Medicare's Disadvantage
MedPAC issues scathing report on private Medicare Advantage plans
With the privatization of Medicare nearing its halfway point, the program’s watchdog is warning that continuing to overpay the private insurers selling Medicare Advantage plans threatens to undermine the financing of the entire program.
Using language rarely seen in a Medicare Payment Advisory Commission (MedPAC) report, the agency last week told Congress and the Centers for Medicare and Medicaid Services that “a major overhaul of MA policies is urgently needed.” With 46% of beneficiaries or 27 million seniors now in private plans, continued growth in the number of these higher costs plans “will further worsen Medicare’s fiscal sustainability,” the report warned. About 62 million seniors and people with disabilities depend on the program for their health care coverage.
Enrollment in private plans grew 10% a year over the past three years. Growth has been especially fast among low-and-moderate income seniors attracted to the plans’ lower upfront costs. MA plans usually include drug coverage and eliminate the need for supplemental Medigap plans. A generous federal reimbursement policy also allows the plans to offer extra benefits like dental and eyeglass coverage, which has proven to be a powerful marketing tool for the private insurers since those benefits aren’t provided by traditional Medicare.
The gist of the MedPAC critique rests on what the report claimed are overly generous payments by CMS, which it estimated to be 4% higher on average than what seniors in the private plans would cost if they remained in government-run, fee-for-service Medicare. The Medicare Advantage program, when launched in 1997, was touted as a way for the government to save money. But that has never happened, although the level of excess payment was whittled down during the Obama administration.
How it works
Private insurers selling MA plans in any given county or region receive a lump sum payment (called a capitated payment or capitation) for every senior they enroll. The capped amount is based on the average spending for a traditional fee-for-service (FFS) Medicare beneficiary in that region. The plans usually price their plans well below the average spent on a FFS beneficiary. In 2021, the average MA plan bid was about 15% below the average FFS spend in their service territory.
But then their bids are adjusted upward to reflect the underlying health conditions of the seniors who opt into the plan. It doesn’t matter whether those conditions are being treated.
That methodology had led to a massive “upcoding” industry, where an insurance company’s data miners or their consultants and technology vendors pore over patient medical records to find untreated diagnoses, which the plans then use to inflate their capitated payments. In other words, even though traditional Medicare never paid hospitals, doctors and other providers to treat the conditions, the plan gets paid more.
MedPAC estimated plan overpayments cost the government about $12 billion in 2020 or about 3.4% of the $350 billion spent on Medicare Advantage plans. An independent researcher who previously worked on MA payments at CMS estimates the excess runs as high as $20 billion a year. Upcoding accounts for about half to two-thirds of the excessive payments to MA plans compared to traditional fee-for-service Medicare.
The rest comes in quality improvement payments, which are also based on plan-generated reports. The MedPAC report said those reports are of such low quality that “the Commission can no longer provide an accurate description of the quality of care in Medicare Advantage.” A Wall Street Journal investigation in 2018 found that insurers were combining plans with poor performance into larger, better-performing plans in order to win payment bonuses for the entire group.
MedPAC’s critique is not new. Similar complaints have been lodged in its annual reports for years. What’s new (and, sadly, unreported in the mainstream press) is this year’s warning that the excessive payments now threaten to undermine the Medicare trust fund, which pays beneficiaries’ hospital bills and is projected to run out of assets in 2026.
Enter the courts
Most efforts to recoup money have come in court. There have been dozens of whistleblower lawsuits filed in federal courts alleging upcoding, about 25% of which have been joined by U.S. attorneys. Federal prosecutors intervene when they believe they can succeed in court, which can lead to triple damages.
In 2017, Freedom health and Optimum Healthcare paid $31.7 million to settle an upcoding complaint. Northern California’s Sutter Health, a large hospital system with an affiliated health plan, paid $30 million in 2019 and another $90 million in 2021 to settle similar charges.
But the biggest players in Medicare Advantage have largely eluded successful prosecution, often with the help of insurer-friendly federal judges. A major whistleblower suit against UnitedHealth, the nation’s largest MA insurer with 27% of the market, was thrown out of court in 2018. At the time many observers suggested the ruling would make it more difficult for the government to join cases.
But in 2020, U.S. attorneys in New York charged Anthem, one of the nation’s largest insurers, with providing inaccurate or inflated diagnosis information leading to MA overpayments worth $100 million a year. And last July, government attorneys in California and Colorado sued Kaiser Permanente for upcoding. Clearly, the failed UnitedHealth case has not scared off some federal prosecutors.
The insurance industry responds
The insurance industry has successfully used its clout in Congress and at CMS to push back against any new law or regulatory action that would bring Medicare Advantage reimbursement in line with FFS reimbursement. This past January, 346 members of Congress from both political parties and representing a broad ideological spectrum signed a support letter organized by the Better Medicare Alliance, an insurance industry front group. The letter repeated the main talking points the industry uses to justify higher payments in the MA program.
“Medicare Advantage provides older adults affordable, high-quality services, including care coordination, disease management programs, out-of-pocket spending limits, access to community-based programs, additional supplemental benefits such as vision and dental coverage, and often prescription drug coverage for no additional premium,” the letter said. “Older adults on Medicare Advantage report consistent satisfaction with their coverage and quality of care.”
Signatories ranged from Rep. Ilhan Omar (D-Minn.) and Rep. Barbara Lee (D-Cal.) on the left to Rep. Michael Burgess (R-Tex.) and Rep. Ronny Jackson (R-Tex.) on the right, both of whom are physicians and are among the more conservative members of the U.S. House of Representatives.
Indeed, the broad bi-partisan consensus supporting Medicare Advantage stands in stark contrast to the intense campaign led by progressive members in Congress and single-payer advocates denouncing Medicare’s direct contracting program, which was initiated by the Trump administration. Direct contracting, as recently amended by the Biden administration, extends the Medicare Advantage capitated payment model to provider organizations led by hospitals or large physician practices, which are sometimes owned by private equity firms and insurance companies.
As I’ve reported here and here, a number of private equity and venture capital-backed physician practice start-ups have entered the MA market in recent years to serve the needs of low- and moderate-income patients. Relying on capitated payments from private insurers who’ve signed up lower income patients with multiple chronic conditions in their Medicare Advantage plans, these practices expect to make money (most are still money-losing propositions due to their pouring capital into expansion) by delivering more of the preventive and coordinated care that keeps people out of hospitals, which are most expensive settings for delivering health care.
Members of the progressive caucus in Congress lump them in with the private insurers like UnitedHealth and Aetna that have acquired thousands of physician practices in recent years. In a letter sent in January to HHS Secretary Xavier Becerra, 54 members of Congress led by Rep. Pramila Jayapal (D-Wash.) asked for a complete end to direct contracting.
“Unfortunately for patients in these entities, direct contracting entities are incentivized to funnel patients to providers within their networks to maximize profits which can limit patients’ care options,” the letter said. “These models transform the care of a traditional Medicare beneficiary to care typically seen in a private Medicare Advantage (MA) plan.” Ironically, 15 of the 54 signatories, including Omar and Lee, who signed onto the anti-direct contracting letter, also signed onto the Better Medicare Alliance letter calling for maintenance of the MA program.
The takeaway
I’m of two minds on this controversy. On the one hand, traditional Medicare, which relies on fee-for-service payments to providers, has been mostly ineffective at encouraging hospital systems and large physician practices to move toward capitated payments, which is the best way to incentivize providers to coordinate care, promote prevention, reduce hospitalizations, improve outcomes and prolong lives.
The Center for Medicare and Medicaid Innovation is moving at a snail’s pace in encouraging providers to adopt cost-effective accountable care organizations or other payment reforms to lead in the direction of full capitation. Hospital revenue still depends on putting heads in beds, as industry jargon puts it, and the high six- and seven-figure salaries earned by physicians who work in high-priced specialty practices still depend on the number of fee-for-service procedures they deliver, which aren’t necessarily what will lead to the best outcomes for their patients.
On the other hand, Medicare Advantage plans, which receive capitated payments, have also failed to deliver on its promise of delivering lower cost care. Most of the payments made by MA plans to providers mimic the fee-for-service payments established by CMS.
While every MA insurer touts their care coordination and outreach programs for addressing their low-income members’ social needs, very few actually deliver. The emergence of private equity-backed primary care practices like ChenMed, Oak Street Health and CityBlock Health, which are taking the most challenging patients from MA plans, suggests the insurers who contract with these firms are nothing more than privatized administrators of the Medicare program. Their profits depend not on delivering better care but, for the majority of their enrollees, on narrowing networks and using traditional tools like prior authorization to discourage utilization regardless of its impact on outcomes.
Integrated delivery networks like Kaiser Permanente and Geisinger in central Pennsylvania, which house both an insurance arm selling MA plans and a complete delivery network under their non-profit umbrella, no doubt do a much better job at coordinating care than their private insurance industry counterparts. But as the recent lawsuit charging Kaiser with upcoding suggests, even non-profits are prone to maximizing revenue when the government presents them with the opportunity.
The entire risk adjustment and quality bonus programs governing Medicare Advantage payments is in need of a dramatic overhaul. As the MedPAC report pointed out, more and more people are entering MA plans. The shrinking number of people left in FFS Medicare — soon to be less than half — will be be setting the benchmarks by which CMS sets the base payments for MA plans. That shrunken group may no longer be a representative sample, which could lead to ever larger overpayments in the years ahead.
Congress needs to address this issue. It can begin the process by holding hearings on why the Medicare Advantage program has never succeeded in delivering health care at a lower cost than the fee-for-service program. If we’re going to continue moving toward privatizing Medicare, the government will need much better tools for overseeing the program and ensuring it is not getting gouged.