A Pennsylvania judge found, on May 6, 2015, that a Medicare Advantage Plan had no right under its participation agreements to pass CMS sequestration reductions through to participating providers. Judge R. Stanton Wettick Jr. in the Allegheny Court of Common Pleas granted summary judgment to a group of hospitals that sued Highmark Inc. and its affiliate Keystone Health Plan West, Inc. for passing along the 2% sequestration payment cut.

Sequestration Background

President Obama issued a sequestration order on March 1, 2013 requiring a series of across-the-board reductions in Federal spending in order to comply with the requirements of Section 251A of the Balanced Budget and Emergency Deficit Control Act. As a result of the President’s order, CMS notified Medicare Advantage (“MA”) plans that payments associated with enrollment periods beginning on or after April 1, 2013 made to MA plans would be reduced by 2%. The reduction was applied to the net capitation payment made to MA plans. The sequestration did not change the calculation of Medicare payment rates, only the net amount Medicare paid for services. CMS did not address whether or not an MA plan could pass through the sequestration cuts to providers, instead stating that whether and how sequestration might affect a MA plan’s payments to its contracted providers are governed by the terms of the contract between the MA plan and the provider. Many MA Plans, like Highmark, passed the reductions through to providers, despite provider objections. The decision of MA plans to pass through along the reduction has led to breach of contract lawsuits and arbitrations across the country. The assessment of arguments concerning whether an MA plan can apply the sequestration reduction to payments made as the result of provider contracts through to the providers is dependent on the specific provisions of the applicable agreements.

The Current Case

The Highmark case centered on whether certain contractual language from a 1999 version of the participation agreement with the hospitals remained in effect. Highmark argued that participation agreement language stating that rates paid by a Highmark health plan to participating hospitals would be recalculated annually “based on the payment received by health plan” from CMS remained in effect and allowed for the recalculation of rates in light of sequestration. However, the language had been removed in subsequent amendments to the agreements and the provisions were superseded. Hallmark argued that the language of the original agreement revived once the term of an amendment ended and was therefore current, but the Judge disagreed. The Judge determined that Highmark was unable to point to a provision that would support the 2% reduction from the amount Highmark was obligated to pay under the provider agreements, granting summary judgment in favor of the hospitals.

The Highmark case re-emphasizes the need for contract by contract review in determining whether or not the sequestration cuts can be passed through. There will be likely be more opinions addressing this issue coming to light in the near future as decisions are issued in pending disputes. This case highlights the importance of clarity in reimbursement terms in participation agreements and of addressing matters such as government cuts and reimbursement model changes up front in order to avoid costly litigation and dispute resolution.

The case in question is referenced above is Butler Healthcare Providers et al. v. Highmark Inc. et al., case number GD-14-016452, in the Allegheny County Court of Common Pleas.