How Medicare Advantage Works

Study findings:

  • Individuals switching into MA [Medicare Advantage plan] before risk adjustment had risk scores roughly 0.31 points lower than those remaining in FFS [fee-for-service Medicare], risk scores of those switching into MA rise after risk adjustment is introduced, making up about a third of the difference.
  • After risk adjustment, individuals switching into MA are over $1,200 “cheaper” than their risk-scores predict them to be.
  • Even after risk adjustment, however, the least healthy individuals (i.e., those with risk scores in the top 5 percentiles) are still unprofitable for MA plans.

Jason Shafrin’s explanation:

I pose that the main reason this result occurs is “upcoding” by MA plans. Medicare bases MA beneficiary health status on the diagnosis codes submitted by MA plans. FFS providers typically have less of an incentive to extensively document all of a beneficiary’s health conditions…MA plans, on the other hand, receive more money the more diagnosis codes they document. Thus, when FFS beneficiaries switch to MA plans, their risk scores increase even if their true health status changes little or not at all.

The reason that the most severely ill patients are still unprofitable is that medical spending is highly skewed with a long right tail. Even upcoding will not sufficiently reimburse MA plans for their costs…

Comments (11)

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  1. Chuck says:

    Interesting post, it will definitely have me thinking on the way home.

  2. August says:

    Yet another great paper by the NBER.

    These findings are important to the ACA too because, “The 2010 Patient Protection and A ordable Care Act (ACA) requires risk adjustment in the individual and small group health insurance markets starting in 2014. In fact, the legislative language of the ACA suggests that risk adjustment in these markets may use similar \criteria and methods” to those used in Medi-care Advantage”

  3. Ryan says:

    Coding is done by the provider and facility, not by the payor, so it isn’t clear to me that MA plans could upcode.

  4. August says:

    The NBER also agrees with Shafrin’s point, “CMS has… found that MA plans exhibit greater coding intensity in documenting disease conditions, so that an MA enrollee’s risk score grows substantially faster than an FFS enrollee’s risk score (Center for Medicare and Medicaid Services, 2008).”

    But they find it important that “The HCC model will also off er an upwardly biased estimate of the counterfactual FFS (fee for service) costs of MA enrollees if these enrollees are positively selected along dimensions not included in the model. In fact, the introduction of risk adjustment will incentivize firms to selectively target individuals who they expect to have low costs conditional on their risk score”

  5. Devon Herrick says:

    I suspect Jason is correct that MA plans have an incentive to document every diagnosis since the payments are risk adjusted. That’s to be expected. If health plans are being paid to take on high-risk patients, health plans will document diagnoses that boost risk.

  6. Robert says:

    I know medicine is a business, and it has to be, but I still find it distasteful that patients are looked upon as “profitable” and “unprofitable”..part of the reason I got out of the healthcare field.

  7. steve says:

    Providers still have incentive to upcode. That should show up on FFS stats. I think the real point here is that MA manipulates its numbers.


  8. Thomas Carlson says:

    MA has a huge incentive to upcode. It’s a shame that people manipulate the system.

  9. Al says:

    “Even after risk adjustment, however, the least healthy individuals (i.e., those with risk scores in the top 5 percentiles) are still unprofitable for MA plans.”

    Since it is the 5% that is the biggest cost problem for Medicare, (the rest can be more easily managed) those that supported Medicare Advantage were barking up the wrong tree.

  10. Jane P. says:

    Wasn’t “upcoding” illegal? or unethical.. shall I say? When private plans manipulate enrollees’ reports at their convenience they lose credibility and consistency…and at some point it just becomes a big mess that ends up affecting both parties.

  11. Alex says:

    That’s an interesting bit of obfuscation.