Today, 54% of all Medicare patients get their coverage through Medicare Advantage, or MA. That’s Medicare’s popular system of private health plans—and currently, it’s the only viable alternative to enrollment in traditional (fee-for service) Medicare.
But future payment for those plans rests on a knife-edge, and the stakes for millions of seniors couldn’t be higher.
Created in 2003, the rapidly growing MA program is a GOP health policy achievement, offering millions of patients the option of an affordable and comprehensive plan with richer benefits and a hard cap on out-of-pocket costs.
Despite the program’s clear advantages, congressional Democrats have waged a protracted campaign to cut its funding, with the obvious goal of forcing Medicare patients back into traditional (fee-for-service) Medicare—which also requires supplemental insurance to fill in crucial coverage gaps.
Yet what both congressional Republicans and Democrats agree on is that currently, MA plans are being paid too much—allowing health plans to “game the system” at taxpayers’ expense. That consensus became evident at a recent congressional hearing, where members and witnesses alike expressed concern about MA’s higher reimbursements.
Meanwhile, Team Trump is launching annual audits of the plans and investigating the business practices of the United Health Group, the program’s largest insurer.
Audits and investigations may be warranted, but they won’t solve the underlying policy problem: that the MA payment system is not only mind-numbingly complex, but also profoundly flawed.
Each year, the Medicare bureaucracy sets a basic “benchmark” payment (based on traditional Medicare fixed prices) to be applied at the county level to all MA plans throughout the United States. That basic payment is upwardly adjusted for other factors, including the “risk” of enrolling higher-cost older and sicker beneficiaries.
Plans are legally required to submit data on the beneficiaries they enroll for several risk categories—categories that include age, sex, institutional status, and health status. Of course, plans enrolling patients with higher risks get higher reimbursements.
This entire MA risk adjustment process is prospective, meaning that health plans must estimate beneficiary risk and submit (hopefully) accurate data to secure additional reimbursement.
Today, the controversy centers on assessing health risk. Plans must assign diagnostic codes for health risk for a wide variety of conditions ranging from diabetes and depression to high blood pressure and heart failure. The more diagnostic codes submitted for beneficiaries, the higher the government reimbursement for the plans.
For this year, the Medicare Payment Advisory Commission, the panel that advises Congress on Medicare reimbursement, says that this “coding intensity” is responsible for an estimated $40 billion in additional costs.
Yet prospectivelyaccounting for beneficiaries’ health status cannot dodge an insoluble problem. Even if health plan officials’ best estimates of the health conditions of their enrollees are as accurate and as meticulous as humanly possible, they won’t always get it right.
Conceptually, if plan officials enroll, say, 100 diabetics—patients who can be frightfully expensive—they cannot possibly know which one of those 100 diabetics will incur over $800,000 worth of hospital and physician costs in the coming year.
On that fundamental point, a prospective health risk adjustment fails. And taxpayers lose.
Heritage Senior Fellow Edmund Haislmaier and I addressed this problem in our book, “Modernizing Medicare: Harnessing the Power of Consumer Choice and Competition.” There, we provided a detailed model of a retrospective health risk adjustment system, which we believe provides the best remedy to the present overly broad prospectiverisk adjustment system.
In broad outline, under a retrospective system, Congress could require all MA plans to participate in a common risk transfer pool, where plans would cede their high risks to the pool and their actuaries would price the appropriate plan premiums to cover those risks. At the end of the year, payments would then be redistributed among the plans for the actualcosts they incurred. Health plans that enrolled the sickest and most expensive beneficiaries would be made whole with accurate payments for their real costs.
This sort of change would stabilize health insurance markets, eliminating the guesswork and possible gaming of the system—and eliminating unnecessary taxpayer costs.
Writing in Health Affairs Forefront, Stanford University’s Alain Enthoven, one of the nation’s top health economists, observed, “In this model, costs would not need to be predicted. The pool payments would be settled after the fact. This would take place under the supervision of state insurance departments, which already have experience with pooling arrangements in different lines of insurance.”
Proposals for retrospective health risk adjustment are hardly new. All major Medicare reform proposals offered during the last 15 years included a “back-end” or retrospective risk adjustment system for assessing health—a key feature that guarantees market stability while ensuring accurate additional reimbursement for plans enrolling large numbers of older and sicker patients.
Such proposals include the 2012 proposal from Sen. Ron Wyden (D-Ore.) and Rep. Paul Ryan (R-Wis.), as well as that of Sen. Pete Domenici (R-N.M.) and former Congressional Budget Office Director Alice Rivlin of the left-leaning Brookings Institution. This suggests potential for a bipartisan solution to this problem.
Medicare Advantage can have a bright future. But that’s only if Congress and the White House work together to fix its obvious flaws and build upon its best features: personal choice and market competition.