GAO: Diagnosis Code “Creep” Leads To Medicare Advantage Windfall

Today’s Managing Health Care Costs Indicator is $5.8 billion

Click on image to enlarge. Source

The General Accounting Office reported last week that Medicare Advantage (MA) plans, the private health plans that care for one in five Medicare beneficiaries, receive a windfall because of their effectiveness at coding member illnesses.  This is a quandary – capitation for Medicare members is only reasonable if there is careful risk adjustment. The Deficit Reduction Act of 2005 required risk adjustment to be phased in by 2010. 

Physicians in Medicare Advantage plans have a strong incentive to use coding to maximize the apparent illness of their patients.  Physicians in traditional Medicare are paid only based on services provided, so they have little incentive to aggressively code diagnoses.  As a result, the apparent severity of illness of Medicare beneficiaries who have chosen the private plans has increased dramatically faster than the severity of illness of Medicare beneficiaries on traditional Medicare.

It’s actually a bit worse than that. The Medicare Advantage plans put an enormous amount of energy into coaxing their participating physicians to aggressively code comorbidities during 2007-2009.  Here’s an example of how much it’s worth.  The Medicare payment goes up by 16% for diabetics, but goes up by over 50% for those who also have evidence of kidney or blood vessel involvement.   Mild diabetic kidney disease is quite common, but was rarely coded before risk adjustment.  Now, physicians participating in Medicare Advantage know that they must use the ICD9 code for diabetes with renal manifestations (250.4) at least every other year, or they will not get the maximum Medicare budget.   

Here are Medicare risk adjustment factors associated with diabetes. (See HCC_Coefficients_2009-2012)   Note that multiple comorbidities allow an additional upward adjustment, further encouraging more aggressive coding.

Click on image to enlarge.  Source 

CMS has been aware of this for some time, and as a result the agency has lowered all reimbursement to MA plans by 3.4% ($2.7 billion).  However, the GAO analysis suggests that the increased costs associated with aggressive coding are between 4.8% ($3.9 billion) and 7.1% ($5.8 billion).  

Across-the-board cuts to reimbursement to counteract differential coding aggressiveness means that all physicians associated with MA plans have to work even harder to be the most aggressive at coding complications.  If they merely code the same way as physicians participating in traditional Medicare, their reimbursement will fall each year.

The conclusion from a recent FTC analysis of gaming of risk adjustment:

Before risk adjustment, MA plans had an incentive to enroll individuals who were low cost, both along dimensions that will later be included in the formula and those that will not. Because risk adjustment increases payments for individuals with the conditions included in the formula and decreases payments for those with few or no conditions, risk adjustment lowers the payments MA plans would receive for these individuals, as they were selected to have low risk scores.

But in response to the new incentives created by risk adjustment, selection patterns into

MA change. After risk adjustment, MA plans have less incentive to avoid individuals with

the conditions included in the formula but have a greater return to enroll individuals who

have low costs conditional on their risk score. Indeed, relative to individuals who remain in FFS…MA enrollees' risk scores increase after risk adjustment, but their costs conditional on their risk score fall so much that, if anything, MA enrollees have lower total costs after risk adjustment.

There is no easy answer to this problem.  MA plans would seek the lowest risk Medicare beneficiaries if there were no risk adjustment.  However, they will seek to maximize the proceeds of risk adjustment when it is in place, and seek to select low-risk beneficiaries based on measures that are not included in the risk adjustment.  At a minimum, CMS should rebalance the risk adjustment “code creep” factor each year.  Further, CMS should consider applying this factor differentially to groups that have a high level of apparent “code creep.”  It’s possible that this could be done using ceilings on annual adjustments by group, exempting groups with very small or much-changed membership.  

The sad fact is that it’s easier to code aggressively than perform more effective medical management on the Medicare population.

Payment Reform: Off the Rails in Massachusetts

Massachusetts not only led the nation in passing and implementing legislation to dramatically decrease the number of uninsured, but it also planned to lead the nation in reforming provider payment to be sure that we could afford near-universal coverage.

Health care reform in Massachusetts remains popular, but the wheels are coming off of the payment reform bus.

A state commission recommended a multi-year transition from predominately fee for service to a series of bundled payments to encourage better coordination and to discourage providers from “running the meter” and recommending diagnostic and therapeutic care which would enrich providers without real value to patients. 

The Boston Globe reported Saturday   that state Senate President Terese Murray has, for the moment, given up on enacting legislation to reform payment in Massachusetts.  She said ““It’s like going around in circles…Nobody is in agreement on anything.’’

It’s no surprise.  The goal of payment reform is to lower overall costs, and that means that some stakeholders will earn less.  Since all of us are intensely loss averse, the losers will fight much harder against reform than the winners will fight for reform.

Here is my summary of barriers to payment reform, and some steps to help overcome these barriers.   Under the best of circumstances, it’s hard to reform payment methods.  It’s probably even harder when money has to come out of the system.

Barriers	Potential Enablers
Many providers are doing quite well under fee for service, and perceive the threat that payment reform will lower their earnings.	As long as providers feel that fee for service will yield continued increases (in both fee per unit and allowed utilization), they will insist on continued fee for service.   We won’t see health care payment reform until providers feel a meaningful threat that there will not be future fee for service increases.
The payment system is fragmented, and employers demand that every health plan include (almost) every provider.   This gives health plans little leverage to change the payment methodology.	For most adult practitioners, Medicare is a huge source of revenue.  The commercial payers cannot legally collude around payment, so any health care reform will depend up on a Medicare waiver allowing CMS to pay other than fee for service for Medicare services. Limited networks could facilitate introduction of bundled payments.
Providers are fragmented, and few are arranged in such a way to take “risk” or capitation for their entire population.	As long as fragmented fee for service payment is available, many physicians who deeply value their autonomy will continue to practice in nonintegrated practices.  We'll need transitional approaches for those physicians who are not currently in integrated groups. We also should continue to pay fee for service for some specialty services.
Providers remember that the capitation of the 1990s included inadequate risk adjustment.	Risk adjustment software is far better than 10 years ago
We demand choice, and bundled payment is far easier to arrange if patients are locked in to a delivery system	We need bundled payments that have corridors to avoid excess loses or windfalls, and we must include contingencies for when patients choose to split their care among different systems.
Most large companies self-insure, and it’s difficult to administer payments other than fee for service for these plans which  are governed by ERISA	Health plans must show their clients that paying fee for service, even with discounts, is more costly than paying for bundles of care.
Capitation or global budgets lead to an incentive to undertreat	Payment reform must include quality scores and report cards, and payment must be decreased if all appropriate evidence-based care has not been delivered.
Capitation or global budgets lead to an incentive to reject the sickest patients	Risk adjustment should help – although we’ll have to rely on physicians’ professionalism too.  That’s imperfect, since we know professionalism has not prevented overtreatment in the fee for service system.

These aren’t all the challenges, and there’s no guarantee that these steps will overcome enough of the objections to payment reform in the provider community.  From my discussions with colleagues over the past few weeks, I’m convinced that many physicians and hospitals accept that we will need to reform payment to be able to afford to cover our population.

But it will take a real sense of crisis to move forward, and a real threat that rejecting health care payment reform will lead to unacceptable fee for service payment cuts.