CMS Issues Proposed Rule to Amend the U.S. Department of Health and Human Services’ Risk Adjustment Data Validation Program
Overview of Proposed Rule
Today, the Centers for Medicare & Medicaid Services (CMS) issued a proposed rule to amend the methodology and other requirements for the U.S. Department of Health and Human Services’ risk adjustment data validation (HHS-RADV) program. HHS-RADV was created to strengthen the integrity of the HHS-operated risk adjustment program by validating the accuracy of data submitted by issuers that is used to calculate the amount of funds transferred among insurers based on the risks of the individuals they enroll. The proposed rule addresses stakeholder feedback and will provide states and issuers with a more stable and predictable regulatory framework, promote program integrity, and foster increased competition.
Background on Risk Adjustment and HHS-RADV Program
The proposed rule announced today builds upon the agency’s ongoing efforts to improve the accuracy and effectiveness of the HHS-operated risk adjustment program, which is critical to maintaining a strong and stable insurance market and encouraging broader issuer participation resulting in more choice for consumers. Since the 2017 benefit year, HHS has operated the risk adjustment program under section 1343 of the Patient Protection and Affordable Care Act on behalf of all states and the District of Columbia.
The risk adjustment program seeks to reduce the incentives for issuers to avoid high-cost, high-risk individuals. It provides payments to health insurance issuers that have higher-than-average risk enrollees, such as those with chronic conditions, which are funded through the collection of charges from issuers that have lower-than-average risk enrollees. Risk adjustment state transfers are calculated separately for the individual non-catastrophic, catastrophic and small group market risk pools within a state.
To ensure the integrity of the risk adjustment program, HHS-RADV helps verify that issuers are providing accurate and complete data for the purposes of risk adjustment transfer calculations. The findings from HHS-RADV are used to adjust issuers’ plan liability risk scores which can result in changes to risk adjustment transfers. This process ensures that risk adjustment transfers reflect verifiable risk differences among issuers, rather than risk score calculations that are based on poor data quality.
Proposed Rule Changes
In response to stakeholder feedback about HHS-RADV, the rule proposes changes to two technical aspects of the HHS-RADV program, the error rate calculation and the application of HHS-RADV results.
Updates to the HHS-RADV error rate calculation: The first proposal is to refine the HHS-RADV error rate calculation, the methodology CMS uses to determine the adjustments to issuers’ previously calculated risk adjustment risk scores and transfers based on HHS-RADV results. This error rate calculation is, in part, based on the issuer’s failure rate, a measure of the issuer’s failure to validate diagnoses and conditions associated with enrollees selected for audit. To avoid making adjustments to risk adjustment transfers for expected variations, HHS-RADV only makes adjustments to an issuer’s risk score when an issuer’s failure rate goes beyond a certain threshold making them an outlier. For 2019 HHS-RADV and beyond, CMS is proposing the following three modifications to the error rate calculation:
- CMS proposes to modify the way that it groups medical conditions in HHS-RADV within the same hierarchical condition category (HCC) coefficient estimation groups in risk adjustment to determine failure rates for those HCCs. This modification seeks to better account for the difficulty in categorizing certain conditions and to, therefore, refine how the error rate calculation measures risk differences within and between condition groupings.
- CMS also proposes changes that would reduce the magnitude of risk score adjustments for issuers close to the threshold used to determine whether an issuer is an outlier. Currently, issuers whose failure rates are not significantly different from issuers just inside the threshold may see significant changes to their risk scores and transfers, creating a “payment cliff” for issuers just outside the threshold. Adjusting the magnitude of risk score adjustments intends to mitigate this effect.
- In addition, CMS proposes to modify the error rate calculation in cases where a negative error rate outlier issuer also has a negative failure rate. Error rate outliers can be either positive or negative. Positive error rates reflect a higher failure rate and negative error rates reflect a lower failure rate. However, low failure rates are not always due to more accurate data submission. A lower failure rate can also be due to not identifying conditions that should have been reported. The proposed rule would refine the error rate calculation to mitigate the impact of adjustments that result from negative error rates driven by these newly found conditions.
These changes are intended to strengthen program integrity by reducing possible incentives for issuers to underreport diagnoses during initial risk adjustment data submission in order to achieve greater financial benefits from HHS-RADV later on. These changes will also promote fairness by ensuring that issuers are not penalized in HHS-RADV when a difference in diagnosis for an enrollee has no effect on risk, as well as by ensuring that issuers that receive adjustments are receiving adjustments in proportion to the errors identified through HHS-RADV.
Application of HHS-RADV Results: The second proposal would apply the HHS-RADV results to adjust the risk scores and transfer amounts for the benefit year being audited. Currently, HHS-RADV generally applies a prospective approach for making adjustments to risk adjustment transfers, meaning HHS-RADV results are used to adjust the subsequent benefit year risk score and transfers. For example, 2017 benefit year HHS-RADV results are generally used to adjust 2018 benefit transfer amounts. This proposed change is intended to address stakeholder concerns about making adjustments to risk scores based on HHS-RADV error rates calculated using prior year data, when an issuer’s risk profile, enrollment, or market participation could change substantially from benefit year to benefit year. It would also promote fairness by avoiding situations where an issuer who newly enters a state market risk pool is subject to HHS-RADV adjustments from a benefit year in which they did not offer plans.
CMS is committed to continuing to monitor and refine the HHS-RADV methodology and program requirements. CMS designed the proposed rule to help improve the predictability of HHS-RADV results, while mitigating the burden to issuers. CMS consulted with stakeholders on policies related to risk adjustment and HHS-RADV and held a series of stakeholder engagement sessions to gather input on potential areas of improvement for the HHS-RADV program. Additionally, based on results from CMS’ first payment year of HHS-RADV, CMS issued a white paper for comment on December 6, 2019, regarding potential changes to the HHS-RADV methodology and program requirements. CMS considered all public input it received through the public comment process on the HHS-RADV white paper, other regulations and formal discussion and correspondence with issuers as the agency developed the policies in this proposed rule.
To view the Proposed Rule, click here: https://www.federalregister.gov/public-inspection/
 For states with merged individual and small group markets, risk adjustment state transfers are calculated separately for the catastrophic and merged (individual non-catastrophic and small group) market risk pools.
 An exception to the current prospective application of HHS-RADV is for exiting issuers, whose HHS-RADV results are applied to the risk scores and transfer amounts for the benefit year being audited.