With so much changing in health insurance regulation, stakeholders might overlook a complicated area with an intimidating name: risk adjustment data validation or RADV. Health plans and providers would be wise to pay attention to this tricky topic. The stakes are high, and federal regulators will be making critical decisions soon.

The Background: Balancing Access, Fairness and Price Stability

To understand RADV, it’s important to know the drivers behind it. The Affordable Care Act (ACA) health insurance reforms that become effective in 2014 have the potential to disrupt the health insurance market. In seeking to expand access to affordable, quality coverage, the ACA deprives insurers of the ability to price their products based on the risk they are assuming when they enroll sick members.

To compensate plans fairly for taking on this added risk—as well as to keep premiums stable—the U.S. Department of Health and Human Services (HHS) is implementing a risk adjustment program for all non-grandfathered commercial health insurance sold in the individual and small employer markets. Other risk adjustment programs, and their resulting RADV issues, are already in place for Medicare Advantage and some state Medicaid managed care programs. Massachusetts is the only state with HHS permission to run its own risk adjustment for commercial health insurance in 2014.

Under risk adjustment, insurers that enroll healthier-than-average individuals will make payments to insurers that enroll sicker-than-average individuals in their state. The goal of these transfers is to keep insurers’ revenue at a similar level to what it would have been had they been allowed to incorporate health risk into their pricing calculations for premiums. The Congressional Budget Office estimates that risk adjustment transfers could total around $10 billion a year nationwide.

The Calculation: Predicting the Average Health Status of Enrollees

In a series of regulations, HHS has explained that risk adjustment transfers will be calculated based on projecting the average health status of each plan’s enrollees. These risk scores will take into account the ages, genders, and documented diagnoses of each plan’s members. For privacy reasons, the scores will be calculated on computers owned by each insurer, not HHS. HHS will receive only the enrollee risk scores, not the underlying diagnosis and demographic data.

This data collection design makes auditing all the more important, particularly given the amount of money at stake. In Medicare Advantage, RADV audits have been controversial, if only because they can result in insurers having to return payments they believed they have earned.

HHS has learned some key lessons about implementing RADV from its Medicare experience. So far, however, it has shared very little about how RADV will operate for commercial health insurance. HHS has revealed that it will calculate an error rate based on the audit results and use that error rate to adjust transfers. To minimize disruption, the error rate will be used only prospectively.

For example, insurers would generate risk scores based on their 2016 experience. HHS then would calculate and invoice risk adjustment transfers in 2017. Simultaneously, HHS would audit the 2016 risk scores and calculate an error rate. It then would apply that error rate to adjust the payments being made on insurers’ 2017 claims experience.

The Audit Process: Two Levels and the Chance for an Appeal

HHS has said that there will be two levels of audits. The first audit will be conducted by an auditor that the insurer hires, with HHS determining the audit sample. The second will be performed by HHS auditors, who will validate the accuracy of the first audit’s results. Insurers who disagree with the audits’ findings have an opportunity to file an administrative appeal.

If Medicare RADV is a guide, the audit process will require insurers to collect medical records from providers, demonstrating that the diagnoses reported are accurate. Providers should be following closely how RADV develops to minimize the burden it poses on them.

The Questions: Many Open Issues Remain, as Discussions Continue

Many questions linger around RADV. How will HHS select the audit samples—and how large will they be? What auditing standards will apply? What appeal rights will insurers have? HHS has already said it will not adjust payments in the initial years as it evaluates the accuracy of risk and error scores. But how soon will HHS begin using the RADV audits to adjust transfers?

This month, HHS is holding a stakeholders’ meeting to discuss these questions with insurers, states and others. After that session, it is expected to release additional information about how RADV will be administered.