On November 1, 2022, the Centers for Medicare and Medicaid Services (CMS) published notice that it will postpone for another three months the finalization of a methodology to audit Medicare Advantage (MA) diagnosis coding data. The final rule could impact payors and providers in unexpected ways, and could fundamentally alter the economics of MA.

The Upshot

  • CMS proposed a rule in late 2018 that would allow it to recoup MA (e.g. Medicare Part C) payments going all the way back to 2011 under a new auditing methodology. After extended delays, it appears CMS is preparing to finalize this rule in early 2023.
  • The rule, if finalized in a form that includes any of the main components of the proposal, will have significant financial implications for all payors who participate in MA, and by extension, for the providers who care for MA plan beneficiaries.

The Bottom Line

Payors and providers should start preparing now for the arrival in early 2023 of a new CMS auditing regulation.

On November 1, 2022, the Centers for Medicare and Medicaid Services (CMS) published notice in the Federal Register that it will postpone finalization of its risk adjustment data validation (RADV) Audit Rule (the Proposed Rule) until February 1, 2023. The Proposed Rule, which CMS initially published in late 2018, would grant CMS new powers to recoup funds from Medicare Advantage Organizations (MAOs) based on audits that review a sample of diagnosis codes submitted to CMS under a given Medicare Advantage (MA) contract. The Proposed Rule faced heavy opposition by industry stakeholders and has been delayed several times since it was first proposed four years ago, but it appears CMS may now be getting close to finalizing.

Overview of the Existing MA RADV Audit Environment

Under MA, MAOs are paid a capitated rate for each of their beneficiaries. That rate is adjusted based on the actuarially-expected cost to provide care for each patient, which is determined in part based on diagnosis codes that providers and MAOs submit to CMS. Each diagnosis code is assigned a specific actuarially-relevant weight that increases the capitation payment for the beneficiary to whom the code applies. In plain English: MAOs get paid more to cover sicker patients (where sickness is determined according to the diagnosis codes submitted to CMS).  These diagnosis codes are considered accurate when they can be substantiated in the underlying medical records on file with a given patient’s provider. 

The Proposed Rule would establish a methodology for CMS to test the accuracy of the coding data it receives, and to determine the amount of any financial recoupment from MAOs where inaccuracies are found. CMS first issued guidance in 2012 for a methodology to conduct annual RADV audits. Under that guidance, which is still the only final guidance the agency has issued, CMS would audit MA contracts by selecting a sample of beneficiaries in a given contract, reviewing the medical records underlying the diagnosis codes submitted on behalf of those beneficiaries, and then estimating payment error for the full contract by extrapolating the rate of unsupported diagnoses in the sample to the full contract population.

But importantly, before determining a dollar amount to recoup from an MAO as a result of a RADV audit, CMS would first apply a fee-for-service adjuster (FFS Adjuster), a concept that CMS stated would account for differences in documentation standards between fee-for-service Medicare and MA (MAOs have long argued that these differences in documentation standards carry actuarial implications that must be accounted for before CMS can recoup funds from MAOs). The exact mechanism by which the FFS Adjuster would be calculated was left vague, but it was broadly expected to provide a substantial offset against amounts CMS would otherwise have recouped under the methodology it proposed in 2012.

CMS has conducted RADV audits for payment years 2011 through 2013 under the methodology it announced in 2012, but it never published a FFS Adjuster, and has never attempted to make contract-level payment recoveries under the 2012 methodology. That is where things stood until the fall of 2018.

CMS Published a New Rule in 2018 That Proposed to Change the MA Audit Regime

On November 1, 2018, CMS published a new Proposed Rule, in which it proposed to depart from the 2012 audit methodology in a number of significant ways.

First, and perhaps most importantly, CMS proposed to do away with the FFS Adjuster when calculating payment recoupments. By calculating recoupment amounts without first applying the offsetting FFS Adjuster, CMS’s new methodology could dramatically increase any financial recoupments resulting from CMS RADV audits.

Second, CMS proposed to apply its new methodology retroactively, going back as far as payment year 2011. This would be problematic for MAOs, since those years are closed, and in any event were based on actuarial assumptions that would be upended by applying a new audit and payment recoupment standard to those years after the fact.

Third, CMS announced its intention to consider audits of “sub-cohorts” of beneficiaries for whom particular diagnoses were reported. The stated rationale for this approach was that targeting sub-cohorts may allow CMS to base audits on smaller sample sizes, thus enabling CMS to “spread [its] audit resources across a wider range of MA contracts.” Although the significance of this aspect of the Proposed Rule was unclear at the time, an Office of Inspector General (OIG) audit initiative that subsequently came to light (and remains highly active) has brought clarity to what such audits of “sub-cohorts” may look like. More on this below.

Stakeholders across the industry offered vigorous opposition to the proposed rule, resulting first in additional rounds of comments, and then on the eve of CMS’s three-year deadline to finalize the rule, an additional one-year extension (the maximum permitted extension from a previous deadline). Following that extension, CMS’s deadline to finalize the Proposed Rule was November 1, 2022. 

This brings us to the present day.

Deadline Extension Keeps Industry Guessing for Another Three Months

On November 1, 2022, CMS once again extended the deadline to finalize the Proposed Rule. This time, however, it has only taken an extension of three months. CMS probably could have extended the deadline by another year, and the fact that CMS has not availed itself of the maximum permitted extension suggests that its plans to finalize the Proposed Rule may now be taking shape.

It is hard to know why, four years after it initially issued the Proposed Rule, CMS is not now prepared to finalize it. Perhaps agency staff simply need an extra few months to put the finishing touches on the final regulation. Or perhaps politics are a factor, and CMS preferred not to finalize a regulation that could have major implications for the Medicare program one week before the November 8 mid-term elections.

Regardless of the underlying reason, the reality is that this extension will keep MAOs and providers guessing well into next year about whether and how CMS will seek to operationalize contract-wide payment recoupments, including the potential for audits of diagnosis data that MAOs and providers submitted to CMS as far back as 2010.

Practical Considerations in Anticipation of a Final RADV Rule

The outcome of this rulemaking could have widespread implications for payors and providers who participate in Medicare Advantage. Some of the considerations, which stakeholders should seek to address promptly, include those detailed below.

MAOs must submit their annual Part C bids in June 2023, which will set the economics for each of their MA contracts in 2024. This exercise, conducted annually, requires heavy focus from MAO actuaries and other subject matter experts. An MAO’s bid is critically important to its financial performance because the bid determines, in part, the compensation that the MAO receives in the following year to cover its MA beneficiaries. Most MAOs will be well into the effort to prepare bids for the following year by February 2023, when CMS now plans to finalize the rule. Plans should start evaluating the impact that a finalized rule could have on their bidding strategy now: It will be too late to begin that exercise in February. That evaluation is best performed in concert with the legal department, and likely in collaboration with outside counsel and consultants, because the findings of such an evaluation could have legal implications that must be handled with care.

As many MAOs are painfully aware, OIG has initiated an expansive set of its own RADV audits, which were already in process when the Proposed Rule was first issued (see OIG’s Report of its audit of Essence Healthcare, Inc., which was published in April 2019, but notes that audit work was conducted from May 2017 through August 2018). These audits likely reflect the “sub-cohort” audit methodology that CMS referenced in the Proposed Rule, and generally target codes viewed as being at “high risk” of being unsupported by underlying medical records. OIG has published the results of at least nine such “high-risk” audits in 2022 alone. But the finalized OIG audits are just the tip of the iceberg, as audit reports that OIG is publishing now relate to audits that OIG commenced several years ago.  Many more have been initiated since then but have not yet been published. These OIG-driven audits generally conclude with a recommendation that CMS recoup a specified amount (ranging from several million dollars to much higher) from the audited MAO. MAOs undergoing such audits should consider coordinating with counsel and other subject matter experts on how best to object to such findings. This step and others are necessary to prepare for the likelihood that CMS will accept OIG’s recommendation to recoup specified amounts once CMS finalizes the Rule. MAOs who have not yet received an audit notice from OIG have more time than those undergoing an audit. They should use that time to prepare for the likelihood that an OIG or CMS audit notice will eventually be forthcoming.

MAOs should expect increased RADV audit activity once CMS finalizes a new RADV audit methodology. These audits are time consuming and can strain an organization’s resources, as personnel typically dedicated to ordinary-course operations must be diverted to assume audit-related duties. MAOs in particular should take steps to collaborate with providers on medical record retention and access, because (1) obtaining access to medical records is one of the primary logistical challenges in such audits, particularly where an audit is focused on medical records that are several years old, and (2) the ability to retrieve medical records that relate to audited diagnosis codes is directly related to an MAO’s ability to demonstrate that the relevant codes are valid (an auditor will view codes for which no medical record can be retrieved as unsupported).

All MAOs are required annually to attest to the accuracy of the data they have submitted to CMS. These attestations are presented to MAOs as a boiler-plate statement, and many MAOs simply submit them as is. However, such attestations may be the basis for enforcement authorities or a qui tam relator to assert False Claims Act liability against an MAO (this theory of liability is known as the “false attestation” theory). The risk of such suits may be heightened if OIG or other audits are deemed to put MAOs on notice that certain “sub-cohorts” are at heightened risk of coding errors unless MAOs take corrective actions. MAOs should therefore consider qualifying their attestations to align with their operational realities, and should consider evaluating what steps they can take to bolster their defenses in the event of such suits.

Finally, MAOs and providers will need to work out who will pay the cost of any future payment recoupments resulting from these audits. In the first instance, CMS will likely recoup payments that are linked to unsupported diagnoses directly from MAOs. But providers are the original source of those diagnoses, and are responsible for documenting support in their medical records.  Some providers have been in shared savings (and similar) relationships with MAOs, and would have received a share in prior years of the increased premium associated with diagnoses later determined to be unsupported and subject to recoupment. Navigating the question of who should pay for any future CMS recoupments will therefore be a delicate balancing act.

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