The Big Picture
On January 30, the Centers for Medicare & Medicaid Services
(CMS) released a long-awaited final rule addressing
how it will calculate and collect overpayments from Medicare
Advantage (MA) plans arising from risk adjustment errors discovered
through data validation audits.
In the final rule, CMS announces that it will recover excess
premiums paid to MA plans when it finds unsupported or inaccurate
plan-submitted risk adjustment data. CMS will not only recover the
specific premiums associated with a specific error but will also
extrapolate a plan’s error rate across entire cohorts of
beneficiaries, thereby magnifying the potential scope of
recoveries. In a related decision, CMS will not be using an
adjuster to establish equivalence in error rates between MA data
and risk adjustment data reported in the fee-for-service (FFS)
Medicare program. The agency has granted plans some relief,
deciding not to use extrapolation for audits that look back at 2011
through 2017 and beginning the extrapolation-based recoveries for
the audits looking at the 2018 contract year.
The decision is expected to draw significant objection and
litigation challenges from MA plans, which stand to lose
significant funds under the rule. CMS projects that recoveries for
2018 alone will add up to $479 million. There will likely be
downstream impact to providers and vendors who have been delegated
risk or participate in value-based contracts for MA populations,
and who profit based on the performance of the population they
manage. Payments in those arrangements are often tied to premiums,
which may be impacted by closer scrutiny and increased recoveries
based on risk adjustment errors.
Background: Medicare Advantage Risk Adjustment
Payments from CMS to MA plans are risk-adjusted. The monthly
premium CMS pays to an MA plan is increased to account for each
beneficiary’s health status and demographic factors, and the
degree to which those differences are expected to cause increased
medical spending. Through this risk adjustment process, the
Medicare program attempts to minimize the process of “adverse
selection,” under which MA plans avoid sicker beneficiaries
and their higher medical costs.
CMS and the U.S. Department of Health and Human Services Office
of Inspector General (HHS OIG) have increasingly come to view the
risk adjustment program as a “major driver” of improper payments in the
MA program. Out of concern that plans might improperly increase
their payments through risk adjustment, CMS has imposed
requirements for documenting and substantiating beneficiaries’
diagnoses in medical records and claims. Plans must repay funds to
CMS when a diagnosis is found to be erroneous or unsubstantiated,
or face sanctions and suits under the False Claims Act.
Federal regulators have increasingly audited MA plans for errors
in risk adjustment in the past few years. The HHS OIG has been
conducting targeted reviews of individual plans to search
for incorrectly coded diagnoses. CMS’ main effort in this area
is the Risk Adjustment Data Validation (RADV) audit program, dating
back to calendar year (CY) 2011. Under RADV, CMS reviews medical
records from a sample of up to 201 beneficiaries per MA contract
and determines if any of the diagnoses submitted for those
beneficiaries were erroneous.
RADV audits looking back at 2011, 2012, and 2013 have been
conducted but are not yet finalized as CMS has been awaiting this
final rule to determine how it will calculate the final tally of
associated overpayments. The RADV audit looking at 2014 was
launched in 2019, and the 2015 audit, delayed from intended start
by COVID, took place in late 2020.
The issue left unresolved until this final rule is how CMS would
treat the results of RADV audits and to what extent MA plans would
be required to repay CMS for overpayments arising from erroneous
diagnoses uncovered through RADV. Since 2012, CMS has contemplated
extrapolating from the error rate determined in these audits. That
is, rather than reverse and recoup payments associated with
specific members whose diagnoses were erroneous or unsupported, CMS
would recoup a much larger sum from plans on the presumption that
the error rate from that small sample is representative of the
error rate among all diagnoses submitted for all beneficiaries.
This proposal has been hotly contested since its original
announcement. Nonetheless, in 2018, CMS formally issued a proposed
rule under which it stated it intended to move forward with
extrapolation-based recoupment for audits looking back at 2011,
2012, and 2013, and for all future years.
Under the 2018 proposed rule, CMS proposed to extrapolate an
error rate determined through a RADV audit to an entire
contract’s worth of beneficiaries’ diagnoses and recoup
presumed overpayments from plans. It also proposed that it could
instead identify sub-cohorts of beneficiaries within a contract
(such as beneficiaries with a specific diagnosis), identify a
sub-cohort-specific error rate, and apply that error rate
contract-wide to the entire sub-cohort. And it reserved the right,
in all cases, to review individual beneficiary records outside the
RADV process when there is suspicion of error.
A second component of the proposed rule was a CMS decision not
to apply a FFS Adjuster to the extrapolated error rate. The MA risk
adjustment model is based on claims experience and costs observed
in the FFS Medicare program. If the diagnoses submitted by
physicians in that program contain errors, a FFS Adjuster to the
extrapolated RADV error rate could be used to account for that
underlying bias in the MA risk adjustment program. But around the
time of the proposal, CMS released the results of a long-awaited
study and asserted that errors in FFS claims data do not have any
systemic effect on the MA risk adjustment model or payments made to
MA plans. Accordingly, CMS did not propose to make any FFS
adjustments to extrapolated RADV recoveries.
CMS did not immediately finalize the proposals. Instead, it
first extended the comment period and then allowed itself multiple
extensions on the grounds of “exceptional circumstances”
against the usual statutory three-year deadline for publication of
final Medicare rules.
The Final Rule
Extrapolation. In the final rule, CMS announces
that it will extrapolate RADV audit findings to determine
overpayments recoverable from MA plans due to RADV-detected
errors.
CMS is not actually specifying any particular method for
extrapolating. Instead, it will “rely on any statistically
valid method for sampling and extrapolation that is determined to
be well-suited to a particular audit.” This absence of a
specific methodology appears calculated to give CMS flexibility in
applying extrapolation differently in different circumstances, as
CMS notes it “may include applying one or more RADV audit
methodologies for any given RADV audit” or using discretion to
not use extrapolation in a given circumstance. It may also
be a calculated sidestep of commenter criticism of particular
extrapolation methods (such as extrapolation based on sub-cohorts)
and an attempt to avoid legal challenges on the basis of a
particular method’s invalidity. Instead, individual plans will
have to challenge the validity of a specific extrapolation method
used in their own audit.
The extrapolation of RADV audit results applies retroactively
but not so far into the past as originally proposed. The original
proposed rule had indicated CMS would extrapolate results as far
back as those from the RADV audits for 2011. Instead, CMS will only
begin extrapolating with the RADV audit for 2018. For the audits
looking at 2011 through 2017, CMS will collect only enrollee-level
overpayments identified in those audits, or in audits conducted by
the HHS OIG. This delay is justified by CMS based on operational
concerns, such as controlling the number of appeals filed in the
years following this final rule. It may also serve as an olive
branch of sorts to MA plans: Plans need not fear substantial
repayments for errors in the 2011 through 2017
period.1
Any retroactive imposition of extrapolation methods is likely to
invite legal challenge. CMS states that it is “not imposing
additional liabilities, penalties or retroactive application of new
requirements or policy” and is merely recovering improper
payments, but that claim will likely be litigated.
Any extrapolation methodology adopted by CMS for RADV audits
will be focused on plan contracts that, through statistical
modeling, are identified as being at the highest risk for improper
payments.
Once assessed, CMS will recover contract-level payment
adjustments through a lump-sum reduction in the plans’ monthly
payments. CMS indicates that it will now begin sending recovery
notices to plans for individual enrollee-level errors uncovered in
the audits that examined 2011, 2012, and 2013.
FFS Adjuster. CMS is finalizing its proposal
not to apply an FFS Adjuster to RADV audits.
In justifying this decision, CMS leans heavily on its
interpretation of the statutes establishing the MA program.
According to CMS, the statute’s mandate that MA rates have
“actuarial equivalence” to those in FFS is applicable to
rates alone and not to the obligation of an MA plan to report and
return improper payments for diagnoses lacking medical record
support. In so doing, CMS finds support in a recent decision from
the U.S. Court of Appeals for the D.C. Circuit in
UnitedHealthcare Insurance Company v. Becerra, where the
court reached a similar conclusion in the context of False Claims
Act litigation addressing the obligation to report overpayments.
(For more on this decision, see the August 20, 2021, edition of Insights This Week.)
Notably, CMS does not cite its study on coding in FFS
as a basis for its decision and explicitly disclaims dependence on
it as grounds for finalizing the rule. This move may be an attempt
to avoid a “battle of the studies” between CMS and
advocates for an FFS Adjuster.
Footnote
1 CMS estimates the forgone collections for this
period at $683.2 million.
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