What Really Happened to 2010 Medicare Advantage Payment Rates?

This post originally appeared on The Finance Buff.

I am in the middle of a three-post series on the basics of Medicare and its payment systems. The first post covered FFS Medicare and the second covered the Medicare Advantage (MA) program. I’ll release the third post next week. This post applies a bit of what was covered in my review of the MA program to touch on a recent development.

On 6 April 2009 the Centers for Medicare & Medicaid Services (CMS) made a complicated announcement about how Medicare Advantage (MA) plans will be paid in 2010. The details were not explained well by CMS or the news media. It was widely reported that payments to MA plans would decrease by 4-5% in 2010. Plans warned of increased beneficiary premiums and reduced benefits.

MA plans are paid a fixed rate for each enrolled beneficiary. Ignoring risk-adjustment, these rates are capped by “benchmarks,” which vary by county. (I summarized the MA payment system in a prior post. See also this MedPAC paper.)

Examining CMS benchmark data, from 2009 to 2010 MA benchmarks will decrease by about 0.5% on average, or about $3 per month. I’ve created a spreadsheet with the 2009 and 2010 monthly benchmarks by county so you can see for yourself that they only differ by a few dollars per month.

So where are the big payment cuts that plans are complaining about? It turns out CMS made another change to how plans are paid, not to the benchmarks directly but to how they are adjusted to reflect “upcoding.” The effect of this change will be to reduce payments to plans by 3.41% in 2010. This plus the 0.5% reduction in benchmarks plus a few other small changes in 2010 bring the total reduction into the 4-5% range.

Upcoding is like grade inflation. It is the coding of health care in a beneficiary’s medical record in such a way to make the beneficiary seem less healthy than he or she actually is. To the extent MA plans upcode they benefit financially from it because plan payments are adjusted for risk. Payment is higher for beneficiaries that appear sicker based on the codes in their health care record. However, if the beneficiary is not actually as sick as his codes make him seem then the plan is paid more for that beneficiary than it should be.

CMS and the Congressional Budget Office (CBO) studied coding pattern differences between MA plans and FFS Medicare and found evidence of upcoding among MA enrollees. Having found that MA plans are overpaid due to coding creep, for the first time in 2010, CMS will adjust payments accordingly.

So, while the benchmarks hardly change, the plans are right that they’ll get less. I have a minor semantic quibble with how this is characterized. I would not call it a “reduction in payment.” I would call it a “reduction in overpayment.”

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