Medicare Advantage insurers could be on the hook for billions from audit changes

The CMS wants to make a few dramatic changes to the way it audits Medicare Advantage plans for overpayments, which could leave insurers on the hook for billions of dollars.

In a proposed rule released last week that largely involved expanding telehealth benefits, the CMS said it wants to stop applying a "fee-for-service adjuster" to its audit findings, which historically has been used to ensure traditional Medicare and Advantage plans receive actuarially equivalent payments.

It also warned that it wants to start recouping payments to Medicare Advantage plans based on a methodology it proposed back in 2012. The formula would extrapolate the results of an audit of a sample of enrollees across the entire plan population. Moreover, the CMS wants to apply these changes retroactively going back to 2011. Taken together, the changes could be very expensive and disruptive to Medicare Advantage plans, experts said.

"You're looking at potentially substantially larger recoupments of overpayments to Medicare Advantage plans," said William Horton, a partner at law firm Jones Walker.

In 2017 alone, the CMS estimated it made $14.4 billion in "improper payments" to Advantage plans. It predicted that the changes to the "risk adjustment data validation" audits would result in $1 billion in savings to the Medicare program in 2020, and $381 million each year after.

Health insurers are already pushing back on the changes. Matt Eyles, president and CEO of industry lobbying group America's Health Insurance Plans, said in a statement that "the proposal reverses a long-standing position—held by both the agency and other stakeholders—that the adjuster is legally and actuarially required."

The proposal comes at a time when the CMS and the Justice Department have been stepping up efforts to recover what they consider improper payments to the Medicare Advantage program. The Justice Department took UnitedHealth Group to court for allegedly gaming the Medicare Advantage program, and recently alleged similar claims against Anthem. It is also investigating the risk-adjustment programs at Aetna, Cigna and Humana, though it hasn't alleged any wrongdoing against them.

Jessica Smith, senior vice president of healthcare analytics and risk-adjustment solutions at the Gorman Health Group, said the CMS' proposals are an indication that audits will become stricter and health plans need to be ready.

The CMS has audited Advantage insurers annually for years by comparing the diagnosis codes included in insurance claims to the patient's medical record, but the agency has never been very good at recouping the money, Smith said.

The audits are meant to prevent insurers from exaggerating the medical conditions of their members to collect higher government payments. The CMS' payments to Medicare Advantage insurers are adjusted based on unaudited traditional fee-for-service Medicare costs and individual enrollees' medical diagnoses and demographic information. Essentially, the sicker a patient is, the higher the payments to the plan, giving plans a big incentive to inflate the health status of their members.

In 2012, the CMS published a methodology to calculate a payment error rate from a sample of enrollees from each audited Advantage plan and then extrapolate that error rate across the entire plan. It would then apply the fee-for-service adjuster to account for any errors in the traditional Medicare program data, which are used in Medicare Advantage risk-adjustment. The CMS applied that methodology to audits in 2011, 2012 and 2013, but never finalized the results and never recovered any overpayments using that process.

But now the CMS wants to collect. "The public has a substantial interest in the recoupment of millions of dollars of public money improperly paid to private insurers," it said in the proposed rule. "The public also has a significant interest in providing incentives for those insurers to claim only proper payments in the future, which would be promoted by the recoupment of funds improperly paid in the past."

The CMS suggested that health insurers shouldn't be surprised by the proposal, noting that it "put MA organizations on notice" in 2012 that these changes would be coming. The agency also said it studied the fee-for-service adjuster and found that diagnosis errors in traditional Medicare data don't lead to payment errors in the Advantage program, so it proposed getting rid of the adjuster.

Those findings may call into question a federal judge's decision last month to vacate the "2014 overpayment rule" in a challenge brought by UnitedHealthcare. That rule required Advantage insurers to return overpayments to the government within 60 days of identifying them or they would be considered in violation of the False Claims Act and potentially subject to civil lawsuits, treble damages and additional penalties. But the case's outcome is unlikely to change due to the new rule.

The proposed changes are dramatic and applying them retroactively could be a blow to health insurers' income, Horton said. He predicted health plans have a good shot at winning the fight they are sure to put up over the changes.

"There's a very sound fairness argument that says change (the rules) going forward, and give people a reasonable period to adjust to it; but it's not fair to go back now and say these plans may have to cough up millions of dollars they believe in good faith they were entitled to," Horton said.

This story has been updated to clarify that the CMS estimated it spent $14.4 billion in improper payments, which includes overpayments and underpayments, to Medicare Advantage plans in 2017.