Repeat: Medicare Advantage & Other Private Investment Hurt Medicare

June 7, 2022

Summary: A September 2021 Health Affairs blog revealed how Medicare Advantage insurers use aggressive and fraudulent diagnostic coding practices to artificially boost revenues, with similar risks looming from Direct Contracting Entities. That blog was criticized as inaccurate by two corporate leaders in healthcare. The original blog authors responded this week, buttressing their case against Medicare Advantage and DCEs (now known as ACO Reach).

The Emperor Still Has No Clothes: A Response To Halvorson And Crane
Health Affairs Forefront
June 6, 2022
By Richard Gilfillan and Donald M. Berwick

Following our September 2021 Health Affairs Forefront articles on the “Medicare Advantage Money Machine,” the most common reaction of which we are aware has been that this was an “Emperor Has No Clothes” moment. Many knew the Medicare Advantage (MA) game, but few had called it what it was. Two responses to our articles … have been published in Forefront that find fault with our analyses. … For the most part, their arguments fail.

We count more than a dozen assertions in these critiques, some matters of opinion and others matter of fact. These can be grouped into … six categories … [see HJM Comment]

[Many] have documented that MA costs more than fee-for-service [largely due to the gaming of risk scores]. Every extra dollar paid to MA plans is, indeed, a transfer of taxpayers’ money to MA plans, which then benefit in terms of growth and higher profits. Those profits represent direct transfers of wealth from taxpayers to plans.

The impact of MA on the delivery of care goes well beyond the Risk Score Game. Traditional Medicare presents a relatively straightforward, highly standardized approach to coverage and the financing of health care. MA creates a highly fragmented coverage and financing system that brings complexity and additional cost for all segments of the industry, particularly the providers. The result is an expensive MA administrative superstructure that we have layered on top of, and that now permeates and distorts, the actual delivery of care. Estimates of administrative costs and profits for all health system parties vary significantly but the broadest definitions are in the range of 25 percent. MA is a major driver of those costs. We must ask what we are getting for that if, after 35 years of privatized Medicare costing more than fee-for-service, we cannot demonstrate real clinical outcomes improvement. The answer is, “We are not getting much.” The opacity that comes from the privatization of public payment confounds objective, scientific analysis.

Comment by: Jim Kahn

Gilfillan and Berwick logically and effectively counter the two published criticisms of their September 2021 “Medicare Advantage Money Machine” blog (discussed in HJM). In so doing, they solidify an appropriately harsh assessment of Medicare Advantage and ACO Reach (rebranded DCEs). Below is a structured summary, incorporating quotations from the blog.

Bottom line: Massive insurer profits achieved via widespread diagnostic upcoding deplete Medicare funds without evidence of added value for beneficiaries.

1) The Medicare Advantage Business Model
Snapshot: Model = diagnostic upcoding to raise capitation rates.

Coding efforts are not just to inform clinical practice, as the critic argues; they are to drive up payment rates. “MA risk scores have for decades risen continually … now almost 2 percent per year faster than those in traditional Medicare. That is not a mark of … increasing relative severity of actual illness in MA compared with the fee-for-service population; it is the Risk Coding Game …”

The industry is so focused on this, it refers to a “risk score headwind” when COVID prevented home visits used to add more diagnoses.

Overall, an estimated 14 percent risk score excess will result in overpayments to Medicare Advantage of $600 billion from 2023-2031.

2) The Profitability of MA Firms
Snapshot: Huge profits and valuations.

The critic proposes “Most businesses in most industries would see their stock prices dropping with only 4.5 percent profits [as seen with insurers].”

Yet “[T]he increases in plans’ stock prices and valuations [are extraordinary].” Why? I argue in HJM that the nominal 4.5% for insurers obscures a real return rate of 30%, and thus explains why the investment is so attractive.

“Profits are the product of profit margin multiplied by revenue. Risk Score Gaming positions plans to increase profits from both.“

And here’s the maximum profit strategy: if insurers buy up providers, as they are doing, the “Medical Loss Ratio” restriction on profits is easily evaded, dropping the real MLR from 85% to 70% and thus more than doubling actual profit margins.

3) The Effects of MA On Care and Underinsurance for Low-Income MA Beneficiaries
Snapshot: Lower upfront costs, but poor financial protection when sick.

“Plans use some of the subsidies [overpayments] from CMS to offer products with improved benefits and lower premiums for members. … Zero-premium products, with less-rich benefits and more out-of-pocket costs, are targeted at cost conscious buyers, particularly those with limited disposable income. Lower-income individuals have little choice but to trade a known zero premium cost for an unknown likelihood of greater out-of-pocket costs. But that tradeoff leaves many low-income beneficiaries underinsured and possibly experiencing significant negative impacts on their health.”

The Kaiser Family Foundation found that “enrollees in Medicare Advantage do not generally receive greater protection against cost-related problems than beneficiaries in traditional Medicare with supplemental coverage, particularly for some enrollees, such as Black beneficiaries in relatively poor health…”

4) Financial Savings for MA Beneficiaries
Snapshot: Impossible to tell, with distorted comparisons.

The critics claim that “MA members actually spend much less money each year on care.”

Gilfillan and Berwick explain why: a) MA plans are subsidized due to over-payment by Medicare, and they share the subsidies with members, and b) the plans use risk selection to enroll a healthier population than traditional Medicare.

In other words, apparent savings are artifact, meaningless.

5) The Quality of Care In MA
Snapshot: Mixed and ambiguous picture, with flawed data.

The critics claim higher quality of care in MA. We just can’t know, say Gilfillan and Berwick.

For example, “[R]ecent studies document that MA plans are actively ignoring system-improvement efforts as they use lower-quality skilled nursing facilities and home health providers more, and high-quality hospitals less, than traditional Medicare.”

Claims that integrated care systems like Kaiser improve care (itself dubious, IMO) don’t carry over to the non-integrated Medicare Advantage norm.

MA plans actually artificially boost quality scores – “manipulating contracts to ‘move about 550,000 enrollees from non-bonus contracts to bonus-level contracts, resulting in unwarranted bonus payments in the range of $200 million in 2019.’”

“Understanding the effects of MA on quality is extremely difficult in part because MA operates in an information environment in which it is all but impossible to demonstrate better clinical outcomes for patients.” Data are missing, biased, or manipulated. [Stunning eg’s in the blog.]

Gilfillan and Berwick’s positive view of ACOs diverges from my deep skepticism. But I agree with them, the greatest danger lies in the growth of investor-controlled entities.

6) The Direct Contracting Model/ACO Reach Model
Snapshot: Investor control portends problems such as in Medicare Advantage.

[W]e remain concerned that [ACO Reach] brings MA investor and insurer-controlled firms directly into the fee-for-service alternative payment model (APM) world. The 52 of 100 Reach ACOs that are investor-controlled operate in 49 states (including the District of Columbia and Puerto Rico) containing 99 percent of the 35 million fee-for-service beneficiaries.

7) Resolution via Single Payer
Snapshot: They didn’t say this. They should have.