On February 1, 2023, the Centers for Medicare and Medicaid Services (“CMS”) will issue its final rule on the method for conducting Medicare Advantage audits and calculating overpayments. As part of its 2023 final rule, CMS will eliminate the application of a fee-for-service adjuster (“FFSA”), which reduced the amount of the extrapolated overpayments determined to be owed in risk adjustment data validation (“RADV”) audits, and replace it with a retroactive method of determining extrapolated overpayments.
The Medicare Advantage RADV final rule raises serious issues as to whether it falls within the narrow circumstances under which retroactive rulemaking applies—that is, whether CMS’s corrective adjustment of costs “is necessary to comply with statutory requirements” or whether “failure to apply the change retroactively would be contrary to the public interest.” The implications for the Medicare Advantage program as a whole are significant. Pricing uncertainties affecting the Medicare Advantage bid process, and the potential negative effect on Medicare Advantage plans’ financial reporting treatment of liabilities, may affect the availability or the cost of plan benefits—and could even potentially affect the decision of insurers to remain in the Medicare Advantage market.
The New Standard: Retroactive Rulemaking
In its prior final rule in 2012, CMS recognized the need to use the FFSA to account “for the fact that the documentation standard used in RADV audits to determine a contract’s payment error (medical records) is different from the documentation standard used to develop the Part C risk-adjustment model (FFS claims).” The FFSA was intended to ensure that the amount due in a RADV audit took into account the difference between audit review standards and the errors resulting from unsupported fee-for-service diagnostic codes, creating a permissible level of payment errors and limiting RADV audit recovery to payment errors above the set level.
In the 2023 final rule, instead of using the FFSA, CMS, through its rulemaking authority, will be using a new substantive standard for the extrapolation of overpayments: authorizing the audit of earlier payment periods extending as far back as the 2011 plan year to recoup amounts paid to insurers in those earlier periods. Thus, the audit methodology imposes retroactive rulemaking, despite the fact that courts have recognized that there is a presumption against statutory retroactivity: “[t]he legal effect of conduct should ordinarily be assessed under the law existing at the time that the conduct took place.“
It remains to be seen whether the 2023 Medicare Advantage rule will meet the narrow circumstances under which retroactive rulemaking is permitted. CMS did not cite any prior regulation or statute as a basis for its retroactive method of extrapolating overpayments in RADV audits. In its final rule, it simply stated that “based on longstanding case law and best practices from HHS [Health and Human Services] and other federal agencies,” it had a right to change the extrapolation methods that are “historically a normal part of auditing practice throughout the Medicare program.”
Effects of New Rule
The retroactive RADV rule will change the standard under which earlier payments were made, creating new financial obligations in the current periods. Due to the elimination of the FFSA factor that offset extrapolated amounts and the resulting increased audit recoveries, the change will create uncertainty in the market in two ways. First, it will affect the plan bid process, as plans will be required to estimate potential rebates or premiums based on increased audit recoveries arising from the retroactive application of a different audit methodology. Second, it will affect the financial reporting treatment associated with higher risk-adjusted liabilities.