Insurers Seek Clarification in Penalty Deduction Regs

July 1, 2020

Internal Revenue Service
Room 5203
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044

CC:PA:LPD:PR (REG-104591-18)

Re: Comments on REG-104591-18: Guidance related to Sections 162(f) and 6050X with Respect to Certain Fines, Penalties, and Other Amounts

Dear Sir or Madam:

On January 25, 2019, we, the tax leaders of five of America's largest Medicare Organizations (Anthem, Cigna, CVS Health/Aetna, Humana, and UnitedHealth Group), submitted comments in response to FR Document 2018-19621, regarding transitional guidance under sections 162(f) and 6050X regarding the disallowance of deductions for certain amounts paid to or at the direction of governmental entities and the related reporting requirements imposed on governmental entities receiving such payments (our “Original Comment Letter”). Our Original Comment Letter addressed the potential application of these new tax law provisions to the operation of the Medicare Program, and in particular to certain payments from Medicare Advantage Organizations (“MAOs”) and Part D Sponsors that participate in the Medicare Program to the Centers for Medicare & Medicaid Services (“CMS”), and suggested approaches to avoid systemic problems and unnecessary burdens on CMS as the administrator of the Medicare Program. We were grateful to have the opportunity to further explain our concerns with representatives from the IRS and Treasury in a meeting that took place on April 1, 2019.

After careful review and consideration of the many comments received in response to FR Document 2018-19621 from both taxpayers and governmental agencies, on May 13, 2020, the IRS and Treasury published REG-104591-18, a Notice of Proposed Rulemaking that proposes regulations under section 162(f) and new section 6050X (the “Notice”). We were pleased to see that the Notice generally reflected the principle underlying our Original Comment Letter, namely, that payments made in the ordinary course of business should not be subject to disallowance under Section 162(f) nor to the reporting requirements of Section 6050X.

The Notice requests comments about specific examples of audits, inspections, or reviews conducted in the ordinary course of business that are not investigations or inquiries of potential violations of law intended to fall within the ambit of section 162(f). In response to that request, we resubmit for your consideration a copy of our Original Comment Letter. For all of the reasons therein discussed, we believe that a CMS Risk Adjustment Data Validation (“RADV”) audit is a prime example of an of audit, inspection, or review conducted in the ordinary course of business that is not the investigation or inquiry of a potential violation of law intended to fall within the ambit of section 162(f). We respectfully request the inclusion of such an example in the final regulations under section 162(f).

Although we do not intend to request a public hearing with respect to this comment letter, we would be more than happy to provide additional information at your request. Please contact John Kelly at (952) 936-1252 to address any questions you may have.

Chris LaFollette
Vice President, Tax
Anthem, Inc.

John E. Mimlitz
Vice President — Tax
Cigna Corporation

John P. Kennedy
Senior Vice President and Chief Tax Officer
CVS Health Corporation.

Hank Robinson
Senior Vice President — Tax
Humana Inc.

John W. Kelly
Senior Vice President — Tax
UnitedHealth Group Incorporated

Enclosures:
Original Comment Letter to Mr. Krishna P. Vallabhaneni and Ms. Carolyn Brown, re: Transitional Guidance Under Sections 162(f) and 6050X with Respect to Certain Fines, Penalties, and Other Amounts; OMB No. 1545-New, dated January 25, 2019

---

January 25, 2019

Mr. Krishna P. Vallabhaneni
Acting Tax Legislative Counsel
Office of the Tax Legislative Counsel
Department of the Treasury
1500 Pennsylvania Avenue, NW Room 3044
Washington DC 20220

Ms. Carolyn Brown
Internal Revenue Service
Room 6236
1111 Constitution Avenue, NW
Washington, DC 20224

Re: Transitional Guidance Under Sections 162(f) and 6050X with Respect to Certain Fines, Penalties, and Other Amounts; OMB No. 1545-New

Dear Mr. Vallabhaneni and Ms. Brown:

As the tax leaders of five of America's largest Medicare Organizations (Aetna, Anthem, Cigna, Humana, and UnitedHealth Group), collectively representing over 45% of the American health insurance industry, we are pleased to have the opportunity to submit comments in response to FR Document 2018-19621 regarding transitional guidance under sections 162(f) and 6050X regarding the disallowance of deductions for certain amounts paid to or at the direction of governmental entities and the related reporting requirements imposed on governmental entities receiving such payments.

Our comments address the potential application of these new tax law provisions to the operation of the Medicare Program, and in particular to certain payments from Medicare Advantage Organizations (“MAOs”) and Part D Sponsors that participate in the Medicare Program to the Centers for Medicare & Medicaid Services (“CMS”), and we suggest approaches to avoid systemic problems and unnecessary burdens on CMS as the administrator of the Medicare Program.

1. Medicare Organizations Routinely Return Payments to CMS

Under the Medicare Program, and more specifically under Part C or Medicare Advantage (“MA”) and Part D, CMS makes payments to MAOs and Part D Sponsors to provide healthcare coverage to Medicare beneficiaries. Those payments depend, in part, on diagnosis codes submitted by the MAOs and Part D Sponsors to CMS.

Because of how this payment methodology works, these payments are subject to various types of adjustments. For example, for Part C, in the normal course, diagnosis codes are submitted to MAOs by healthcare providers who rendered medical care to Medicare beneficiaries and the MAOs then submit these and other diagnosis codes to CMS. On occasion, the diagnosis codes are later deleted or otherwise remediated by the healthcare provider, by the MAO, or as part of a routine audit conducted by CMS, known as a Risk Adjustment Data Validation (“RADV”) audit. Once such determinations are made, MAOs will submit data corrections to CMS or engage in other remedial actions. Under the operative CMS data system, the payment associated with the corrected risk adjustment data may be recouped by CMS or returned by the MAO to CMS; if discovered within the context of a RADV audit, the MAO returns the payment in accordance with CMS' RADV audit requirements.

As an initial matter, adjustments such as these diagnosis data changes¹ are nothing more than a necessary part of a continuing government program involving millions of payments annually to MAOs and Part D Sponsors and that they are, therefore, not the type of payments which motivated sections 162(f) and 6050X and the underlying legislative concern over transparency in law enforcement actions and related settlement policies. Thus, as described below, these adjustments are not properly characterized as paid in respect of violations of law and we recommend guidance be issued clarifying that these amounts are not subject to the new requirements of sections 162(f) and 6050X.

2. Payments Resulting from Diagnosis Code Data Changes Submitted to CMS Should Not Be Understood as Addressing “Violations of Law”

However, a prior comment letter may be read incorrectly to suggest that payment adjustments such as diagnosis data changes submitted to CMS are made to address violations of law. Specifically, if made outside of the “applicable reconciliation” period, the funds returned as a result of the diagnosis data corrections described above could, in some situations, constitute “overpayments” within the meaning of 42 C.F.R. 422.326 (“any funds that an MA organization has received or retained under title XVIII of the [Social Security Act] to which the MA organization, after applicable reconciliation, is not entitled under such title.”) or 42 C.F.R.§ 423.360 (“funds that a Part D Sponsor has received or retained under title XVIII of the [Social Security Act] to which the Part D Sponsor, after applicable reconciliation, is not entitled under such title”). The prior comment letter submitted in response to Notice 2018-23, though well-intended, could be read to suggest that all overpayments within this provision constitute payments made to address violations of law. See Letter from Jeffry J. Erney, Partner, Dentons US LLP, to Internal Revenue Service (May 18, 2018).

That conclusion is incorrect for the following reasons:

Absent clear overpayment guidance and an appropriately calculated FFS Adjuster, there currently is no basis for CMS or MAOs to determine with certainty whether an “overpayment” exists under Part C, making it impossible for CMS or MAOs to “identify” instances in which payments resulting from diagnosis code data corrections by an MAO address a violation of the recently vacated overpayment regulation.

Even if overpayments could be “identified” and calculated under Part C, applying sections 162(f) and 6050X to overpayments would impose an untenable burden on CMS, requiring the agency to review each year tens of thousands of transactions and file returns to comply with the information return requirement. Therefore, to the extent that in the future there is a basis for determining that certain payments resulting from diagnosis data corrections submitted to CMS constitute overpayments and, further, are appropriately regarded as addressing violations of law, such payments will, by definition, constitute restitution because there is no penalty or fine included in an overpayment. Accordingly, in order to avoid unnecessarily burdening CMS and MAOs, it would be appropriate for the proposed regulations to treat payments that could only be characterized as restitution if paid under settlement arrangements with CMS as deductible.

3. Annual RADV Audits Are Not “Investigations Of Potential Violations of Law”

As noted above, one way that potentially unsupported diagnosis codes submitted by MAOs to CMS are discovered is through RADV audits for the Part C Program. CMS undertakes two types of RADV audits: “national” audits on an annual basis in which a set of MA Program beneficiaries are randomly selected from across all MAOs participating in the MA program; and “contract” audits for which 30 contracts selected from across all of the participating MAOs are selected for a given contract year, with CMS auditing 201 members from each contract.³ During a RADV audit, CMS reviews medical records to determine whether the hierarchical condition categories (“HCCs”) for the selected members can be validated based on medical record documentation to support a corresponding diagnosis code according to CMS coding and documentation standards. To the extent an HCC is not validated in the audit, CMS may seek to recoup the amount associated with that unsubstantiated condition.

More broadly, however, the purpose of the RADV audits is to calculate and reduce the improper payment rate within the MA Program, not to investigate any wrongdoing or violations of law. As previously stated, CMS acknowledges that unsupported or otherwise erroneous diagnosis codes are present in MA Program data, usually based on good faith errors arising from the complexity of diagnostic criteria and coding standards. See July 31, 2015 letter from Acting CMS Administrator Andrew Slavitt to Chairman of the Committee on the Judiciary Charles Grassley (“It is important to remember that not all improper overpayments are necessarily fraud — improper payments are often caused by insufficient documentation or errors.”). CMS often refers to the unsupported codes in its RADV audits as “discrepant” — not as a violation. Thus, targeted RADV audits are intended to allow CMS to evaluate the rate of unsupported diagnosis codes and adjust payments to that plan accordingly. To this end, the Agency had previously acknowledged that “to determine the final payment recovery amount” in a RADV audit, it must “apply a Fee-for-Service Adjuster (FFS Adjuster) amount as an offset to the preliminary recovery amounts.” CMS, Notice of Final Payment Error Calculation Methodology for [MAO] Risk Adjustment Data Validation Contract-Level Audits at 4 (Feb. 24, 2012), https://www.cms.gov/Research-Statistics-Data-andSystems/Monitoring-Programs/recovery-audit-program-parts-c-and-d/Other-Content-Types/RADV-Docs/RADVMethodology.pdf; see also id. at 5 (“The actual amount of the adjuster will be calculated by CMS based on a RADV-like review of records submitted to support FFS claims data.”). Accordingly, payment errors can only be assessed at the contract level and not at the individual diagnosis code level. Although a newly proposed rule would not apply the FFS Adjuster, the deadline for comments on the proposed rule has not yet elapsed and CMS has not finalized the rule. Indeed, the comment period for the proposed rule has now been extended. In light of the fact that CMS has not finalized a FFS Adjuster as required by the existing policy, CMS has not recovered monies based on RADV audits subsequent to its pilot RADV audits in 2007.

The routine nature of these audits and their purpose are clear evidence that RADV audits are not “investigations of potential violations of law” intended to fall within the ambit of sections 162(f) and 6050X. Moreover, this approach is consistent with avoiding the undue administrative burden that would be imposed on CMS if it were required to fulfill the information return requirement in connection with every diagnosis data change resulting from an annual RADV audit (which covers not only dozens of MAOs but hundreds of conditions) — including both future audits and past audits that the agency has not yet finalized given the lack of a FFS Adjuster.

Given the considerations described above and the confusion among market participants, guidance should be issued to provide the government and insurers with certainty regarding the inapplicability of Code Sections 162(f) and 6050X to payment adjustments from MAOs and Part D Sponsors to CMS, such as those resulting from self-identified diagnosis data changes or RADV audits.

This result could be accomplished by (i) specifying that payment adjustments, such as those described above, are not subject to Code Sections 162(f) or 6050X or (ii) providing that such payment adjustments are presumed, without the need for separate identification or information reporting, to constitute restitution or amounts paid to come into compliance with the law. The guidance suggested in clause (i) would provide greater certainty to CMS and insurers, as well as be more consistent with Code Sections 162(f) and 6050X, given that such payment adjustments are not properly viewed as made in respect of violations of law and, therefore, it is not necessary that the payments represent “restitution” for purposes of Code Section 162(f).

In addition, we believe that, as a general policy matter, guidance should be issued providing exceptions from the scope of Code Sections 162(f) and 6050X for payments made in respect of routine compliance procedures in order to further the public policy of encouraging compliance with laws, especially in instances, such as the present case, where any payment made to the government would, by legal definition, constitute restitution because there are no fines or penalties implicated by the payment and such payment should therefore be deductible as restitution even in the absence of a settlement agreement.

* * * *

We hope that this information is helpful to you in developing proposed regulations or other guidance that avoids unnecessary regulatory burdens for both insurers and CMS. We would like to request a meeting with the relevant IRS personnel to further discuss our concerns. Please contact John Kelly at (952) 936-1252 to discuss scheduling a meeting and to address any questions you may have.

We look forward to meeting with appropriate representatives of the IRS and Treasury to further discuss these approaches to implement sections 162(f) and 6050X in a manner that will continue to allow the MA Program to function as intended and keep healthcare costs affordable for MA Program enrollees.

Melissa B. Pavlovich
Vice President, Corporate Tax
Aetna Inc.

Chris LaFollette
Vice President, Tax
Anthem, Inc.

John E. Mimlitz
Vice President — Tax
Cigna Corporation

Hank Robinson
Senior Vice President — Tax
Humana Inc.

John W. Kelly
Senior Vice President — Tax
UnitedHealth Group Incorporated

cc:
Christopher Wrobel
Attorney
Department of the Treasury
Internal Revenue Service
1111 Constitution Avenue NW.,
Washington, DC 20024
Phone:202 317-4612
Fax:855 576-2336
Email: christopher.wrobel@irscounsel.treas.gov