College of Liberal Arts

Upcoding Inflates Medicare Costs in Excess of $2 Billion Annually

Thu, Jun 18, 2015
Image: Bigstock
Image: Bigstock

AUSTIN, Texas — Medicare, which is already the costliest public health insurance program in the world, is costing taxpayers an excess of $2 billion annually because of a practice called “upcoding” in private Medicare Advantage plans, according to research by an economist at The University of Texas at Austin.

University of Texas at Austin economics professor Michael Geruso and Harvard Medical School research fellow Timothy Layton investigated risk adjustments in private Medicare Advantage (MA) plans, finding the costly practice of upcoding to be most prevalent among highly integrated insurance plans — or insurers that are more tightly connected with the physicians they contract.

Unlike traditional fee-for-service Medicare, private MA plans receive diagnosis-based subsidies based on their enrollees’ risk scores — or current diagnosed health conditions. Higher risk scores yield higher government subsidies.

“Upcoding means that Medicare Advantage enrollees appear sicker than those same enrollees would have appeared if they had chosen the fee-for-service option. The implication is that the taxpayer is laying out hundreds of extra dollars for each senior who chooses an MA plan instead of fee-for-service Medicare. With more than 16 million MA enrollees, upcoding mean billions in overpayments to plans,” Geruso said. “This is an issue of significant practical importance, given the large and growing role of risk adjustment in regulated insurance markets for Medicare, Medicaid and Affordable Care Act Exchange plans.”

On average, MA plans generate risk scores that are 6.4 percent higher than what the same enrollees would generate on traditional fee-for-service, report the researchers.

According to the paper, a 7 percent increase in the average risk score 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 diabetic.

Excess payments could total about $640 per Medicare Advantage enrollee each year — totaling almost $10.5 billion. However, the Centers for Medicare and Medicaid Services recognized the issue and began deflating risk scores that MA plans report in 2010. As of 2014, these regulations decreased excess costs to $120 per MA enrollee per year, or $2 billion.

“Regulation changes still fall short: Number one, because the deflation percentage isn’t high enough; and, number two, because coding intensity varies across different insurers in the market,” Geruso said.   

The researchers estimate risk score inflation varies between 6 and 16 percent across MA plans, with the highest risk scores being generated from the most integrated insurers (i.e. physician owned).

“Risk adjustment is necessary to prevent insurers from designing plans that cater only to low-cost enrollees. It solves a real problem,” Geruso said. “However, the regulators need to design the risk adjustment system with an explicit consideration of how insurers and providers can manipulate the patient diagnoses that get reported. This means attaching less importance in the payment formulas to the health conditions most susceptible to manipulation.”

The working paper, “Upcoding: Evidence from Medicare on Squishy Risk Adjustment,” was published in the May issue of the National Bureau of Economic Research

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