A federal judge in Texas has vacated a rule that would have expanded the government's ability to audit Medicare Advantage plans and claw back billions in alleged overpayments each year.
The rule, finalized in 2023, gave the Centers for Medicare and Medicaid Services (CMS) authority to extrapolate findings from audits of a sample of diagnosis codes across all enrollees of Medicare Advantage insurers. Historically, CMS had recouped overpayments only for diagnoses tied directly to the enrollees included in the sample, according to a report from BestWire.
Billions at stake
CMS has long argued that Medicare Advantage plans generate substantial overbilling compared to traditional Medicare’s fee-for-service model, estimating more than $10 billion in excess payments annually.
Officials said auditing all claims is cost-prohibitive, pointing to one year in which a $50 million audit effort yielded just $4 million in recoveries. Extrapolating results, the agency maintained, is necessary to correct the imbalance.
Insurers push back
Humana Inc. challenged the rule shortly after it was issued, arguing that CMS violated the Administrative Procedure Act (APA). The company said the final rule, which eliminated a fee-for-service adjuster adopted in 2012, was not a logical extension of earlier proposals.
The US District Court for the Northern District of Texas agreed. Judge Reed O’Connor wrote that CMS had not given affected parties fair notice of the change, stating that a proposed rule must “adequately frame the subjects for discussion such that the affected party should have anticipated the agency’s final course.”
Regulatory fallout
For regulators, the ruling underscored the challenges of tightening oversight of Medicare Advantage while balancing cost recovery against administrative and legal hurdles. The CMS has pledged to improve accountability in the program, but the setback may require the agency to revisit its approach or pursue new rulemaking.
The decision also provided a measure of relief to insurers that write Medicare Advantage coverage, which has become a key growth driver for the sector. Nearly half of Medicare beneficiaries are now enrolled in private plans, and the program represents a significant portion of premium revenue for major carriers including Humana, UnitedHealth Group, and CVS Health’s Aetna.
By striking down the extrapolation rule, the court removed a potential financial risk that could have resulted in significant clawbacks and impacted earnings. Analysts have warned that broad-based recovery efforts could have introduced volatility to insurers’ balance sheets and forced changes in underwriting practices.
CMS did not respond to requests for comment.
