A federal judge has backed UnitedHealthcare's argument that a 2014 Medicare rule designed to recover overpayments to insurers would have wrongly resulted in underpaying the health plans.

As a result, Judge Rosemary Collyer of the U.S. District Court of Washington, D.C., vacated the rule, which she said violated a statutory requirement for actuarial equivalence while also departing from prior government policies.

"The effect of the 2014 overpayment rule, without some kind of adjustment, is that Medicare Advantage insurers will be paid less to provide the same health care coverage to their beneficiaries than [the federal government] itself pays for comparable patients," Collyer wrote in a ruling issued Friday.

Medicare Advantage plans provide and manage benefits for about one-third of all Medicare beneficiaries. UnitedHealthcare, the nation's largest seller of the plans, covered about 4.4 million people with the policies in 2017. The Minnetonka-based company filed the overpayment case against the federal Centers for Medicare and Medicaid Services (CMS) in early 2016.

In a statement, UnitedHealthcare said the ruling "sets an important precedent and affirms the government must apply its actuarial standards equally to Medicare Advantage plans and fee-for-service Medicare."

The plans are one of several key types of coverage sold by the company's Medicare division, which last year posted nearly $66 billion in revenue.

Separately, UnitedHealthcare last year faced two whistleblower lawsuits related to alleged overpayments in Medicare Advantage, although one case was dismissed and the focus of the second case has been narrowed.

Health insurance is provided to most seniors and many disabled Americans through Medicare, which is paid for by taxes and administered by CMS, Collyer wrote. The Medicare statute lets individuals elect to receive Medicare coverage through a private insurance company that sells a Medicare Advantage health plan.

This insurer must provide at least the same coverage as the traditional Medicare program, Collyer wrote, and can make a profit "through efficiencies and other cost-saving methods."

With traditional Medicare, the government pays a fee for every service provided to a beneficiary, whereas Medicare Advantage health plans pay care providers from a budget that comes from per capita payments from the government. These per capita payments are set based on a government analysis of how much care beneficiaries with various diagnoses use in the traditional Medicare program.

Payments to health plans can be increased through so called risk adjustment, which is meant to compensate insurers when they provide coverage for those who use more medical care, but, as Collyer wrote: "This is no straightforward task."

CMS has for years conducted audits that try to identify when health plans have been overpaid based on the data they have submitted to justify risk adjustment payments. In conducting these audits, the government uses diagnosis data from the traditional Medicare program that includes many errors, Collyer wrote, and is adjusted accordingly.

With the new overpayment rule, however, the government would penalize insurers for errors in their diagnostic data, when such problems in traditional Medicare data aren't fixed when establishing payment rates. The distinction "makes an actuarial difference," Collyer wrote.

"The rates at which CMS pays Medicare Advantage insurers are based on flawed data across the millions of people in traditional Medicare," the judge ruled. "Yet the 2014 overpayment rule ignores those flaws when defining an 'overpayment.' "

Collyer added: "CMS sets Medicare Advantage rates based on costs that are presumed, based on traditional Medicare diagnoses codes, to be associated with particular health status information that is not verified in underlying patient records. The same unverified diagnosis is, under the 2014 overpayment rule, treated as an overpayment that must be repaid, thus reducing the reimbursement to a Medicare Advantage insurer while requiring no such reduction in payment under traditional Medicare."