Background on Medicare Advantage (MA) Risk Adjustment Data Validation (RADV)

The Centers for Medicare & Medicaid Services (CMS) pays MA plans a capitated amount per member per month on a risk-adjusted basis using the CMS Hierarchical Condition Category (HCC) risk adjustment model. Under the HCC model, CMS determines risk scores based on health status and demographic characteristics. MA enrollee HCCs are assigned based on diagnosis data collected from certain healthcare providers (i.e., hospitals, physicians, and outpatient facilities) and submitted by plans to CMS for payment.

CMS annually selects a subset of plans for audit in a process called risk adjustment data validation (RADV).  Through these audits, CMS seeks to ensure payment integrity by validating the accuracy of the diagnosis codes plans submitted for payment. For each health plan selected for RADV, CMS generates a random sample of enrollees and reviews medical records for the sample to validate their risk scores and the corresponding payments to the plan. CMS estimates payment error by taking the difference between the actual paid amount, based on plans’ submitted diagnoses, and the amount that would have been paid based on RADV-validated diagnoses. The process of applying the error rate of a sample of plan enrollees to the plan membership is known as extrapolation.

Overview of 2012 and 2018 Proposals to Modify the MA RADV Process

Over the last 10 years, policymakers proposed different approaches for when CMS can and should recoup overpayments made to MA plans. In December 2010, CMS proposed a methodology for selecting “a statistically valid sample of enrollees from each audited MA contract and extrapolating from the results of that sample audit to calculate a contract-level payment adjustment.” In February 2012, CMS released a “Notice of Final Payment Error Calculation Methodology for MA RADV Contract Level Audits” (the 2012 Notice).

The methodology described in the 2012 Notice included the sampling framework, extrapolation calculation, and the application of a technical adjustment to account for differences in documentation standards for RADV data and the Fee-For-Service (FFS) data used in the risk adjustment model calibration (known as the FFS Adjuster). The FFS Adjuster represents the level of diagnoses not supported by medical records in FFS but included in the calibration of the risk adjustment model and, by extension, plan payment. The FFS Adjuster sets a permissible level of payment error due to unsupported diagnosis codes and limits RADV audit recovery to payment errors above that level.

In November 2018, CMS published a draft rule (4185-P) that departed, in part, from the methodology outlined in the 2012 Notice. In particular, CMS proposed revising its methodology to exclude the FFS Adjuster in its payment recoupment calculations. To support its proposal, CMS cited an internal study finding “that errors in the FFS claims data do not have a systematic effect on the risk scores calculated by the CMS-HCC risk adjustment model estimation and, therefore, do not have any systematic effect on the payments made to MA organizations.”

Key Issues that May Be Addressed in the Final 2023 MA RADV Rule

CMS will likely release the final MA RADV Rule by February 1. The final rule will set future RADV policy and may address key concerns raised by commenters, including the following:

• Will CMS Move Forward with Eliminating the FFS Adjuster? In its 2018 proposal, CMS reversed its approach on the FFS Adjuster from the 2012 Notice, saying it would not include a FFS Adjuster in the final methodology. CMS based its proposal not to include the adjuster on the results of its internal study. Stakeholders expressed contention with methods used in the study by CMS to determine that no FFS Adjuster was necessary. To the extent that plans may have anticipated costs associated with the 2011–2013 audits, they may have expected use of a FFS Adjuster. Without the application of a FFS Adjuster, recoveries could be quite different than plans anticipated. In addition, the burden on providers could also increase if health plans increase oversight to enforce a zero tolerance for errors in diagnostic coding in medical records and claims, without similar expectations on the Medicare FFS side.
• Will the Changes to RADV Policy Be Applied Retroactively? CMS proposed making changes to regulations retroactively that would allow it to use its new methodology, without a FFS Adjuster, to recover payments from audits conducted for 2011–2013. CMS also asserted its authority to use its discretion to identify different sampling methods and auditing techniques for 2014 and subsequent RADV audits. Some stakeholders believe that CMS’s actions are not in compliance with statute or regulation, citing the statutory requirement for CMS to announce changes to payment methodology in advance of the payment year. Plans may not be prepared to manage the operational or financial burdens associated with retroactive application, since they could not have been aware of those changes as the rule had not yet been in effect.
• Will CMS Move Forward with Its Methodology for Sampling and Extrapolation? CMS asserted its authority to use any statistically sound methodology to conduct audits and to extrapolate results. More specifically, it noted that extrapolation can be applied “based on longstanding case law and best practices from [the Department of Health and Human Services] and other federal agencies.” However, stakeholders posited that CMS did not specify which statutory provision it relied on to extrapolate results.

Potential Impact of the Rule if Finalized as Proposed

Finalizing the rule as proposed has the potential to create disruption for plans and providers, which may, in turn, affect premiums and benefits for MA enrollees. Given the stakes, plans are likely to take legal action to prevent implementation of the rule. While CMS and industry agree on the need for a program to ensure payment integrity, the policy issues are complex, and implementation of proposed changes would likely present numerous challenges. The finalized rule will offer insight into how CMS will address the concerns that stakeholders have raised.

Avalere has deep expertise in RADV and MA plan payment methodologies. To learn more about the potential impact of the final MA RADV Rule on your business, connect with us.