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Making Medicare Advantage Payments More Accurate

Anticipating the Centers for Medicare and Medicaid Services’ (CMS) expected announcement Friday of preliminary payment rates and policies for Medicare Advantage insurers in 2017, insurers have pushed for changes to the “risk adjustment” system — which raises or lowers payments to plans based on their enrollees’ health.  Insurers claim the system undercompensates them for high-cost enrollees with chronic conditions.  We favor making the system as accurate as possible, but that should include reducing overpayments to insurers as well.

To be sure, risk adjustment tends to underpredict health spending for high-cost individuals in poorer health.  The Medicare Payment Advisory Commission (MedPAC) suggests that CMS make several changes to better account for higher spending by people with multiple chronic conditions and low-income beneficiaries eligible for both Medicare and Medicaid.

But Medicare Advantage risk adjustment also overcompensates insurers for healthier, low-cost enrollees.  For example, Avalere Health research, which insurers have cited favorably, shows risk adjustment overpredicting spending among people with no chronic conditions by 26.9 percent and among people with one or two chronic conditions by 5.1 percent.  That’s critical because Medicare Advantage enrollees are healthier than those in traditional Medicare, on average.

CMS could reduce Medicare Advantage overpayments by doing more to address “upcoding,” which the Congressional Budget Office, the Government Accountability Office (GAO), and academic research cite as a long-standing problem.  The risk adjustment system measures enrollees’ health using a “risk score” based on patient diagnoses; upcoding occurs when the risk scores that plans submit for their enrollees rise over time — making enrollees appear increasingly unhealthy — without actual changes in their health. 

Risk scores have risen 9 percent faster in Medicare Advantage, on average, than in traditional Medicare for comparable beneficiaries, MedPAC estimates.  This leads to excessive payments to Medicare Advantage plans. 

To compensate for upcoding, health reform requires CMS to adjust Medicare Advantage’s risk adjustment system by at least a minimum amount each year.  CMS has only applied the minimum required adjustment in recent years.  A larger adjustment, which MedPAC believes is warranted, would reduce overpayments to Medicare Advantage plans.    

CMS could also reduce upcoding by excluding health assessments from risk score calculations unless they’re later confirmed in treatment settings, as MedPAC will likely recommend in its March report to Congress.  Medicare Advantage plans increasingly provide health assessments of their enrollees; for example, a nurse may come to a patient’s home to do a physical exam.  CMS has found that some insurers mainly use these assessments to “collect” diagnoses in order to raise enrollees’ risk scores for purposes of risk adjustment, rather than to improve follow-up care or identify illnesses requiring treatment.  In fact, CMS had proposed excluding these kinds of assessments but dropped this change in the face of industry opposition.