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Medicare Advantage is a program offering private health-insurance plans as options to replace traditional Medicare. Unlike traditional Medicare, plans are not paid for services rendered, but are paid up-front and can profit from denial of care. They can offer extra benefits, including dental and drug benefits, but they use limited networks of physicians and hospitals, and they can restrict care with prior authorizations and formulary restrictions.
Since payment per-person based on average cost would severely over-pay for the healthy and under-pay for the sick, this method of payment creates incentives that worsen disparities in care. Medicare attempts to correct for this with risk adjustment (paying more for higher risk than lower risk beneficiaries), but risk adjustment cannot be made anywhere near accurate enough to avoid over-paying for the healthy and under-paying for the sick. Medicare Advantage plans therefore use strategies to sign up healthier beneficiaries and discourage sicker ones, so as to secure a healthier than average pool of beneficiaries while getting paid as if their beneficiaries had average health risks, and profiting from the difference.
The Centers for Medicare & Medicaid Services (CMS) added diagnoses to the risk adjustment formula in 2004 in an attempt to make it more accurate, but this only improved its predictive accuracy from 1% to 12% and introduced a major opportunity for Medicare Advantage plans to game the formula by “upcoding,” which means choosing more specific or severe (and more highly paid) diagnosis codes than would be required for purely patient care purposes and sometimes fraudulently adding irrelevant or non-existent diagnoses. According to one expert estimate, the cost to Medicare of aggressive diagnostic coding by Medicare Advantage plans and the failure of CMS to correct for it will reach several hundred billion dollars in coming years.
Medicare Advantage plans have achieved profitability largely by gaming their risk pools, up-coding and blunt restrictions on care, including issuing millions of inappropriate denials for care that met Medicare coverage rules and minimally, if at all, by improving care. Typical administrative costs for Medicare Advantage plans, including profits, have been in the 15-20% range, compared to around 2% for traditional Medicare prior to the Affordable Care Act.
It would be far more cost-effective for CMS to improve traditional Medicare by capping out-of-pocket costs and adding improved benefits within the Medicare fee-for-service system than to try to indirectly offer these improvements through private plans that require much higher overhead and introduce profiteers and perverse incentives into Medicare, enabling corporate fraud and abuse, raising cost to the Medicare Trust Fund, and worsening disparities in care.
These problems are not correctable within the competitive insurance business model, and the Medicare Advantage program should be terminated.
Stephen Kemble, MD is a Board member and chair of Policy Committee for Physicians for a National Health Program (pnhp.org).
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