On October 26, the Centers for Medicare and Medicaid Services (CMS) issued a notice of proposed rulemaking that would significantly alter the risk adjustment data validation (RADV) methodology that applies to Medicare Advantage (MA) insurers, both going forward and looking back as far as 2011. If adopted, the proposed rule could require MA insurers to collectively repay billions of dollars to CMS.

The proposed rule would revise the MA RADV audit formula promulgated by CMS in 2012. Under the MA program, each MA plan is reimbursed by the government according to the varying health “risk” of its enrollees, as reported by the insurer to CMS. A “RADV audit” is CMS’s annual review of claims submitted by select MA insurers to make sure that submitted diagnosis codes match enrollees’ medical records. If a code is not supported by the medical record, CMS deems the payment improper and can seek to recoup the amount of overpayment.

In 2012, CMS promulgated a RADV audit formula that extrapolated an error rate for each audited MA plan based on the results of an audit involving a sample of plan members. This formula represented a significant change, as CMS had previously required plans to repay only those claims that CMS specifically could not validate. However, the 2012 rule also applied a fee-for-service adjuster (FFS adjuster) that accounted for the effect of erroneous diagnosis codes in the (unaudited) traditional Medicare data, which are used to calculate payments in the MA program. In other words, the FFS adjuster “would calculate a permissible level of payment error . . . and limit RADV audit recovery to payment errors above that level.” CMS applied this formula to its 2011-2013 audits, but it never finalized the audit results nor recovered any overpayments.

Now, in the proposed rule, CMS seeks to apply an extrapolation formula (similar to the one above) without the FFS adjuster to recoup overpayments, and to apply this formula to 2011 and all subsequent years. CMS expects that this proposed rule will allow it to recover $4.5 billion over the next 10 years, including $1 billion in 2020 alone.

Anticipating challenges to the retroactive nature of the proposed rule, CMS suggests it can recoup payments from subsequent years under section 1871(e)(1)(A) of the Social Security Act, which authorizes retroactive rulemaking when it is necessary to comply with a statute or when failure to do so would be contrary to the public interest. CMS also notes that insurers have had notice of this methodology since 2012, and, regardless, they have never been entitled to payments that cannot be validated.

With regard to the FFS adjuster, CMS states that, after the 2012 rule publication, it conducted an “extensive study regarding the presence and impact of diagnosis error in FFS claims data,” finding that diagnosis errors do not lead to systematic payment errors in the MA program. However, CMS further states that, even if it had found that diagnosis errors in the data led to systematic payment errors, “we no longer believe that a RADV-specific payment adjustment would be appropriate.” According to CMS, “if a payment has been made to an MA organization based on a diagnosis code that is not supported by medical record documentation, that entire payment is in error and should be recovered in full, because the payment standard has not been met.”

The proposed rule reflects the government’s growing focus on MA overpayments. The outcome of this proposal will have significant implications for MA insurers subject to the rule and will influence the government’s ability to pursue False Claims Act litigation in this area. Notably, the DOJ is currently pursuing FCA litigation against MA insurers for alleged failure to repay MA overpayments. CMS is accepting comments on the proposed rule through December 31, 2018.