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Medicare Advantage is growing in popularity, but the program is also costly to taxpayers. 

According to analysis from Kaiser Family Foundation, enrollment in Medicare Advantage (MA) plans have doubled from 2011 to 2021. The plans are popular among beneficiaries, according to a survey from the Better Medicare Alliance. The research found universal satisfaction with Medicare Advantage’s coverage (98 percent), provider networks (97 percent), and handling of the COVID health crisis (98 percent).  

But Richard Kronick, PhD, Professor in the Department of Family Medicine and Public Health at the University of California, San Diego and a former Director of the Agency for Healthcare Research and Quality (AHRQ), is of the belief that Medicare overpays for these plans—and not by a small amount. According to Kronick’s own analysis, Medicare overpaid for MA plans by a total of $106 billion from 2010 to 2019.  

Kronick spoke with Health Evolution about how he arrived at this number, why there is increased scrutiny over Medicare Advantage plans, and how CMS could regulate the program better to reduce the amount these plans are being overpaid.  

In your analysis of Medicare Advantage how you determine that CMS is overpaying by $106 billion?  

Medicare pays Medicare Advantage plans based on the risk scores of Medicare Advantage members. Risk scores use diagnostic and demographic information to figure out how much care each beneficiary is likely to need. The risk scores start with the information that comes from fee-for-service Medicare beneficiaries. The average beneficiary in fee-for-service has a score of 1.0 construction. The diagnostic information for these risk scores for Medicare Advantage members gets reported by Medicare Advantage plans. So plans that have more people with cancer, heart disease, and serious illnesses get paid more money than plans with fewer of those beneficiaries. That’s how Medicare makes this work and tries to create a system where plans are not unhappy to have sick people.   

When this system was created, in the mid-2000s, Congress very quickly realized that the diagnostic information that was reported by plans would likely look different from the diagnostic information that was reported in fee-for-service. Congress realized if we create a system where plans get paid based on how sick the members are, there’s probably going to be a lot more quadriplegics written down. In 2005…Congress directed CMS to implement a coding intensity adjustment to adjust for the differences in coding between MA and fee-for-service. The purpose of this is to say that if you have a beneficiary who had a risk score of 1.0 in fee-for-service and she goes into MA and has a risk score of 1.1, the plan should get paid as if she were 1.0 because the system is calibrated based on fee for service. In 2010, CMS implemented a coding adjustment of 3.1 percent. In the Affordable Care Act and subsequent legislation, Congress directed CMS to enact statutory minimum adjustments so that in 2014 the adjustment had to be at least 4.4 percent and in 2018, 5.9 percent. CMS has the authority and the obligation to implement an adjustment larger than the statutory minimum if it determines that a larger adjustment is appropriate. But it has never yet implemented an adjustment larger than the statutory minimum.  

I did an analysis in trying to figure out how big the adjustment should be. I used a pretty simple approach based on the comparison of two numbers. One number is the relative risk of all Medicare Advantage to the risk of fee-for-service beneficiaries when that risk is measured using the diagnostic and demographic approach used to pay plans. The average risk score for Medicare Advantage beneficiaries is much higher than the average risk score for fee-for-service beneficiaries. And it has been increasing a lot since 2006. The numerator of this measure of coding intensity is the relative risk of MA using diagnostic and demographic information. The denominator is the relative risk of MA just using demographic information. Prior to the implementation of this risk adjustment system, the risk adjustment just used to be age, gender, Medicaid and institutional status to measure risk. Part of why Congress told CMS to use diagnostic information is that in the late 1990s and early 2000s there was very strong evidence that the demographic system overpaid MA plans because it was clear that MA was getting favorable selection and that healthy people were going into MA. There’s less favorable selection now than there was in 2000. In 2000, there were few in MA plans and now there’s close to 40 percent of eligible beneficiaries in MA plans. But there’s some evidence that MA is still maybe getting a little bit of favorable selection. If you’re really sick and you’re in fee for service and you’re using a lot of care, you’re not likely to join Medicare Advantage. There’s some evidence that some really sick people in MA switch back into fee-for-service. It’s probably still a little bit, a favorable selection but not too much on average. 

Through my analysis, I saw that the coding intensity adjustment should have been 20 percent, which is much higher than the 5.9 percent that CMS actually implemented for 2019. The coding intensity adjustment was increasing more than a percent per year over the previous 14 years. The difference between the adjustment that CMS implemented…and the adjustment I estimated using the demographic estimate of coding method results in the estimate that CMS overpaid by $106 billion over the decade.