On February 1, the Centers for Medicare & Medicaid Services (CMS) published a final rule strengthening their authority to recover alleged overpayments made to Medicare Advantage plans. The rule formalizes the Medicare Advantage Risk Adjustment Data Validation (RADV), which CMS uses to risk-adjust payments made by CMS to a Medicare Advantage Organization (MAO). While legal challenges to the rule are likely, if the final rule is ultimately upheld as written, CMS estimates that it will result in a recoup of $4.7 billion in purported overpayments to MAOs over the next decade.

When CMS contracts with MAOs to offer Medicare Advantage plans, it must — per Section 1853(a)(1)(C) of the Social Security Act — make payments that are “risk-adjusted” based upon the health status of the enrolled beneficiaries of those MAOs. In general, CMS relies upon patient diagnosis codes submitted by the MAOs to determine the risk adjustment factor it applies. However, CMS and the U.S. Department of Health and Human Services have both conducted audits and found some instances where the medical records do not substantiate the codes.

Under the rule, the results of these RADV audits will be extrapolated to reduce payments made to MAOs. The final rule did not include an adjustment factor — the Medicare Fee-for-Service (FFS) Adjuster — which had been proposed by some MAOs to increase payments due to issues with Medicare FFS data. As most FFS payments are made on the basis of what service is provided (and not the diagnosis code), MAOs argue that CMS’s audit methodology will systematically understate the number and severity of the diagnoses received by their members. CMS rejected the notion that this issue had a systematic effect.

There is a modicum of good news for payors in the final rule: while the proposed rule would have applied the extrapolation methodology dating back to 2011, the final rule limited the retroactive application of the RADV extrapolation methodology to 2018.

This rule — if upheld by the courts — is likely to result in a large reduction in payments to MAOs. It also will result in increased attention by MAOs to the methodologies by which they submit medical diagnoses to CMS for purposes of calculating their risk-adjustment payments.

Troutman Pepper will continue to monitor developments on the rule and provide further updates.