Humana Sues HHS Over Final Rule on RADV Audits of MAOs

The Centers for Medicare & Medicaid Services (CMS) released the Final Rule on risk adjustment data validation (RADV) audits of Medicare Advantage organizations (MAOs) on Jan.0 30, 2023. Humana then sued the U.S. Department of Health and Human Services (HHS) on Sept. 1, arguing that the RADV audits, as newly revised, are not accurate and should not be used.

The RADV program is CMS’s mechanism for validating the accuracy of diagnoses submitted by MAOs for risk adjustment. Arguably, the Medicare Advantage companies receive higher reimbursement rates for more severe diagnoses. The goal of RADV audits is to identify and correct any discrepancies or inaccuracies in the diagnoses reported by MAOs. Inaccurate coding can result in overpayments or underpayments.

A quick summary of the 2023 Rule:
CMS will extrapolate. This Final Rule allows CMS to audit a sample of an MAO’s diagnoses reported for risk adjustment purposes (from 2018 and later) and then use the audit findings to calculate an extrapolated improper payment amount for the MAO’s contract.

This extrapolation technique is controversial for a number of reasons, including whether CMS has the authority to use it in the manner proposed in the Final Rule, and whether it is an actuarially sound method of auditing.

CMS will not apply a fee-for-service (FFS) adjuster in RADV audits to account for any effect of erroneous diagnosis codes in the data from Medicare Parts A and B, which are used to calibrate the MA risk adjustment model.
MAOs will be required to remit improper payments identified during RADV audits in a manner specified by CMS.

Humana’s lawsuit also asks the court to vacate the Final Rule and enjoin CMS from applying it in any audits of the plaintiffs.

The plaintiffs allege that the MA program is based on a foundational bargain that is being threatened by the Final Rule. This bargain is that MAOs agree to provide their enrolled Medicare beneficiaries at least the same level of benefits that the beneficiaries would receive under traditional FFS Medicare, and in turn, CMS agrees to pay the MAOs the same amount that CMS would expect to pay to cover those beneficiaries if they remained in FFS Medicare. This bargain is codified in the statutory mandate of 42 U.S.C. § 1395w-23(a)(1)(C)(i), “to ensure actuarial equivalence.” According to the complaint, the Final Rule breaks this bargain and undermines the financial stability of the MA program.

At the heart of the plaintiffs’ complaint is an allegation that the Final Rule is actuarially unsound. The plaintiffs allege that the Final Rule would use one set of data when setting risk adjustment payment amounts for MAOs and a different set of data in RADV audits.

This disconnect will result in systemic underpayments to MAOs. More specifically, CMS will use reported diagnosis codes when estimating FFS Medicare costs and will use documented diagnosis codes in RADV audits. The complaint includes the following simplified illustration of why these different documentation standards could result in a payment problem:

If CMS were to divide $1,000 of total spending associated with epilepsy among 100 beneficiaries whose doctors report an epilepsy diagnosis code in FFS Medicare claims data, it would calculate an average incremental cost of $10 per beneficiary. But if the agency instead audited those claims against the underlying medical records for those beneficiaries and found that 50 of the diagnosis codes were not documented in the medical records, it would divide the $1,000 in spending associated with epilepsy across only the remaining 50 diagnosis codes, for an average expected incremental cost of $20 per beneficiary.

In other words, according to the plaintiffs, there is a greater number of Medicare beneficiaries who are reported to have a given condition than are documented to have that condition, and using one standard for risk adjustment payments and another for RADV audits is not an actuarially sound methodology unless an adjustment is made to account for this problem.