Problems with Medicare Advantage Payment System Contribute to Overpayment

The Medicare Advantage program has serious structural problems that lead to overpayment and policymakers must take action on MedPAC’s recommendations in order to create a more cost-effective program, an issue brief from the Urban Institute found.

“MA plans have reduced health care utilization, but although MA was also supposed to generate Medicare program savings, it never has,” the brief explained. “Policy groups such as the Medicare Payment Advisory Commission (MedPAC) have long understood and explained that MA plans are overpaid relative to TM when viewed on comparable terms.”

The brief named problems in all three areas of the Medicare Advantage payment system--bidding benchmarks, quality bonuses, and risk adjustment--that contributed to overpayment.

In the benchmark methodology, overpayment of Medicare Advantage plans can occur based on the plans’ geographic areas. Additionally, plans’ quality rating systems can boost payments even more. These payments become health plan profits.

Quality bonus payments in Medicare Advantage fuel the exorbitant payment system and have not proven to translate into higher quality of care.

The star-rating system does not accurately reflect variations in health plan performance, specifically gendered care disparities. Moreover, it fails to properly represent network adequacy or inappropriate denials.

“Paying more in MA than TM might be justified if MA provides better-quality care for similar patients, but evidence of this is elusive,” the brief stated.

However, the brief acknowledged that comparing quality of care was difficult since Medicare Advantage and traditional Medicare gather different data to assess quality. Medicare Advantage encounter data is more rare than in Medicare.

MedPAC and other similar entities have recommended an overhaul for the quality-based payment system.

Some have suggested eliminating the double bonus for high performing Medicare Advantage plans in urban areas while others advocate for completely discarding the quality bonus payment benchmark system. MedPAC specifically suggested substituting the current system for a value incentive program, while others have recommended tweaking the star-rating syste,.

Risk adjustment in Medicare Advantage has also been problematic due to the practice of incentivized upcoding.

“In theory, capitation provides stronger incentives than FFS payment for plans to better manage costs by allowing them to deploy resources to accomplish quality, access, and spending objectives without the constraints inherent in FFS coding and payment,” the brief explained.

“However, four decades of studies have found that MA plans enroll beneficiaries who require lower spending than the average beneficiary, called ‘favorable selection,’ whether intentionally through how they market and advertise, design their benefits, and configure their provider networks or simply as a reflection of the segment of the Medicare beneficiary population attracted to MA as an alternative to TM.”

Part of the problem is that Medicare Advantage risk scores rely on diagnoses that form the basis of a prospective model, unlike traditional Medicare. As a result, Medicare Advantage plans may code more diagnoses than Medicare.

As a result, patients can be coded as sicker in Medicare Advantage plans than they are in traditional Medicare. Additionally, Medicare Advantage plans may engage in favorable selection of individuals whose costs are lower than projected. Both outcomes lead to overpayment.

While CMS has tried to apply a discount factor to risk scores in order to account for this trend, the researchers indicated that a more thorough fix is required.

“The paradox is that MA plans provide Parts A and B services for a much lower cost than TM would spend for the same beneficiaries, but Medicare spends more overall than TM would spend for these same beneficiaries by paying for extra benefits and providing MA plans healthy and growing profit margins,” the brief stated.

The problem does not lie entirely with Medicare Advantage plans. Traditional Medicare has been barred from using managed care tools that Medicare Advantage plans employ to reduce costs, accountable care organization development has lagged, and Medicare’s benefits need to be revamped.

Still, it is the architecture of the Medicare Advantage program that demands policymakers’ attention, something that MedPAC advised in 2022, in 2019, and in years prior.

In response to reports from MedPAC and other federal agencies, AHIP has called for more accurate reporting on Medicare Advantage.