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Medicare Advantage overpayments explained

January 31, 2020

Topics: Quote of the Day

By Richard Kronick
Health Affairs Blog, January 29, 2020

In the Deficit Reduction Act of 2005, Congress gave the Centers for Medicare and Medicaid Services (CMS) the statutory authority and obligation to implement a “coding intensity adjustment” for Medicare Advantage (MA) plans, to adjust for differences in patterns of diagnosis coding between MA and traditional Medicare.

Under both the Obama and Trump administrations, the coding intensity adjustment implemented by CMS has consistently been substantially smaller than justified by the data. The fiscal problem created by inadequate adjustment for coding intensity is large. Under reasonable assumptions about the rate of growth of MA coding, CMS will overpay MA plans by $200 billion over the next decade if the coding intensity adjustment remains at 5.91 percent, its current level.

Why does this overpayment persist? The annual decision about the size of the coding intensity adjustment is made by political appointees at CMS, the Department of Health and Human Services, and the White House, and the political benefits from implementing a smaller than empirically justified coding intensity adjustment far outweigh the potential political gains from protecting the taxpayers and creating a stable and level playing field between MA and traditional Medicare.

The Problem

CMS pays MA plans based on the health status of the beneficiaries who enroll, paying more for older and sicker enrollees and less for younger and healthier enrollees. This “risk adjusted” payment mechanism is intended to encourage MA plans to develop systems of care that are attractive to beneficiaries most in need and to prevent MA plans from profiting by attracting only good risks.

The health status of MA enrollees is measured using diagnostic information submitted by the MA plans themselves. As a result, MA plans have strong incentives to identify and report as many diagnoses as can be supported by the medical record, incentives that are not present in traditional Medicare. Although some MA plans may have used fraudulent strategies to inflate enrollee risk scores, many legitimate strategies are available to MA to increase risk scores.

Discretion For CMS

Recognizing the likelihood that MA plans will report diagnostic information differently than is reported in traditional Medicare, in the Deficit Reduction Act of 2005, Congress gave CMS the authority to implement a “coding intensity adjustment” to adjust for differences in coding patterns between MA and traditional Medicare. In 2010, CMS implemented a 3.41 percent coding intensity adjustment, reducing MA risk scores by that amount. The Affordable Care Act, and subsequently the American Taxpayers Relief Act of 2012, created a schedule of minimum adjustments, starting at 4.71 percent in 2014, increasing to 5.91 percent in 2018.

CMS retained the authority and obligation to implement adjustments larger than the statutory minimum if the data indicated that a larger adjustment was needed. However, it has not yet done so, despite strong evidence that a larger adjustment is needed to compensate for differences between MA and traditional Medicare in coding patterns. The measured risk of MA enrollees relative to traditional Medicare increased from 95.0 percent in 2007 to 106.2 percent in 2015.

MA enrollment grew substantially from 2007 to 2015, and it is theoretically possible that the increase in relative risk reflects real changes in the relative health of MA enrollees. However, analyses of other data sources—including mortality rates, survey data from the Medicare Current Beneficiary Survey, data on switchers from traditional Medicare to MA, and prescription drug use data—show conclusively that there was little, if any, change in real relative risk over this time period. The 11-percentage-point increase in measured relative risk from 2007 to 2015 appears largely to be the result of differences in coding patterns between MA and traditional Medicare.

Perverse Political Incentives

The main reason that CMS has not implemented a larger coding intensity adjustment is that there is little political gain from doing so, and the decision about the coding intensity adjustment is, ultimately, made by political appointees. If CMS were to implement an adjustment that is larger than the statutory minimum, MA plans would make their displeasure known to members of Congress. Furthermore, an adjustment larger than the statutory minimum might result in higher MA premiums or fewer extra benefits for enrollees, raising the likelihood of constituent dissatisfaction.

In even numbered years, information on MA premiums and benefits is made public soon before the November elections. Members of Congress (and, every four years, the president) are concerned that voters, likely encouraged by information fed to them by MA plans, may blame incumbents for increased premiums or reduced benefits. This is not a merely theoretical argument: Federal legislators have repeatedly exerted strong bipartisan pressure on CMS in response to industry and constituent concerns about MA payment policy.

The political cost of more aggressive action by CMS on coding intensity is clear. The political benefits are much less clear: The deficit would be slightly smaller but not enough to change interest rates or anything else that voters would notice. Given this imbalance between political costs and benefits, it is not surprising that CMS has stuck with the statutory minimum, despite strong evidence that larger adjustments are warranted.

A Better, More Practical Approach

An alternative, and, in my view, preferable approach would be to require CMS to calculate the coding intensity adjustment using a method that CMS floated as a trial balloon in the Advance Notice for 2016 MA rates.

(For details, use the link below.)

Summing Up

Under reasonably conservative assumptions about the rate of growth of coding intensity, using the budget neutrality method to calculate coding intensity would likely result in approximately $200 billion in savings to Medicare over the next decade compared to current policy in which the coding intensity adjustment remains at 5.91 percent. Just as CMS is reluctant to anger the MA industry and its enrollees, members of Congress will be reluctant as well. However, unlike CMS, which does not get to spend any of the savings generated by more appropriate actions on coding intensity, Congress can choose to use the $200 billion in savings for additional spending or tax cuts, providing reason to hope that legislators will, at some point, do the right thing.

https://www.healthaffairs.org…


Comment:

By Don McCanne, M.D.

Why was Medicare enacted? Wasn’t the private insurance industry fulfilling the role of financing health care? Well, not for seniors. With their higher health care needs and limited income from social security or modest pensions, the market of seniors who could afford private health insurance was too small. Thus, as governments should do, they filled the void with publicly-funded Medicare.

Since Medicare was functioning quite well, why did we need to add the option of private Medicare plans? It was not to benefit Medicare beneficiaries, but rather it was to give private health plans access to the government funds in order to expand their business model of health care financing.

The insurance industry convinced Congress that they could provide higher quality care at a lower cost and thus the Medicare + Choice program was established. It turned out they couldn’t and enrollment began declining. But the insurance industry wouldn’t give up, and they convinced Congress that the rules needed to be changed, and thus Medicare Advantage was enacted to replace Medicare + Choice. Profits were still the motivating factor.

The industry devised devious methods of selectively marketing their products to the healthy while being reimbursed at rates more appropriate for the less healthy individuals who remained in the traditional fee-for-service sector. It did not take long to recognize this scheme and thus a system of risk adjustment was established such that payments for those at higher risk were greater than payments for those at average risk. The industry then responded in several ways to game the system for higher payments, but the most important was to add diagnoses (upcode) to make their comparatively healthy patients appear sicker than they were, for instance making house calls to snoop around to see if other diagnoses could be added such as recording a diagnosis that would explain a grab bar in the bathroom, or recording a single high blood pressure in a patient offended by this intrusion. You should read the full article by Richard Kronick (link above) to understand how the legislators and bureaucrats responded to make this work for the insurers.

And it is still working to bolster their profits. Their enrollment continues to increase (their beneficiaries seem to be oblivious to their shenanigans, and in this age of tolerance of ethical compromise, they probably wouldn’t care anyway). Further, their performance in the stock market has pleased their shareholders, and between profits and stock appreciation, the political pressure they place on legislators of both major parties is actually welcome since it is accompanied by… (see OpenSecrets.org).

In the full article, Professor Kronick suggests an approach that would recover about $200 billion in overpayments over a decade. As a beneficial tweak, it should be enacted. However, it does not correct many of the other inherent flaws of including private health plans in a fragmented, dysfunctional system of financing health care. The private plans were devised for the purpose of diverting our health care dollars to a business entity – the insurance industry – an industry that doesn’t even provide health care services to patients (though that is changing as they move sectors of the health care delivery system into their enterprises – converting a service industry into an entrepreneurial business model).

No, we need to change the financing infrastructure into one that is designed exclusively to provide essential health care services for everyone while dumping the rent seekers that are screwing up our health care for their own personal gain. The obvious: We need to enact and implement a well designed single payer model of an improved Medicare for All.

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About the Commentator, Don McCanne

Don McCanne is a retired family practitioner who dedicated the 2nd phase of his career to speaking and writing extensively on single payer and related issues. He served as Physicians for a National Health Program president in 2002 and 2003, then as Senior Health Policy Fellow. For two decades, Don wrote "Quote of the Day", a daily health policy update which inspired HJM.

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