Health Law Scan

The Centers for Medicare & Medicaid Services (CMS) delayed the publication of the final rule on the use of extrapolation and the application of a fee-for-service adjuster (FFS Adjuster) in risk adjustment data validation (RADV) audits of Medicare Advantage organizations (MAOs). The proposed rule was published on November 1, 2018, more than four years ago. With this latest extension, the final rule deadline is now February 1, 2023.

Debate surrounding the FFS Adjuster has been ongoing for more than a decade. Over the years, CMS has changed its position on the necessity of the FFS Adjuster, and the final rule could have a significant impact on the extrapolated repayments to which MAOs are subject.

MAOs are paid a capitated rate (per member per month) for each Medicare-eligible beneficiary they insure. Risk adjustment allows MAOs to receive an increased capitated rate for beneficiaries with certain health conditions. Specifically, CMS uses a risk adjustment model (CMS-HCC model) under which diagnosis codes are assigned to hierarchical categories, each of which has a coefficient that represents that disease’s incremental contribution to overall costs. In other words, providers and MAOs submit beneficiary diagnosis codes that are converted by the model into risk factors that increase the MAOs’ payment for the beneficiary to offset the average expected costs of the individual’s health conditions.

The Medicare statute requires CMS to adjust MAO capitated payments to be actuarially equivalent to base year payments in traditional fee-for-service Medicare. CMS’s discretion to select, and obligation to apply, risk factors to MAO capitated payments is to ensure that MAOs “are paid appropriately for their plan enrollees (that is, less for healthier enrollees and more for less healthy enrollees).” See 70 Fed. Reg. 4588, 4657 (Jan. 28, 2005). Therefore, risk adjustment must achieve actuarial equivalence between the FFS and managed care (i.e., Medicare Advantage) programs.

To ensure the accuracy of risk adjustment payments, CMS conducts RADV audits in which a subset of diagnoses submitted for risk adjustment are reviewed to determine whether they are supported by medical record documentation. MAOs must return to CMS any payments that an audit reveals were based on unsupported diagnoses.

In 2008, CMS expanded the RADV audit program by announcing that it would use audited samples to generate a payment error rate that would be applied across an MAO’s entire contract. Therefore, MAOs would be required to make repayments based on an extrapolated error estimate in addition to repayments for unsupported diagnosis codes identified in the sample. CMS issued a proposed rule to the same effect in 2009 and sought comments in late 2010. Commenters, including the American Academy of Actuaries, objected to the extrapolation.

The risk adjustment model is based on diagnoses and program costs for individuals in traditional Medicare (i.e., FFS claims). CMS uses this claims data to calibrate the risk adjustment model and calculate risk factors, but the data is subject to minimal auditing. This means there are undocumented errors in the FFS data. Commenters argued that by applying an extrapolated payment error rate to an MAO’s entire contract, CMS would effectively have audited all of the MAO’s data. Commenters further argued that, without an adjuster, there would be an actuarial difference in documentation standards between the MAO payments (based on unaudited FFS data) and the RADV standard (based on audited medical records). In other words, it would not be actuarially equivalent to, on the one hand, make payments based on unaudited data and, on the other hand, recoup overpayments based on audited data.

In 2012, CMS responded by proposing to use an FFS Adjuster for RADV audits. The FFS Adjuster would calculate a permissible level of payment error. By applying the FFS Adjuster, MAOs would be liable for repayments only to the extent that their extrapolated payment errors exceeded any offsetting payment error in traditional Medicare. CMS said that it would determine the actual amount of the FFS Adjuster “based on a RADV-like review of records submitted to support FFS claims data.”

In 2018, CMS backtracked by announcing that it had completed its review and found that, while there are significant diagnosis errors in FFS claims, these errors do not lead to systematic payment errors in the Medicare Advantage program. Shortly thereafter, CMS issued a proposed rule that would allow extrapolation in RADV contract-level audits of MAOs starting with payment year 2011 but would not apply an FFS Adjuster to such audit findings. The American Academy of Actuaries requested further transparency because CMS’s documentation did not fully explain the underlying methodology in its study. CMS extended the comment period twice, released the data underlying the study, and finalized all other provisions of the proposed rule except the RADV provisions in 2019. Commenters have criticized the study based on design flaws, alleged inaccurate assumptions and adjustments, and other errors.

On October 21, 2021, CMS extended the timeline for publication of the final report until November 1, 2022, based on the receipt of extensive public comments and delays resulting from the COVID-19 public health emergency. On November 1, 2022, CMS extended the deadline to February 1, 2023, citing the same exceptional circumstances.

The absence of a definitive rule from CMS caused complications in interpreting the Overpayment Rule, which requires MAOs to refund identified overpayments within 60 days, including unsupported diagnosis codes. In 2014, commenters to the Overpayment Rule contended that (given CMS’s announcement that it would use an FFS Adjuster in its RADV audits in the context of extrapolating error rates from a RADV audit to the entire Medicare Advantage plan) an overpayment cannot exist for a particular Medicare Advantage contract unless CMS applies an FFS Adjuster to the entire contract.

In 2018, the US District Court for the District of Columbia, in UnitedHealthcare Insurance Co. v. Azar, held that CMS’s adoption of the 2014 Overpayment Rule without inclusion of the FFS Adjuster constituted an unexplained departure from its prior 2012 policy in which CMS indicated it would use the FFS Adjuster and was thus arbitrary and capricious. The government moved for reconsideration based on new empirical analysis in CMS’s 2018 study, but was denied when the court held that the data underlying that analysis had long been in CMS’s possession but was not litigated and was not persuasive. The court also stated in its 2020 decision:

RADV audits introduce a complication in this payment scheme. RADV audits extrapolate an error rate based on audited data from a Medicare Advantage insurer, but Medicare Advantage payment rates are based on data drawn from traditional Medicare, which is itself unaudited and admittedly prone to some degree of error. This has the effect of making traditional Medicare patients appear healthier, and cost less per diagnosis code, than their Medicare Advantage counterparts.

On appeal in 2022, the DC Circuit reversed the 2018 decision and upheld the Overpayment Rule in UnitedHealthcare Ins. Co. v. Becerra, concluding that “CMS has preliminarily decided not to use an FFS Adjuster for contract-level RADV audits after all.”

Additionally, the DC Circuit held that CMS did not have any obligation to consider the FFS Adjuster in the overpayment-refund context because RADV audits were an error-correction mechanism that was materially distinct from the Overpayment Rule. However, the court did not reach the issue of whether the actuarial-equivalence standard requires an FFS Adjuster for extrapolation of error estimates in RADV audits.

Extrapolation of RADV audit errors has a significant impact on MAOs. In addition, recent enforcement priorities have identified Medicare Advantage risk adjustment practices for priority scrutiny. Whistleblower activity under the False Claims Act’s private citizen provisions with respect to risk adjustment coding is also increasing. MAOs should expect that the rise of managed care and the ramp-up of risk adjustment payments will correlate with increased enforcement.

Although the Department of Health and Human Services Office of Inspector General currently uses extrapolation in its RADV audits of MAOs and does not apply an FFS Adjuster, CMS has not reached a final decision on whether the FFS Adjuster is necessary for extrapolated RADV repayments. It appears that MAOs must wait longer still for much needed clarity in the long-awaited final rule.