Over time, the Centers for Medicare and Medicaid Services (CMS) has revised the risk adjustment methodology for Medicare Advantage plan payments.  The risk adjustment process calculates a risk score for each Medicare Advantage (MA) plan enrollee, consistent with specific demographic factors and health status.  An MA plan’s overall risk score is applied to the plan’s base rate, increasing or decreasing the plan’s overall Medicare payments depending on the relative complexity of the beneficiaries enrolled.

As a result, diagnostic coding greatly influences Medicare Advantage plan risk scores and thus also the overall Medicare revenue each health plan receives.  To avoid excess payments to MA plans, CMS periodically assesses diagnostic coding and adjusts the risk adjustment methodology in an attempt to minimize coding differences between Medicare’s health plan and fee-for-service (FFS) delivery systems.

Following policymaker concerns about possible inflated risk scores and health plan payments resulting from MA plan and Medicare FFS diagnostic coding differences, the Government Accountability Office (GAO) studied the actual impact of coding differences on Medicare Advantage risk scores.  GAO also studied CMS’ evaluation methodology for measuring the impact of coding and risk adjustments.

In Medicare Advantage: CMS Should Improve the Accuracy of Risk Score Adjustments for Diagnostic Coding Practices, a 28-page report to Congress, GAO concluded:

  1. Medicare Advantage plan risk adjustments offer a financial incentive for enrollment and beneficiary care regardless of health conditions or resource needs.
  2. Medicare Advantage plan risk adjustments balance health status disparities among beneficiaries.
  3. Appropriate Medicare Advantage plan payment adjustments require similar MA plan and Medicare FFS diagnostic coding patterns.
  4. Medicare Advantage beneficiary risk scores were higher in 2010 compared to Medicare FFS due to diagnostic coding variances.
  5. CMS could have underestimated the impact of coding difference in 2011 and 2012 by leaving its methodology unchanged.
  6. Excess payments due to coding differences could rise unless CMS updates its methodology.

GAO recommended improvements to the accuracy of CMS MA risk score adjustements. To reach this objective, CMS could incorporate adjustements for additional beneficiary characteristics using up-to-date information, while taking into account coding differences through the years and incorporating the effects of those trends into its figures.

To read or download the full GAO report, click here (PDF).

To learn more about how Medicare Advantage plans are paid, read MedPAC’s helpful primer (PDF).