Study: Medicare Advantage upcoding cost $2B in 2014

This article has been updated.

Upcoding — when payers and providers assign inaccurate billing codes to increase reimbursement — cost an estimated $2 billion in 2014 in excess public payments to Medicare Advantage, a recent working paper published by the National Bureau of Economic Research suggests.

This equates to about $120 per Medicare Advantage beneficiary in extra government payments, even after correcting for coding inflation. CMS began deflating risk scores 3.41 percent in 2010 to recognize more intense coding in Medicare Advantage. CMS increased this number to 4.91 percent in 2014. After adjustment, Medicare Advantage risk scores in 2014 were still 1.2 percent higher than Medicare fee-for-service, according to the report.

The diagnosis-based subsidies, or risk adjustment, used in Medicare Advantage plans compensate payers for high-cost enrollees, safeguarding against increasing contract prices. They are also meant to keep payers from only insuring low-cost enrollees.

However, under the diagnosis-based insurance model, payers may be motivated to influence physicians to upcode patients. This practice impacts taxpayers and consumer choice, as many patients may prefer plans with higher coding intensity, because it may be associated with better continuity of care, according to the report. Similar choice distortion also occurs in Medicaid and health insurance exchanges created under the Patient Protection and Affordable Care Act.

Authors Michael Geruso, PhD, and Timothy Layton, PhD, examined data from 2006 to 2011, and estimated the excess cost of Medicare Advantage was approximately $10 billion annually, without a coding inflation correction.

Based on the authors' analysis, patients receive 6 percent to 16 percent higher diagnosis-based risk scores in Medicare Advantage plans than they would have under fee-for-service Medicare. The analysis also found high levels of vertical integration between payers and physicians is associated with increased coding intensity.

"Any benefits of the MA program in terms of generating consumer surplus or creating cost-saving externalities within local healthcare markets should be weighed against the additional taxpayer costs and consumer choice distortions generated by a regulatory system in which the parameters determining payment are squishy," the authors wrote.

Editor's note: This article was updated June 4, 2015 to provide a more complete reading of the paper. Data from 2006 to 2011 suggests upcoding cost an estimated $10 billion annually in excess public payments to Medicare Advantage. This figure is unadjusted for coding inflation. CMS did not begin deflating MA risk scores for upcoding until 2010, when it implemented a 3.41 percent deflation rate. In 2014, CMS increased deflation to 4.91 percent. In recognition of this increased deflation, the authors estimate the adjusted excess public cost of MA upcoding in 2014 was $2 billion.


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