After the market close last Friday CMS released its long-awaited methodology for conducting Risk Adjustment Data Validation (RADV) audits. It’s a critically important document as for years President Obama has threatened in his budgets to recover billions in payments from Medicare Advantage plans. What it shows is that a new era is dawning at CMS, one brought about by the “tipping point” of Medicare Advantage exceeding 25% of all beneficiaries this year. Call it the era of “the open hand and the closed fist.”
First, we have to acknowledge that the RADV methodology clearly reflects the intensive consultation CMS did with industry stakeholders to get their approach right. In a word, where we ended up is great, and CEOs and CFOs across the industry are heaving up sighs of relief this week.
There were four big developments in the announcement. The first: CMS says RADV audits will begin with plan year 2011, not retroactive to 2007, eliminating the four worst years of exposure for the industry as it figured out risk adjustment — documentation is much better today than it was when the system launched in 2007. Essentially, CMS is saying “the sins of the past are absolved.” They didn’t have to do that, and we, hundreds of CFOs, and bankers up and down Wall Street and Madison Avenue are thankful they did. For plans that have already accrued for RADV for 2007-2010, like Aetna, there’s the potential in the accrual for “found money” or a boost to earnings.
Second, CMS is introducing a “Fee-for-Service Adjuster.” This mean the error rate found at individual Medicare Advantage plans will be reduced by the error rate of the traditional Medicare population. This was probably the biggest issue for the industry in the year’s worth of negotiations since the draft methodology was released. Doctors generally suck at coding, regardless of whether a member is in a managed care plan or in traditional Medicare. Initially, CMS intended to compare error rates in managed care to 0, rather than comparing them to an error rate in the traditional Medicare program. If CMS had gone with its original approach, it could be argued that plans were being penalized twice. According to CMS, the estimated error rate at managed care plans is around 11%, down from the 2010 error rate of 14%.
Third, CMS will allow plans to submit multiple medical records to substantiate submitted codes, rather than requiring plans to only submit one best medical record. This will make it easier for plans to provide supporting documentation, as sicker members typically see several physicians, and the documentation from all of the treating physicians is rarely combined into a single medical record. The only disappointment here is that CMS will continue to focus audits on medical records and will still not allow alternative sources of clinical data like prescriptions.
Fourth, the audit results will be extrapolated only to the contract being audited. CMS will first determine the number of beneficiaries who are RADV eligible. The RADV eligible members are then ranked from highest to lowest based on their risk score and divided into three equal groups, with one group having the highest risk scores, another the lowest, and the remaining enrollees in the middle. CMS will then select 201 members to review medical records, with 67 enrollees randomly selected from each of the three cohorts. Plans will then submit medical records for these 201 members to support all the submitted codes. The resulting error rate is then reduced by the fee for service error rate, and the resulting figure is applied across the contract being audited only, not across the plan’s entire book of MA business.
All in all, CMS made a number of concessions in the RADV methodology that they didn’t have to, and which have the effect of significantly mitigating the risk and impact on the plans. They stated they’re only after about $370 million in recoveries in 2012, much lower than the President’s FY 2012 budget anticipated, and equating to about 0.3% of Medicare Advantage revenues, well below Wall Street expectations. RADV wasn’t even mentioned in Obama’s FY 2013 budget. Combine that with more favorable-than-expected draft 2013 rates for Medicare Advantage against the backdrop of the Age of Austerity we’re in, and we see that these are big, important gestures that point to a new era at CMS: “the open hand and the closed fist.” The open hand is that the Administration is now actively working to help plans where it can, especially on matters impacting revenues; the closed fist is the agency’s continued willingness to take action against weak performers and the noncompliant. It’s about as good as it’s gonna get with this gang in the White House.