Whether Naughty or Nice, Recovery Audit Contractors Are Coming to Medicare Advantage

During the holiday season lull, the Centers for Medicare and Medicaid Services (CMS) issued a weighty document. The agency put out a draft statement of work to procure Recovery Audit Contractors (RACs) for the Medicare Advantage risk adjustment program.

Risk adjustment was built into the Medicare Advantage (MA) program more than a decade ago to fund private plans for the care of particularly sick, frail or otherwise expensive people with Medicare. The program incentivizes MA plans to document the conditions of their members by assigning them multiple diagnosis codes resulting in increased funding. But, along the way, critics have charged that some MA plans have gamed the system by miscoding or even deliberately up-coding the assigned diagnosis codes. Recent whistle-blower law suits and current CMS Risk Adjustment Data Validation (RADV) audits suggest that the government may be paying for codes that lack appropriate underlying evidence.

For almost a decade, RACs have operated in the traditional Medicare program. RACs have recouped at least $2 billion annually from providers over the last several years. But the program remains controversial and CMS recently substantially cut back the number of medical records that could be reviewed during an audit. RACs are fundamentally different from other CMS auditors in two important ways: 1) they get paid on a contingent fee basis, which increases as the amounts recouped for the government increase (fees have been around 10 percent); and 2) they have discretion to extrapolate their findings in an audit sample across the entire claims universe. So a $10,000 finding for a 0.1 percent sample has the potential to generate a near $10 million demand notice. 

The draft statement of work suggests that CMS is moving to replace existing RADV audits with more aggressive RAC RADV audits. The new audits could be comprehensive (examining a sample of all diagnoses codes) or focused on a few specific diagnoses. The agency also signals its intention to greatly increase the total number of audits. According to the statement of work, CMS anticipates going from 30 audits a year (about 5 percent of all MA plans) to having "all MA contracts subject to" either a comprehensive or focused RAC audit.

The Affordable Care Act instructed CMS to build a RAC program into Medicare Advantage, but the agency has not moved to implement this provision until now. An attempt to extrapolate risk adjustment audit results in 2009 ended after the agency's large demand notices induced industry pushback and second guessing from some in Congress. Industry noted that there was no way to recoup extrapolated amounts from its contracted providers years after the contract year in question, and that they should not be at risk for diagnosis errors committed by such providers. Since 2009, some plans have invested significant resources in auditing diagnosis codes submitted by providers in an attempt to mitigate this risk. Meanwhile, the agency has taken steps to improve its operations, including adding an appeals process for MA plans that disagree with the audit results.

Although it will take CMS several months to implement the new audit program, the implications for MA plans are big enough to impact 2017 bids. And MA plans will soon, no doubt, double-check their own internal risk adjustment validation activities.