Better billing through upcoding, public cost high

The federal government is paying billions more per year to Medicare Advantage plans because of upcoded billing, according to a working paper by the National Bureau of Economic Research. CMS pays private Medicare Advantage (MA) plans based on diagnosis-based subsidies, also known as risk adjustment, that reflect an enrollee’s health. As a result, according to the research, enrollees in the private MA plans have 6 to 16 percent higher diagnosis-based risk scores than enrollees in fee-for-service Medicare. In 2014, the additional cost to the government of MA enrollment was around $640 per person per year. With around 16 million Medicare beneficiaries choosing MA, the researchers noted that this translated to an excess public cost of approximately $10.5 billion annually.

Risk adjustments

Between 2003 and 2014, the number of consumers enrolled in a market where an insurer’s payment is based on the consumer’s diagnosed health state grew from zero enrollees to almost 50 million, including state and federal Health Insurance Exchanges created under the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148). The diagnosis-based subsidies to insurers are known as “risk adjustment” and compensate insurers for enrolling high expected-cost consumers. This risk adjustment reduces insurer incentives to distort insurance plan characteristics to attract lower-cost enrollees and addresses the impact of high-cost enrollees driving up plan prices.

Generally for hospital and physician coverage, Medicare beneficiaries can choose a traditional fee-for-service (FFS) option or enroll with a private insurer through MA. In the FFS system, the reimbursement is usually independent of a recorded diagnosis, whereas private MA plans have the noted risk adjustment based on diagnosis.

MA plans are attractive to Medicare beneficiaries because, compared to the traditional system, these plans offer more comprehensive financial coverage, such as lower deductibles and coinsurance rates, as well as additional benefits, such as dental care and vision care.


In practice, the diagnoses used to determine the risk adjustment are reported by physicians and aggregated into a risk score that reflects the consumer’s expected claims cost. Higher scores yield a higher net payment to the insurer. As a result, the researchers noted, insurers have an incentive to influence physicians to upcode diagnosis information in a patient’s record to maximize the insurer subsidy. Insurers do this in practice, for example, by paying physicians on the basis of codes assigned – certain codes net the physician a higher payment.

By examining how a risk score can change depending on an enrollee’s choice of an insurance plan, the researchers found that in a partially privatized public spending program such as Medicare, this upcoding increases the cost of the program to taxpayers, to the tune of $10.5 billion annually. Moreover, consumers are driven toward higher coding intensity plans because of the diagnosis-based subsidy.

For example, data indicated that the average risk score in a county increased by one standard deviation as the MA plan penetration increased from zero to 100 percent. This implies that an individual’s risk score in MA is about 7 percent higher than the individual would be scored under FFS Medicare. In real world context, this risk score increase is equivalent to 7 percent of all consumers in the market becoming paraplegic, 12 percent of all consumers developing Parkinson’s disease, or 43 percent becoming diabetics. Since 2010, CMS has applied a 3.41 percent deflation factor to MA risk scores when determining payments to private plans in the MA program, under the assumption that private plans code the same patients more intensively.