Relative Spending on Medicare Advantage Beneficiaries

A new brief from the Kaiser Family Foundation perpetuates the controversy over whether Medicare Advantage plans are overpaid because they have healthier enrollees than the FFS Medicare population that is used to benchmark payments to the plans.   (KFF Brief)    The form of analysis almost dictates the outcome.  The authors look at relative average spending in 2015 among similar beneficiaries who stayed in fee-for-service Medicare for 2016 and those who enrolled in Medicare Advantage for 2016.  The adjustment to ensure comparability was similar to the CMS risk adjustment methodology.  According to this analysis people who switched to a Medicare Advantage plan had average spending that was $1253 lower in the year before enrolling than did people who stayed in FFS.  This difference also tended to exist for beneficiaries with specific health conditions.  One issue with these kinds of analyses is that they rely solely on identification of health needs by diagnosis coding in the FFS population, which is not good.  They also tend to assume that health status persists from year-to-year, and it often doesn’t.  By looking only at people already in Medicare, the authors ignore the large number of people who enroll in Medicare Advantage right from the start of their Medicare eligibility.  There is nothing that suggests these people are disproportionately healthy.  In fact Medicare Advantage enrolls a greater number of low-income and dual-eligible persons, who definitely have more health needs.  These people never get included in the FFS benchmark so that benchmark very likely understates average prior spending for the entire Medicare population.  Once someone is in FFS Medicare, they may be more reluctant to switch to MA because of concerns about being able to continue to see existing providers.  People who have lower health needs have less of this “provider lock” concern and may be more likely to switch.  But they will also have lower risk scores so they aren’t necessarily going to cost CMS more.  Payments start with a FFS benchmark but are adjusted for actual health risk and that is what ultimately determines payments.  So I don’t see the math that suggests that CMS is automatically overpaying.  The fact that there is substantial geographic variation in this analysis also suggests it is missing something–there are areas of the country where the people who go into MA actually had higher prior spending in the FFS system.

One problem with all these analyses is that they conflate underlying health needs with spending.  Deciphering what health needs a particular person has, and what the appropriate treatments and costs of treatment for those needs are, is not easy.  Medicare Advantage plans tend to “overcode” health needs compared to the FFS population, because the risk-adjusted payment methodology encourages that behavior.  And in turn, CMS already applies a coding reduction to payments to account for this. And use of encounter data for risk adjustment means that only conditions that are treated will be used for risk adjustment.  I don’t think the plans are generally identifying health issues that don’t exist.  The plans are clearly much, much better than FFS Medicare at managing and coordinating people’s care, and have lower costs because they do so.  There is nothing wrong with rewarding them for that, since it is producing better process of care and actual health outcomes.  FFS Medicare tends to miss health issues because it does very little to ensure that providers are taking care of patients in a comprehensive manner.   Because a number of health needs are ignored, FFS spending can be lower than it would be if all the needs were identified and treated.  Trying to compare health needs and spending in an appropriate manner among MA and FFS populations is difficult.  I suspect that over the long haul, MA does a far better job of actually caring for beneficiaries and results in lower spending as a result.