A new report by the Committee for a Responsible Federal Budget that examined studies by the USC Schaeffer Center for Health Policy and Economics and the Medicare Payment Advisory Commission (MedPAC), and its own previous research, finds that MA plans might be overpaid by as much as $1.6 trillion over the next decade.
Studies have previously estimated overpayments based on the assumption that MA beneficiaries have a similar risk as those in traditional or fee-for-service (FFS) Medicare. But the latest research measured the underlying health status of MA beneficiaries. The result: The MA population is significantly healthier than the traditional Medicare population. Beneficiaries who switch from FFS Medicare to MA use fewer medical services than those in FFS Medicare even after risk adjustment.
Due to what researchers call “favorable selection,” MA plans were overpaid by 11 to 14.4 percentage points in 2019. USC Schaeffer points to favorable selection and submission of high-risk diagnosis codes as to why MA overpayments totaled $75 billion in 2023. Combining estimates of the latest reports with its own previous research, the Committee for a Responsible Federal Budget said MA plans could be overpaid by $810 billion to $1.56 trillion through 2033, which could lead to as much as $260 billion in higher Medicare premiums.
In a recent Health Affairs blog post, lead author Steven M. Liberman, a nonresident senior fellow at USC Schaeffer Center, addressed the need to reform risk adjustment to help reduce overpayments. The researchers call for three different approaches:
Alter MA rates to reflect switchers’ risk-score-adjusted FFS spending: This approach could be implemented quickly and would reduce MA payments for switchers based on their recent risk score-adjusted FFS spending.
Use a hybrid approach known as reinsurance for high-spending beneficiaries: This system would incentivize efficiency by balancing retrospective reinsurance payments with prospective monthly capitation adjusted by risk score.
Redesign the current risk adjustment model: The redesign would allow for more predictive power to reduce the extent of favorable selection results in MA overpayments, authors wrote. They suggest three options that would require more research but have the potential to change the current model, improve risk adjustment, and reduce MA overpayments.
“We’ve outlined a policy that could be implemented almost immediately, a second that could be implemented in the near (but not immediate) future, and examples of more fundamental changes to risk adjustment with a somewhat longer timeline,” they wrote. “We recommend policymakers aggressively pursue all three.”