GAO Report Finds Excess Spending in Medicare

Despite tightening budgets, the federal government is substantially overpaying private insurers for Medicare benefits, according to a report recently issued by a federal auditor.

Under the Medicare Advantage program, which covered roughly one quarter of the Medicare population in 2012, Medicare beneficiaries may elect to have a private insurer administer their Medicare benefits. In exchange, the federal government pays private Medicare Advantage insurers a monthly amount per enrollee for providing coverage, as calculated by applying a formula that considers enrollees’ health care risks.

According to a recent U.S. Government Accountability Office (GAO) report, private insurers offering Medicare Advantage plans receive inflated payments because insurers tend to use relatively high risk rates when calculating what Medicare should pay insurers per enrollee. The Centers for Medicare and Medicaid Services (CMS) offsets these higher rates by decreasing payments using a risk score adjustment, but the GAO reports that the CMS has not adequately adjusted these payments. The GAO estimates that this has resulted in “substantial excess payments” to Medicare Advantage plans—totaling in the range of $3.2 to $5.1 billion between 2010 and 2012.

CMS determines the rate it pays private insurers under Medicare Advantage plans based in part on enrollees’ demographic characteristics and health risk profiles, a process known as risk adjustment. CMS assigns each beneficiary a risk score, a measure of anticipated health care expenditures, based on individual characteristics such as age and sex, as well as medical diagnosis codes that these insurers provide.

In theory, two individuals with the same characteristics and health status should have the same risk score, regardless of whether they participate in traditional Medicare or Medicare Advantage. Yet in reality, the risk scores of Medicare Advantage plan participants are typically higher than those of traditional Medicare enrollees.

The GAO attributes this risk score discrepancy to differences in payment methodology and coding practices used by Medicare Advantage and traditional Medicare. Private companies offering Medicare Advantage plans have a financial incentive to exaggerate enrollees’ medical diagnosis codes to give the impression that Medicare Advantage enrollees are less healthy than they truly are. If the diagnostic codes reflect more costly or severe conditions, enrollees are assigned a higher risk score and the company receives greater compensation from CMS.

In contrast, CMS determines the risk scores of individuals enrolled in traditional Medicare based on the claims that providers of traditional Medicare submit to get reimbursed. CMS then translates these claims into medical diagnoses. Traditional Medicare providers receive payment according to the services they actually render—not based on the medical diagnoses of their patients. As a result, risk scores for individuals enrolled in Medicare Advantage plans typically exceed those of traditional Medicare enrollees.

To avoid overpaying Medicare Advantage plan providers because of this discrepancy in coding practices, CMS adjusts Medicare Advantage risk scores, reducing them by the percentage of the risk score that CMS attributes to differences in diagnostic coding practices between Medicare Advantage and traditional Medicare.

In 2010, 2011, and 2012, CMS reduced Medicare Advantage enrollees’ risk scores by 3.4% annually, avoiding $2.8 billion, $3.0 billion, and $3.2 billion in overpayments, respectively. According to the GAO, however, these risk score reductions have inadequately discounted payments to Medicare, resulting in billions of dollars in overpayments. As a result, the GAO encourages CMS to increase its Medicare Advantage risk score adjustment to better account for these overpayments.

In an earlier report, the GAO found that on average, Medicare Advantage risk scores in 2010 were actually 4.8 to 7.1% higher than traditional Medicare risk scores—a far more substantial discrepancy than CMS’s risk adjustment of 3.4%. In that report, the GAO urged CMS to increase the accuracy of its Medicare Advantage risk score adjustments by, for example, taking account of additional beneficiary characteristics and using the most updated information available.

In its 2013 report, the GAO notes that CMS used updated data and considered a limited number of additional factors about beneficiaries in calculating the 3.4% risk adjustment CMS applied in 2012. As this 3.4% figure failed to adequately account for the discrepancy in coding practices between the Medicare and Medicare Advantage programs, the GAO encourages CMS to continue revising the adjustment formula going forward. The GAO also notes that CMS officials seem open to further revisions.