in a financial filing that HHS OIG is auditing its MA plans, while other insurers that have come under fire in the past year or so with audits, whistleblower lawsuits and major settlements for alleged overbilling include UnitedHealthcare, Cigna, Humana, Anthem and integrated system Kaiser Permanente.
The record $90 million payment comes on the heels of another massive settlement for Sutter, adding to the hit on the system's already stressed bottom line. On Friday, a federal judge approved a whopping $575 million antitrust settlement against the hospital system to settle allegations of price gouging.
The final approval comes nearly two years after Sutter agreed to the sum, and seven after it was first sued by health insurance plans for allegedly using its market power to strongarm employers and insurers during contract negotiations.
As part of the settlement, Sutter has also agreed to stop "all-or-nothing" contracting, allowing payers to contract with some, but not all, of Sutter's facilities. Sutter also denies any mispractice in that suit.
The nonprofit tried to delay payment of the settlement in July 2020, arguing the coronavirus pandemic had created a massive financial strain on the system. A judge denied the request, leading Sutter to account for the settlement in 2019, contributing to the system's $548 million operating loss that year.
And 2020 was only slightly better for Sutter, as — like many of its peers — the system faced plummeting volume during COVID-19, leading to a $321 million operating loss. As a result, Sutter initiated a sweeping review of its finances in March, with CEO Sarah Krevans noting "it will take several years to fully recover" from the financial effects of the pandemic.
As part of that restructuring, Sutter has said it plans to lay off 400 employees this year, in addition to roughly 280 information technology jobs that were cut in April.
A spokesperson for the system declined to answer questions about how this new settlement will affect Sutter's financial performance.