Managing payment to Medicare Advantage (MA) plans is becoming increasingly important for the financial health of the Medicare program, as MA enrollees now encompass half of the Medicare population. Researchers and regulators have long noted that MA plans are overpaid, particularly via the risk adjustment system. The Urban Institute convened two workshops with experts on MA and risk adjustment to discuss potential reforms to MA risk adjustment and the MA payment system. This brief summarizes the key proposals discussed by the expert panelists, including potential benefits, drawbacks, and areas for further research.

WHY THIS MATTERS

Medicare’s Hospital Insurance trust fund partly funds the MA program. Accordingly, overpayment to MA plans directly reduces the trust fund’s reserves, which are expected to be exhausted within the next eight years. The Medicare Payment Advisory Commission, other oversight bodies, and policymakers have consistently raised concerns that MA plans game the risk adjustment system to maximize payment. This brief proposes several reforms that could improve the MA risk adjustment system and reduce incentives for MA plans to upcode, which is when plans maximize the number and severity of enrollee diagnoses they report in order to maximize payment.

KEY TAKEAWAYS

• While some positive selection into MA may still occur, panelists saw upcoding and the resulting overpayment of MA plans as the biggest problem with MA risk adjustment.
• The panel identified several promising reforms to MA risk adjustment, including:
  • Making MA risk adjustment zero-sum across MA plans, similar to the approach used in the health insurance marketplaces. This approach would ensure that upcoding does not harm taxpayers or lead to increases in Medicare premiums.
  • Adding a small reinsurance program to the MA payment system or trimming outliers during model calibration. This approach would improve payment accuracy, reducing any selection incentives.
  • Exploring ways to use survey data in risk adjustment, which may reduce reliance on diagnoses and blunt incentives to upcode.
• Panelists emphasized that larger reforms to MA risk adjustment are important but should not stand in the way of smaller, incremental policy changes like increasing the coding intensity adjustment.