CMS Finalizes Long-Awaited RADV Program Rule

Firm Publication

On February 1, the Centers for Medicare & Medicaid Services (CMS) published the Medicare Advantage (MA) Risk Adjustment Data Validation (RADV) Program Final Rule (Final Rule), which will take effect on April 3, 2023. The long-awaited final rule includes major updates to the RADV audit methodology used by CMS to address overpayments to MA plans based on the submission of unsupported risk-adjusting diagnosis codes, which are used to determine payments under MA.

Most notably, the Final Rule: (1) allows CMS to extrapolate RADV audit findings beginning with Payment Year (PY) 2018; and (2) does not include a Fee-For-Service (FFS) adjuster in RADV audits, which was previously contemplated as a method of equalizing payment errors between FFS Medicare and Medicare Part C, and viewed as critical to ensuring actuarial equivalence between traditional and managed Medicare. CMS will not extrapolate RADV audit findings for PYs 2011 through 2017, as originally contemplated. The Final Rule has already received significant industry pushback and is expected to be a target of litigation by MA plans.

Background

The RADV program is CMS’s primary tool for addressing overpayments from Medicare Advantage Organizations (MAOs) and their downstream entities. Through a RADV audit, CMS determines whether diagnosis codes are supported by medical record documentation.

The policies announced in the Final Rule are the culmination of over 20 years of discourse between CMS and the industry over the methodologies and levels of recoupment that are appropriate in the MA context, including the use of extrapolation. Additional context is below.

In 2010, CMS proposed a RADV audit methodology that calculated MA contract-level payment adjustments by extrapolating sample results. The proposal sparked significant concerns about CMS’s use of different auditing standards in the Medicare FFS and MA contexts. Specifically, because Medicare FFS data is used to calculate Part C payments, MA plans feared that failure to audit FFS data for erroneous diagnoses would understate the costs of treating certain conditions resulting in undervalued capitated rates from CMS. To minimize the potential for such an impact, MA plans asked that CMS raise Part C payment rates and/or loosen documentation standards. (The proposed adjustment to rates and/or documentation standards is commonly referred to as a FFS Adjuster.)

In seeming acknowledgment of the fundamental differences between a FFS and capitated model, in 2012, CMS issued a “final methodology” that used both extrapolation and a FFS Adjuster to calculate RADV contract-level payment errors. To date, however, a FFS Adjuster has not been applied to RADV audits.

In 2018, CMS changed course in a proposed rule that would have applied extrapolation to RADV audit findings beginning with PY 2011 and eliminated the use of a FFS Adjuster to RADV audit findings; however, the 2018 rule was never finalized. Simultaneously, federal courts began examining the applicability of a FFS Adjuster in the Part C Overpayment Rule context in UnitedHealthcare Ins. Co. v. Becerra, 16 F.4th 867 (D.C. Cir. August 13, 2021, reissued November 1, 2021), cert. denied, 142 S. Ct. 2851 (U.S. June 21, 2022) (No. 21-1140), with the U.S. Court of Appeals for the District of Columbia Circuit ultimately determining that the actuarial equivalence standard did not apply to MAOs’ obligation to return overpayments. The following years consisted of public notice and comment periods and postponements until CMS issued the newly-published Final Rule.

Extrapolation of RADV Audit Findings

Departing from its 2018 proposed rule, CMS will not, under the Final Rule, apply extrapolation to overpayments identified in RADV audits or audits conducted by the U.S. Department of Health and Human Services, Office of Inspector General (HHS-OIG) for PYs 2011 through 2017. CMS stated it would discuss the collection of non-extrapolated overpayments for these years with MAOs once the rule is effective.

However, the rule contemplates that CMS will extrapolate RADV findings beginning with PY 2018. The Final Rule does not specify extrapolated audit methodologies and to what extent large plans may be disproportionately impacted. In addition, while CMS has stated that it will focus RADV audits on areas at “high risk” of improper payments, it remains to be seen how CMS will interpret which areas are at “high risk” and will therefore become the focus of the extrapolated audit methodology. CMS will not begin recoveries for PY 2018 audits until at least 2025.

The Final Rule also allows CMS to exercise discretion with respect to RADV audits. For example, CMS may decide to proceed with any of the following:

  • Not use extrapolation in certain circumstances (e.g., where the statistical validity of a sample is disturbed due to a loss of medical records in a natural disaster).
  • Recoup overpayments associated only with enrollees in a given sample.
  • Perform a probe sample of RADV reviews without a statistically-valid sample and seek recoupments.

Notwithstanding such discretion, however, CMS expects extrapolation to be the standard practice for its RADV audits beginning in PY 2018.

While it seems the immediate financial impact of the rule will be smaller than expected (because extrapolation will apply beginning with PY 2018, not PY 2011), the prospective and total financial impact could nonetheless be significant. At this point, given the open questions regarding the extrapolation methodology, CMS’s interpretation of “high risk” areas, and the agency’s discretion, MA plans will be required to closely monitor CMS alerts and guidance, as well as legal action related to the Final Rule for further insight.

No Inclusion of a FFS Adjuster

The Final Rule announces that CMS will not apply a FFS Adjuster in its RADV audit methodology. As its support for this change, CMS cites inconsistency between the use of a FFS Adjuster and the aforementioned case UnitedHealthcare Ins. Co. v. Becerra, which addressed a challenge to CMS’s 2014 Overpayment Rule requiring the reporting and returning of “overpayments” under Medicare Part C to CMS within 60 days of identification. Namely, in UnitedHealthcare Ins. Co. v. Becerra, the U.S. Court of Appeals for the District of Columbia Circuit held that the Overpayment Rule’s departure from CMS’s FFS Adjuster policy was not arbitrary and capricious and did not violate the Medicare statute’s “actuarial equivalence” and “same methodology” requirements.

In the Final Rule, CMS claims that the “actuarial equivalence” statutory provision applies only to the risk adjustment methodology CMS uses to make payments to MA plans, not to a plan’s obligation to remit improper payments. CMS argues that it would be unreasonable to read the relevant laws as requiring a reduction in payments to plans while prohibiting CMS from enforcing “documentation requirements” by requiring CMS offset recovery amounts calculated for CMS audits.

Conclusion

The Final Rule will significantly impact MAOs and providers subject to RADV or HHS-OIG audits. CMS suggests it will recover approximately $479 million from MAOs per year beginning with PY 2018, amounting to an estimated recovery of $4.7 billion from MAOs from 2023 through 2032.

Moreover, the Final Rule does not appropriately address the fundamental difference between the FFS and capitated payment models. Medicare FFS data is unaudited and payment is based on the item or service provided, while MAO-submitted diagnosis data is audited and used to determine capitated rates. MA plans have argued for years that FFS and MA rates are incompatible with differing documentation standards used in their respective contexts. CMS’s decision to eliminate the FFS Adjuster may make it more difficult to reconcile that incompatibility and does not put MAOs on a level playing field. The Final Rule also does not acknowledge the open debates about the appropriate coding, documentation, and audit standards to be used during a RADV audit, including the appropriateness of relying on sub-regulatory (here, ICD-10 coding) guidance to sustain an audit finding.

We can expect the industry to engage in litigation to resolve these issues, which will likely take a number of years to resolve. MAOs may also be more likely to exhaust administrative appeal remedies from RADV audits, which could create a backlog and slow the recoupment process.

If you have any questions about the Final Rule or Medicare Advantage matters, please contact the authors.

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Firm Publication

On February 1, the Centers for Medicare & Medicaid Services (CMS) published the Medicare Advantage (MA) Risk Adjustment Data Validation (RADV) Program Final Rule (Final Rule), which will take effect on April 3, 2023. The long-awaited final rule includes major updates to the RADV audit methodology used by CMS to address overpayments to MA plans based on the submission of unsupported risk-adjusting diagnosis codes, which are used to determine payments under MA.

Most notably, the Final Rule: (1) allows CMS to extrapolate RADV audit findings beginning with Payment Year (PY) 2018; and (2) does not include a Fee-For-Service (FFS) adjuster in RADV audits, which was previously contemplated as a method of equalizing payment errors between FFS Medicare and Medicare Part C, and viewed as critical to ensuring actuarial equivalence between traditional and managed Medicare. CMS will not extrapolate RADV audit findings for PYs 2011 through 2017, as originally contemplated. The Final Rule has already received significant industry pushback and is expected to be a target of litigation by MA plans.

Background

The RADV program is CMS’s primary tool for addressing overpayments from Medicare Advantage Organizations (MAOs) and their downstream entities. Through a RADV audit, CMS determines whether diagnosis codes are supported by medical record documentation.

The policies announced in the Final Rule are the culmination of over 20 years of discourse between CMS and the industry over the methodologies and levels of recoupment that are appropriate in the MA context, including the use of extrapolation. Additional context is below.

In 2010, CMS proposed a RADV audit methodology that calculated MA contract-level payment adjustments by extrapolating sample results. The proposal sparked significant concerns about CMS’s use of different auditing standards in the Medicare FFS and MA contexts. Specifically, because Medicare FFS data is used to calculate Part C payments, MA plans feared that failure to audit FFS data for erroneous diagnoses would understate the costs of treating certain conditions resulting in undervalued capitated rates from CMS. To minimize the potential for such an impact, MA plans asked that CMS raise Part C payment rates and/or loosen documentation standards. (The proposed adjustment to rates and/or documentation standards is commonly referred to as a FFS Adjuster.)

In seeming acknowledgment of the fundamental differences between a FFS and capitated model, in 2012, CMS issued a “final methodology” that used both extrapolation and a FFS Adjuster to calculate RADV contract-level payment errors. To date, however, a FFS Adjuster has not been applied to RADV audits.

In 2018, CMS changed course in a proposed rule that would have applied extrapolation to RADV audit findings beginning with PY 2011 and eliminated the use of a FFS Adjuster to RADV audit findings; however, the 2018 rule was never finalized. Simultaneously, federal courts began examining the applicability of a FFS Adjuster in the Part C Overpayment Rule context in UnitedHealthcare Ins. Co. v. Becerra, 16 F.4th 867 (D.C. Cir. August 13, 2021, reissued November 1, 2021), cert. denied, 142 S. Ct. 2851 (U.S. June 21, 2022) (No. 21-1140), with the U.S. Court of Appeals for the District of Columbia Circuit ultimately determining that the actuarial equivalence standard did not apply to MAOs’ obligation to return overpayments. The following years consisted of public notice and comment periods and postponements until CMS issued the newly-published Final Rule.

Extrapolation of RADV Audit Findings

Departing from its 2018 proposed rule, CMS will not, under the Final Rule, apply extrapolation to overpayments identified in RADV audits or audits conducted by the U.S. Department of Health and Human Services, Office of Inspector General (HHS-OIG) for PYs 2011 through 2017. CMS stated it would discuss the collection of non-extrapolated overpayments for these years with MAOs once the rule is effective.

However, the rule contemplates that CMS will extrapolate RADV findings beginning with PY 2018. The Final Rule does not specify extrapolated audit methodologies and to what extent large plans may be disproportionately impacted. In addition, while CMS has stated that it will focus RADV audits on areas at “high risk” of improper payments, it remains to be seen how CMS will interpret which areas are at “high risk” and will therefore become the focus of the extrapolated audit methodology. CMS will not begin recoveries for PY 2018 audits until at least 2025.

The Final Rule also allows CMS to exercise discretion with respect to RADV audits. For example, CMS may decide to proceed with any of the following:

  • Not use extrapolation in certain circumstances (e.g., where the statistical validity of a sample is disturbed due to a loss of medical records in a natural disaster).
  • Recoup overpayments associated only with enrollees in a given sample.
  • Perform a probe sample of RADV reviews without a statistically-valid sample and seek recoupments.

Notwithstanding such discretion, however, CMS expects extrapolation to be the standard practice for its RADV audits beginning in PY 2018.

While it seems the immediate financial impact of the rule will be smaller than expected (because extrapolation will apply beginning with PY 2018, not PY 2011), the prospective and total financial impact could nonetheless be significant. At this point, given the open questions regarding the extrapolation methodology, CMS’s interpretation of “high risk” areas, and the agency’s discretion, MA plans will be required to closely monitor CMS alerts and guidance, as well as legal action related to the Final Rule for further insight.

No Inclusion of a FFS Adjuster

The Final Rule announces that CMS will not apply a FFS Adjuster in its RADV audit methodology. As its support for this change, CMS cites inconsistency between the use of a FFS Adjuster and the aforementioned case UnitedHealthcare Ins. Co. v. Becerra, which addressed a challenge to CMS’s 2014 Overpayment Rule requiring the reporting and returning of “overpayments” under Medicare Part C to CMS within 60 days of identification. Namely, in UnitedHealthcare Ins. Co. v. Becerra, the U.S. Court of Appeals for the District of Columbia Circuit held that the Overpayment Rule’s departure from CMS’s FFS Adjuster policy was not arbitrary and capricious and did not violate the Medicare statute’s “actuarial equivalence” and “same methodology” requirements.

In the Final Rule, CMS claims that the “actuarial equivalence” statutory provision applies only to the risk adjustment methodology CMS uses to make payments to MA plans, not to a plan’s obligation to remit improper payments. CMS argues that it would be unreasonable to read the relevant laws as requiring a reduction in payments to plans while prohibiting CMS from enforcing “documentation requirements” by requiring CMS offset recovery amounts calculated for CMS audits.

Conclusion

The Final Rule will significantly impact MAOs and providers subject to RADV or HHS-OIG audits. CMS suggests it will recover approximately $479 million from MAOs per year beginning with PY 2018, amounting to an estimated recovery of $4.7 billion from MAOs from 2023 through 2032.

Moreover, the Final Rule does not appropriately address the fundamental difference between the FFS and capitated payment models. Medicare FFS data is unaudited and payment is based on the item or service provided, while MAO-submitted diagnosis data is audited and used to determine capitated rates. MA plans have argued for years that FFS and MA rates are incompatible with differing documentation standards used in their respective contexts. CMS’s decision to eliminate the FFS Adjuster may make it more difficult to reconcile that incompatibility and does not put MAOs on a level playing field. The Final Rule also does not acknowledge the open debates about the appropriate coding, documentation, and audit standards to be used during a RADV audit, including the appropriateness of relying on sub-regulatory (here, ICD-10 coding) guidance to sustain an audit finding.

We can expect the industry to engage in litigation to resolve these issues, which will likely take a number of years to resolve. MAOs may also be more likely to exhaust administrative appeal remedies from RADV audits, which could create a backlog and slow the recoupment process.

If you have any questions about the Final Rule or Medicare Advantage matters, please contact the authors.

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