Medicare Advantage RADV Audits: Final Rule to Invoke Retroactive Rulemaking

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.

Rebate Payments to Plan Enrollees

To the extent the calculation of overpayments under the new standard causes the plan’s medical loss ratio to be out of formula with the Affordable Care Act’s 85/15% requirement, plans would be required to pay unexpected increased rebates to enrollees. The amount of the additional rebate would be calculated using a methodology that was not in place during the audited year, relating to a patient population with different actuarial risks than the current one. The pricing distortions and financial risk triggered by noncompliance with medical loss ratios will be magnified due to the lack of a set timetable for resolving RADV audit disputes and the limited scope of appellate challenges permitted. Although there are deadlines by which the insurers must file requests for appeal or reconsideration of hearing officers’ decisions, the hearing officials’ decisions are not subject to any deadlines, and the final review by the CMS administrator is discretionary and unappealable. It is unlikely that appeals of RADV audits would be exhausted before bids were due for subsequent years or a plan’s medical loss reports were due.

Compounding the uncertainty is the inconsistency between two CMS rules pertaining to RADV audit liabilities. Under the 2023 RADV rule, auditors can recover overpayments from the audit of plan years extending back to 2011. However, the financial reporting side of the RADV audit process limits plan liability. The rule pertaining to the reporting of medical loss ratios—the ratio that moves upward or downward based on RADV audit results—limits adjustments to the period from 2017 forward.

Increased Premiums

If the due date for submitting bids to CMS for the next year’s Medicare Advantage contract and the RADV repayment date fall within the same time frame, the insurer would have no choice but to shift the financial risk of the RADV audit results to Medicare Advantage enrollees in the form of increased premiums. In other words, plan enrollees in 2023 could potentially be required to pay a higher premium based on an obligation relating to a patient pool with different actuarial risks. This practice will result in competitive disadvantages and increased volatility in the marketplace. The obvious impact will be that insurers not audited will be able to submit lower Medicare Advantage bids and will be able to charge enrollees lower premiums, leading to a shift in enrollee participation in plans.

Financial Reporting Issues due to Unexpected Charges to Plan Capital Accounts

Where a RADV obligation is calculated under the new standard and falls due in the middle of a plan year, outside of the bid process, the increased liability cannot be shifted as a cost to enrollees in the form of increased premiums. The plans would have no choice but to account for the increased obligation as an additional charge assessed against plan capital accounts.

The financial obligation arising from overpayments determined as part of the audit process could create unexpected consequences at the state level. Recording those additional liabilities may result in the insurer not maintaining its adjusted state statutory capital and surplus levels within state-defined limits, as set out in the National Association of Insurance Commissioners health risk-based capital report. This could potentially trigger regulatory action resulting from questions about the insurer’s financial solvency.

Conclusion

The Medicare Advantage RADV final rule most certainly will be challenged as retroactive rulemaking. Its significant impact on plan pricing and financial reporting will affect both insurer and plan enrollee decision-making.