Health Savers Initiative: Reducing Medicare Advantage Overpayments

The Medicare Advantage (MA) program, which allows Medicare beneficiaries to enroll in federally-funded private health insurance plans, is an increasingly popular alternative to traditional fee-for-service (FFS) Medicare. However, the evidence indicates that MA plans are currently overpaid. This reduces market incentives for innovation by allowing plans to profit from the overpayments rather than through improvements in quality and efficiency.

The overpayments stem from incentives that lead MA plans to report enrollee diagnoses more completely than physicians billing FFS Medicare. MA plan beneficiaries thus appear sicker than they are relative to FFS beneficiaries, which leads to higher payments. The Centers for Medicare and Medicaid Services (CMS) is supposed to adjust payments to account for differences in diagnostic reporting (called “coding intensity”) but its adjustments have fallen well short of correcting the problem.

As part of the Health Savers Initiative, this paper presents a simple method to adjust for coding intensity that was discussed by CMS in 2015 and further developed and analyzed by Professor Richard Kronick of the University of California at San Diego.1 We also discuss the Medicare Payment Advisory Commission’s (MedPAC) method for estimating coding intensity and develop a range of possible Medicare savings.

Addressing this problem would improve the solvency of the Medicare trust fund and reduce the federal budget deficit. Given the high and rising costs of health care, a number of bold policy changes will be needed to assure long-term affordability and sustainability. In this context, fully adjusting for MA coding practices that result in overpayment could be considered an obvious option, particularly because this problem is well known and adjustments are already made; they are just inadequate.