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Medical Loss Ratio (MLR) Fraud

Posted by Dmitry Gorin | Feb 14, 2024

With the advent of the Affordable Care Act (ACA) and many new reporting regulations associated with it, new ways to defraud the government, taxpayers, and others have also arisen. 

Medical Loss Ratio (MLR) fraud is a criminal activity involving manipulating the financial reporting processes within healthcare insurance companies to represent their spending on patient care falsely. MLR fraud takes many forms but typically involves reporting false information to the government, such as about profits or medical costs.

Medical Loss Ratio (MLR) Fraud
Medical Loss Ratio (MLR) fraud means manipulating the financial reporting processes within healthcare.

In other words, the MLS is a financial measurement set by the ACA to encourage health plans to provide quality care to enrollees. Medical Loss Ratio fraud occurs when false information regarding profits or medical costs is reported to the government. 

Notably, whistleblowers are crucial in detecting and preventing Medicare fraud and protecting the healthcare system. Often, they will file a “qui tam” whistleblower lawsuit.

Insurance companies collect premiums from policyholders to pay for their healthcare coverage and overhead costs. However, the ACA requires that most health insurance providers spend at least 80% of their premium income on medical care and improving services, leaving only around 20% for administrative costs. 

Medicare and Medicaid often use private companies to offer benefits through Medicare Advantage Plans, Medicare Part D Plans, and Medicaid Managed Care Plans. To ensure that most of the money that Medicare pays for these plans is spent on services rather than pocketed as administrative or overhead expenses, they require many companies to maintain a minimum Medical Loss Ratio (MLR).

Since reporting MLR often means returning money to the government, some plans may use fraud to avoid their legal obligations. The objective of such fraudulent acts is to deceive regulatory authorities, policyholders, and stakeholders about the true use of premium revenues. If you are charged with MLR fraud and convicted, your organization could face steep fines and potentially imprisonment.

What is the Medical Loss Ratio (MLR)?

The Medical Loss Ratio (MLR) is a metric in the health insurance industry that indicates the percentage of premium revenues an insurance company utilizes towards healthcare and quality improvement activities (as opposed to administrative costs or profits). 

The MLR standard, established by the Affordable Care Act (ACA), mandates that large group plans must spend at least 85% of premiums on healthcare services and activities to improve healthcare quality. 

Individual and small group plans must spend at least 80%. If they fail to meet these thresholds, they are obligated to provide rebates to policyholders. 

Similarly, private insurers participating in government-funded programs such as Medicare Advantage Plans, Medicare Part D Plans, and Medicaid Managed Care Plans must pay the government back a portion of the subsidies received if they fail to meet the minimum MLR standards.

How Does MLR Fraud Occur?

MLR fraud can occur when an insurance provider manipulates data or misreports expenses to appear as if they are meeting these spending requirements when, in fact, they are not. 

Because insurers do not want to pay back premiums, they sometimes engage in a range of deceptive practices aimed at skewing the ratio in favor of the insurer. Some of the most common methods of committing MLR fraud include:

  • Improper Accounting Techniques: This could involve misclassifying administrative costs as medical costs to inflate the MLR.
  • Falsely Inflated Expenses: This involves overstating the amount spent on patient care or quality improvement activities.
  • False Reporting: This includes providing false information to regulatory authorities about the company's MLR.

Other ways medical loss ratio fraud can occur include paying provider claims that should have been denied under Medicare rules and making excessive or duplicate payments to providers. Further, hiding or misallocating revenue from one contract to the next and falsely classifying administrative expenses as claims-related expenses.

Medical loss ratio fraud can be challenging for regulators to detect, so whistleblowers– inside or outside the company – are needed to help stop the fraud.

What Are the Elements of the Offense?

MLR fraud is typically charged as a federal offense under various statutes, including the False Claims Act and the Fraud Enforcement and Recovery Act. To secure a conviction, the prosecution must prove that:

  • The defendant knowingly made a false record or statement.
  • The defendant did so intending to defraud a healthcare benefits program.
  • The false statement or record was material to a fraudulent claim.

In addition to federal laws, specific state laws also govern MLR requirements and fraud.

What are the Consequences of MLR Fraud?

The ramifications of an MLR fraud accusation are severe, encompassing both civil and criminal penalties. Insurers found guilty of MLR fraud could face hefty fines, restitution payments, and, in some cases, criminal sentencing. 

Depending on which statute(s) prosecutors choose to press charges, penalties could include up to $250,000 per offense in fines and up to 10 years in federal prison.

Beyond the immediate legal consequences, there may also be a significant impact on the accused's professional reputation and the potential for losing insurance licenses, which can cripple an insurer's ability to operate.

What are the Defenses Against MLR Fraud Charges?

If accused of MLR fraud, several defenses can be raised, including:

  • Lack of Knowledge or Intent: This defense asserts that the defendant did not knowingly or intentionally commit fraud.
  • Good Faith Mistake: This defense argues that any inaccuracies were due to an honest mistake rather than an intentional act of fraud.
  • Insufficient Evidence: This defense contends that the prosecution has not provided enough evidence to prove beyond a reasonable doubt that the defendant committed MLR fraud.
  • Procedural Errors: This defense focuses on errors in the investigative or prosecutorial process that could undermine the validity of the charges. It could include violating the defendant's rights during the investigation or trial.

Legal defense in MLR fraud cases often involves a detailed analysis of the accused's practices, a comparison with industry standards, and the presentation of evidence to counter the fraud allegations. 

Engaging a federal criminal defense attorney with experience in healthcare law is critical in navigating the complexities of MLR fraud accusations. Contact our law firm for more information. Eisner Gorin LLP has offices in Los Angeles, California.

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About the Author

Dmitry Gorin

Dmitry Gorin is a licensed attorney, who has been involved in criminal trial work and pretrial litigation since 1994. Before becoming partner in Eisner Gorin LLP, Mr. Gorin was a Senior Deputy District Attorney in Los Angeles Courts for more than ten years. As a criminal tri...

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