The Medicare benefit covers any American age 65+ with medical insurance in the hospital and physicians’ office. In 2003, Congress decided to enlist the help of private health insurers to contain the rising costs for America’s seniors and created Medicare Advantage (MA). MA, in concept, is simple – the government pays an insurer a fixed, individualized monthly premium to care for senior citizens.
Each monthly premium is individualized for a specific Medicare recipient in the MA program. That presented a problem – how does the government decide what premium to give for someone who is 65 and in great health vs. an 80-year-old with heart disease, renal failure, and diabetes? The solution created was a system now known as risk adjustment. Risk adjustment is a “multiplier” that increases the monthly premium for an MA member based on their illness severity. Each condition is assigned a “risk score.” For every condition an MA member has, the risk scores are summed to create a single score. The more conditions a person has, the more the MA insurer gets in a monthly premium for taking care of them.
The incentive becomes clear quickly: if MA plans want higher premiums, then they should capture individuals with higher risk scores. On its face, this does not present a problem. In fact, the risk adjustment system was designed in part to prevent MA plans from taking only the healthiest beneficiaries, a phenomenon known as “adverse selection.” However, over the last two decades, there has been an argument among industry, academics, and agencies about what the risk adjustment program has become.
Headlines surrounding the risk adjustment program are now a mainstay of major publications such as the Wall Street Journal and the New York Times. MedPAC, an independent committee of academics and healthcare industry leaders, has called for major reforms to the risk adjustment system for nearly a decade. Both groups’ arguments boil down to one issue: MA insurers, under the current risk adjustment regime, have assigned diagnoses to increase premiums without providing the corresponding care to beneficiaries, resulting in profits.
To be clear, the DOJ has authority under several statutes, including the False Claims Act, to curtail truly fraudulent actions by MA plans, and it has done so. Arguments about “fraud” from MA detractors tend to fall flat because, in most cases, fraud is isolated to discrete instances. Instead, the phenomenon they discuss, where larger MA plans tend to have higher risk scores on their beneficiaries than either Medicare FFS or small & regional MA plans, is, put simply, just being better at the game.
While the simplified explanation of risk adjustment above appears to make the system seem like a simple 1+2 of different comorbidities, the reality is that the process is complex, fact-specific, laborious, and capital-intensive. Rarely does a primary care physician (outside of value-based care arrangements) give their patient a diagnosis that would be valid for risk adjustment. Instead, because all risk scores must be substantiated by a provider visit, MA plans must employ vendors to chase down records of clinical encounters, or “charts,” to substantiate risk scores for their members. Finding charts is like herding cats – they exist in primary care offices for some, but more often are spread out between hospitals, cardiologists, oncologists, endocrinologists, and other specialists, often at offices that don’t even have electronic medical record systems and rely on paper charts and fax machines. As a result, the system becomes inherently “retrospective,” which, in risk adjustment, means that medical charts are submitted after the clinical visit to substantiate a diagnosis. Large national payors invest their war chest in creating networks to get those valuable charts, which in turn makes them better at risk adjustment.
None of these things, in a vacuum, appears problematic. However, from a government financing standpoint, risk adjustment is the primary mechanism driving up costs in the MA system. Both the Biden administration and the second Trump administration have enacted reforms to address this problem. The most notable recent reform was the v28 Risk Model implemented under the Biden Administration, which turned risk scores on their heads. The second Trump administration has taken a different, more fundamental approach to reform, asking, “Why doesn’t the government change where and how risk adjustment must happen?” This CMS believes that patients receive the best and most comprehensive care when providers are the main locus of operations, not insurers. As a result, Capstone believes that more reforms over the next two years will continue to give providers leverage over payors in risk adjustment, shifting power dynamics that have long favored MA payors due to their size. We will be closely watching the dynamics for our clients.
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