While most patients in Medicare use the traditional fee-for-service route, a growing percentage of Medicare beneficiaries are relying on managed care plans through Medicare Advantage. Medicare Advantage provides beneficiaries with additional choice and also serves as a competitive alternative to traditional Medicare. In theory, Medicare should just allocate a beneficiary’s funding to a managed care plans if patients decide that. In practice, patients in Medicare Advantage may be sicker or healthier than those in Medicare fee-for-service.
To compensate for any any differences in cost, the Centers for Medicare and Medicaid Services uses a risk adjustment approach where plans that have sicker patients get more funding and those with healthier patients get less. CMS identifies sicker patients largely based on physician-entered diagnosis codes submitted as part of the health insurance claims system. Does this provide an accurate assessment?
A paper by Jacbos and Kronick (2018) finds that the answer is ‘no’. Using Medicare claims and enrollment data between 2008 and 2015, they find:
Based on prescription drug utilization data, beneficiaries enrolled in [Medicare Advantage] MA in 2015 had 6.9 percent lower health risk than beneficiaries in [traditional Medicare] TM, but differences based on coded diagnoses suggested MA beneficiaries were 6.2 percent higher risk.
The reason for this is likely that Medicare fee-for-service providers do not have an incentive to document every last little diagnosis code when submitting health insurance claims. On the other hand, because of risk adjustment, managed care plans do have this incentive to include more diagnoses. Further, providers in managed care plans may “upcode” to more severe diagnosis codes when there is some doubt over uncertainty.
A few solutions to this problem could be proposed. One option would be to use prescription drug utilization to inform risk adjustment. While accuracy would increase, it would create a much more problematic moral hazard. It could be the case that providers would be incentivized to prescribe certain drugs because the would help improve risk-adjustment payments from CMS. While improper documentation of diagnosis codes is a problem, getting patients the wrong treatment or treatments they don’t need is much more problematic. Another option would be to eliminate Medicare Advantage. This would solve the selection problem but would decrease the utility of the large number of beneficiaries who are now choosing Medicare Advantage. A third alternative–and the likely least bad–would be to make marginal improvements in risk adjustment and perform some additional review of the diagnosis codes included health insurance claims.
While inaccurately characterizing the health status of Medicare Advantage beneficiaries is problematic and costly to CMS, major overhauls to current approach may be even more problematic.
- Jacobs, Paul D., and Richard Kronick. “Getting What We Pay For: How Do Risk‐Based Payments to Medicare Advantage Plans Compare with Alternative Measures of Beneficiary Health Risk?” Health services research (2018).