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Medicare Advantage Risk-Coding

By June 2, 2015Commentary

For decades the various Medicare risk-based health plan programs have been accused of over-paying the participating insurers.  Partly the accusations were based on cherrypicking, or enrollment tactics that favor getting healthy beneficiaries to enroll, and partly on a failure of CMS to capture some of the savings the plans get from better care management.  Currently CMS is paying Medicare Advantage plans on a risk score basis that is supposed to adjust payments for the health status and health needs of the enrolled beneficiaries.  Complaints have emerged that the health plans are finding ways to get paid more by aggressively coding the health issues for enrollees.  A new paper suggests that there may be a basis for those complaints.  (NBER Paper)  Without going into all the methodological details, the researchers find that in general there is a strong positive relationship between Medicare Advantage penetration in a county and average risk scores, with each 10% greater MA penetration being associated with a 6.4% higher average risk score.  Furthermore, fully integrated or physician-owned health plan types have the highest risk scores, which is to be expected if they have the greatest ability to influence physician behavior with regard to coding.  The authors suggest that this results in $10 billion of annual overpayments by CMS to MA plans.

CMS knows that differential coding between the fee-for-service and managed arms of the program is an issue and it adjusts payments downward every year to try to account for that difference.  One countervailing factor may be that coding in the fee-for-service world actually understates the health needs of beneficiaries.  In that part of the Medicare program, providers have little incentive to be sure every diagnosis is reflected, as it often makes no or an insignificant difference to their reimbursement.  As long as all diagnosis codes reflect actual health needs and the health plans can demonstrate that they are actively managing all those health issues, the current methodology seems acceptable.  And CMS is working to ensure that this is the case, but the MA plans were able to gut proposed limits on using home visits to create diagnosis codes for a beneficiary.  What is unfair is that the CMS methodology forces an arms race in which if health plans and their affiliated at-risk providers don’t aggressively code, they lose money due to CMS’s downward coding adjustments.  So plans are competing on their ability to maximize coding, rather than their ability to manage care and costs.  Sooner or later, CMS may need to come up with a whole new reimbursement approach for Medicare Advantage.

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