The CMS pays Medicare Advantage organizations a per member, per month fee to care for seniors enrolled in the plans. Since the 1980s, that payment has been adjusted based on demographic information such as age and sex. But in 2004, the government implemented a new risk-adjustment model that tweaked payment based on demographic information and the health conditions of each member.
Each Medicare Advantage beneficiary is assigned a risk score based in part on their health diagnoses. Insurers are supposed to be paid more for sicker members with higher risk scores because they use more resources to care for them, while plans receive a lower payment for healthier-than-average members with lower risk scores. The payment system is designed to prevent health insurers from cherry-picking only healthy members and it has worked to that effect.
At the same time the system created strong incentives for health insurers to report as many diagnosis codes as possible because that can lead to higher risk scores and higher payments from the CMS. The annual payment to an Advantage plan for an 84-year-old male patient with diabetes without complications who is not eligible for Medicaid would be $6,765, according to the Medicare Payment Advisory Commission. But tack on a diagnostic code for vascular disease and that same diabetic patient's Medicare payment would jump to $9,796.
It's important to note that the CMS requires diagnosis codes to be backed up by the patient's medical record and result from a hospital stay or face-to-face clinician visit. There have been allegations that some health insurers haven't followed this rule.
The traditional Medicare fee-for-service program is paid differently, and there is no incentive for providers in that program to code all possible diagnoses. Because that incentive is present in Advantage plans, the average risk score for Advantage enrollees is about 8% higher than the scores for similar Medicare fee-for-service beneficiaries, according to MedPAC's latest report, despite strong evidence that Advantage members are not sicker than fee-for-service patients.
The result is that payments to Medicare Advantage were 2% to 3% higher in 2016 than they would have been if those same patients were treated under fee-for-service Medicare, according to MedPAC. With that extra money, Advantage plans can offer benefits to their patients that fee-for-service beneficiaries don't have access to, such as vision care and health club memberships. Payments to Medicare Advantage plans totaled $210 billion in 2017 to manage the care for 19 million seniors.
The CMS has taken steps to adjust for the higher rate of coding in Advantage to create more parity in payment with traditional Medicare, but experts like Kronick argue the adjustment isn't enough. Powerful insurance industry lobbies and voter reaction to Medicare payment cuts are one reason the CMS has not done more, he said.