How Medicare Could Save Costs

By Jane Farrell

Current trends in medical billing will lead to Medicare overpaying private insurance programs by hundreds of billions of dollars, according to a new study.

The conclusion was reached by researchers from the University of California San Diego School of Medicine. The study was published in the journal Health Affairs.

Medicare pays more money to the insurance programs, known as Medicare Advantage (MA) plans, if the insurer enrolls patients who are expected to use a high volume of medical services. The companies get less if their enrollees will use a lower volume of services.

MA plans have strong incentives to find and report as many diagnoses as they can, called “coding intensity.” These incentives are not present in fee-for-service (FFS) patients. The study found there is no evidence that MA enrollees have actually gotten any sicker relative to FFS beneficiaries, and if this payment method continues Medicare could overpay MA plans by $200 billion over the next decade.

“Congress and [Medicare] have the opportunity to establish a payment system that will protect taxpayers from the strategies used by MA plans to increase the payments they receive,” said Richard Kronick, PhD, principal investigator and professor in the Department of Family Medicine and Public Health at UC San Diego School of Medicine. “The projected $200 billion in overpayments over the next ten years is stunningly large in absolute dollar terms. To provide some perspective, federal support for community health centers is approximately $5 billion per year.”

Medicare uses patient demographic and diagnostic information to calculate a risk score for each beneficiary, and these risk scores are used to determine payment to insurance plans. For example, spending is expected to be greater for an 85-year-old than for a 65-year-old and greater for a beneficiary with heart disease, diabetes and depression than for a beneficiary with none of these diagnoses. Over the past decade, the average risk score for MA enrollees relative to the average risk for FFS beneficiaries has risen steadily.

“More than 30 percent of Medicare beneficiaries are enrolled in Medicare Advantage. The problem could be largely solved if [Medicare] adjusted for coding intensity using the principle that Medicare Advantage beneficiaries are no healthier and no sicker than demographically similar fee-for-service Medicare beneficiaries,” said Kronick.

“I hope these findings foster a discussion of how to best measure and adjust for differential coding between Medicare Advantage and fee-for-service Medicare. Solving this problem is an important prerequisite to the establishment of a stable and equitable future for the current Medicare Advantage and could save the federal government approximately $200 billion.”