A federal judge has vacated a CMS rule that would have allowed the agency to claw back billions of dollars in alleged Medicare Advantage overpayments, siding with Humana in a closely watched legal battle.
On Sept. 25, the U.S. District Court for the Northern District of Texas concluded that CMS’ 2023 final rule eliminating the “fee-for-service adjuster” in MA audits violated procedural requirements under the Administrative Procedure Act.
The dispute traces back to early 2023, when CMS issued its final rule that allowed the agency to extrapolate overpayment findings from a sample of MA enrollees to an entire plan population. At the same time, the rule removed the fee-for-service adjuster, a tool CMS had used since 2012 to account for differences between MA medical records and fee-for-service claims data. The adjuster was intended to ensure “actuarial equivalence” between the two programs. CMS argued in 2023 that the statute’s equivalence requirement did not apply to risk adjustment data validation audits (RADV) and that other coding adjustments made a FFS adjuster unnecessary.
Humana filed suit against HHS later that year, alleging the rule was unlawful, arbitrary and capricious, and improperly applied retroactively to payment year 2018. The insurer warned that eliminating the adjuster could expose it to hundreds of millions in unexpected clawbacks, citing its reliance on CMS’ prior policy for more than a decade.
CMS estimated it could have recovered $4.7 billion in overpayments to MA plans with the new audit methodology. Humana may have had the largest risk from clawbacks among major insurers, with as much as 17% of its 2023 earnings facing scrutiny, or $900 million.
In its decision, the court found that CMS failed to provide fair notice of the rule change during the regulatory process. Specifically, the agency’s rationale that actuarial equivalence does not apply to audits was not a “logical outgrowth” of the proposed rule, which focused instead on concerns of inequity between audited and unaudited plans. The court ruled that this “surprise switch” deprived stakeholders of a meaningful opportunity to comment, making the rule procedurally invalid. The judge rejected the government’s argument that any error was harmless, citing the significant retroactive financial impact on MA plans.
In May, CMS said it would audit every MA plan for potential overpayments annually in what was described as an “aggressive” plan to step up oversight, though plans there have appeared to stall.
