A federal court on Thursday sided with Humana and tossed out the Centers for Medicare & Medicaid Services’ (CMS) controversial RADV Final Rule, which eliminated the Fee-for-Service (FFS) Adjuster and added extrapolation processes beginning with payment year 2018 RADV audits.
Judge Reed O’Connor of the U.S. District Court for the Northern District of Texas on Thursday vacated and remanded the 2023 final rule, which made significant changes to risk adjustment data validation (RADV) audits, CMS’ primary audit and oversight tool for Medicare Advantage program payments.
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His decision means the rule is nullified and no longer in effect.
Humana filed the lawsuit in September 2023, claiming the final rule that adopted a new policy for calculating payment recoveries in Medicare Advantage audits was “arbitrary and capricious” because it reversed the agency’s prior policy on the FFS Adjuster without an adequate explanation. The agency had used the FFS adjuster to compare error rates in original Medicare and Medicare Advantage.
Humana also argued CMS abused its discretion in deciding to apply the new policy retroactively beginning in payment year 2018 because it relied solely on legal justifications that misinterpret the Medicare Statute. The insurer said that the final rule would lead to financial losses in compliance costs caused by changes to its annual bid submissions as well as significant costs from pending and future RADV audits using the new methodology.
CMS uses the audits to verify that the diagnoses that Medicare Advantage plans submit for payment are supported in members’ medical records. Plans receive higher payments for patients who have more serious or chronic conditions. The final rule allowed CMS to recover suspected overpayments from audited Medicare Advantage plans by sampling a small number of enrollees and statistically extrapolating these audit results across a contract’s entire enrollee population. When it released the final rule in January 2023, CMS estimated that the new audit methodology could claw back $4.7 billion in overpayments to Medicare Advantage plans through 2032.
O’Connor found that the Department of Health and Human Services and CMS violated the Administrative Procedure Act of 1946, and it was not harmless. As a result, he vacated the rule.
So far, Humana, CMS, and industry trade groups have yet to comment.
What happens next?
The ruling calls into question CMS’ most recent plans to audit every Medicare Advantage plan each year.
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In May, CMS Administrator Dr. Mehmet Oz said the agency intended to increase its audits from ~60 Medicare Advantage plans a year to all eligible Medicare Advantage plans each year (approximately 550 plans). It also planned to increase the number of records its audits from 35 records per health plan per year to between 35 and 200 records per health plan per year in all newly initiated audits based on the size of the health plan.
CMS said the increase in records will ensure its audit findings are more reliable and can be appropriately extrapolated as allowed under the RADV final rule.
Industry reaction
Industry expert Melissa Newton Smith, founder, senior advisor of the Newton Smith Group called O’Connor’s ruling a “bombshell.”
In a LinkedIn post, she said that every Medicare Advantage plan, risk adjustment vendor owes Humana an enormous debt of gratitude. Although the Trump administration will likely continue to make risk adjustment policy changes, she said it does offer Medicare Advantage plans some optimism.
“As we await news of this administrations' planned changes to other concepts related to Stars, sales, and marketing, it brings some fresh perspective surrounding ’harm’ that CMS use of anything other than Notice-and-Comment rule making could cause, and may signal decreased risk of this administration leveraging Interim Final Rules to change Medicare or MA policy,” she wrote.
Rebecca A. Welling, vice president risk adjustment, Intermountain Health/Select Health, who like Smith will be a speaker at RISE’s upcoming Risk Adjustment Forum, said the implementation of the 2023 RADV Final Rule placed Medicare Advantage organizations in a challenging position, particularly without an allowance for provider billing errors. This conflicted with the traditional Medicare billing process, where payment isn't directly correlated with the diagnosis code attached to the claim. "It was unrealistic to hold Medicare Advantage organizations to a different standard than traditional fee for service," she said.
Industry expert Ana Handshuh, principal of CAT5 Strategies, said the ruling is a reminder that process matters, but it also goes beyond that. "By requiring CMS to adhere to the Administrative Procedure Act, the court made this about fairness, transparency, and predictability. All three are essential in Medicare Advantage. When rules are developed through proper notice-and-comment, health plans are able to price and design benefits with more confidence, and providers can better anticipate the resources needed to care for their patients. Just as importantly, beneficiaries are protected from sudden or retroactive changes that could disrupt their coverage or increase costs," she said.
CMS will no doubt continue to refine its oversight of risk adjustment, but this ruling makes it clear that sustainable policy must be built on transparency, accountability, and balance between regulatory goals and the practical realities of delivering care, Handshuh said. "That balance ultimately benefits everyone: plans, providers, and most importantly, the members we all serve." she said.
Advice for Medicare Advantage plans
In further comment to RISE, Smith said that the ruling should provide plans with a moment to thoughtfully reimagine their approach to Star ratings, Medical Loss Ratio pressures, and larger-scale administrative changes necessary to compliantly compete in the rapidly-evolving Medicare Advantage market.
“Because of the very real financial harms this now-vacated Final Rule caused, substantially every plan was backed into an uncomfortable position of having to over-anchor scarce staff capacity and budget flexibility to shore up their RADV readiness,” she said. “Though this decision likely only delays material Risk Adjustment changes, this pause should allow plan leaders to more thoughtfully tackle the operational needs in Stars, administrative process redesign and care orchestration more quickly.”
Welling, a self-described staunch supporter of RADV audits who recognizes the importance of full compliance, said she advocates for a more balanced approach. "I am hopeful CMS will take a pause and consider the practical challenges Medicare Advantage organizations face, ultimately promoting a fairer and more effective system," she said.
Handshuh said that while this case focused on risk adjustment, the same lessons apply more broadly, whether in Star ratings or other areas of Medicare Advantage policy. "Health plans should remain vigilant that the agency is following the rulemaking process and be prepared to act when they believe it has not," she said.
To learn more about next steps as a result of the ruling, join RISE for The 26th Risk Adjustment Forum, October 21-23, in Tampa, Florida. Click here for the agenda, speakers, and registration information.