Today’s Managing Health Care Costs Number is (not) $2.6 billion
America’s Health Insurance Plans (AHIP) released a study it funded which suggested that the Centers for Medicare and Medicaid Services has been underpaying Medicare Advantage plans to the tune of $2.6 billion per year.
Well – not exactly.
Avalere Health reviewed the Medicare 5% sample and determined that the risk adjustment underadjusted for the sickest of the sick. That’s what AHIP selectively reported on. The researchers also noted that the CMS risk adjustment overestimates the costs of those with no chronic diseases. This is not considered in the $2.6 billion calculation.
Because CMS risk adjustment is by law self balancing, any underpayment for one group of Medicare beneficiaries means that there is overpayment for another group. Therefore, while CMS is underpaying for the sickest Medicare beneficiaries, it is overpaying for the healthier beneficiaries.
That’s just the nature of risk adjustment. It’s not possible to design a risk adjustment system that will prospectively give a low enough financial weight to those beneficiaries in excellent health, or a high enough financial weight for those who are dreadfully ill.
Risk adjustment works well at the “hump” of the curve – and it underadjusts (pays too little) for the right side (high cost beneficiaries), and overadjusts (pays too much) for those on the left side (low cost beneficiaries. That’s just the nature of risk adjustment. (The curve of medical expense is a positively skewed curve –with a long tail to the right and a much shorter tail on the left. I’ve used a normal curve in the diagram above for convenience).
From the report:
…we find that because the model (due to its construction) calculates costs for a given condition relative to the average cost for all individuals, it over-predicts the disease burden for individuals without chronic conditions relative to individuals with chronic conditions.
This is similar to MedPAC’s conclusions in 2014:
….the CMS–HCC model predicts costs that are higher than actual costs (overpredicts) for beneficiaries who have very low costs and lower than actual costs (underpredicts) for beneficiaries who have very high costs
Many researchershave found that the Medicare Advantage plans routinely enroll healthier beneficiaries. Many (but not all) researchers believe that Medicare Advantage plans are overpaid. (Harvard Link) Medicare Advantage plans also work hard to maximize diagnosis coding to improve risk adjustment payments, so their stated risk adjustment is likely falsely elevated compared to the traditional Medicare population. The Avalere calculations are based on traditional Medicare enrollees, in whom diagnosis coding is likely less aggressive. This makes the it even more likely that the health plans are not being underpaid over their entire population of Medicare beneficiaries.
I’d interpret the Avalere report to support previous research suggesting overpayment of the private Medicare Advantage plans, as they include a disproportionate number of those healthy beneficiaries for whom the pay is too high given the underpayment for those with multiple chronic illnesses.
Please comment on this post if you think my interpretation of this study is incorrect.
Note that overpaying by almost 27% on those without chronic conditions is likely to benefit Medicare Advantage plans disproportionately based on their attracting a healthier population.
