Earlier this year, the Center for Medicare & Medicaid Services (CMS) released the Advanced Notice of Proposed Rulemaking (ANPRM) for Medicare Advantage spending and methodological changes for CY 2024. If finalized, the rule would increase overall Medicare Advantage payments by 1.03%, a considerable departure from increases of 8.5% and 4% in CY 2023 and CY 2022, respectively. Although, some industry groups are pushing to delay a portion of the rule, which would result in at least a 4% increase in Medicare Advantage payments and increase healthcare services inflation considerably more than the 1.03% increase. We have previously advocated for Congress and the Biden Administration to use their authority in the healthcare sector to pursue policies that lower inflation more equitably than Fed-induced tightening. The Biden Administration should finalize the rule as it stands to limit inflation in the healthcare services index, an important component of the Fed’s preferred inflation gauge.
Medicare Advantage’s Flawed Payment System
The proposed rule takes several steps in the right direction to address the issue of overpayments in Medicare Advantage. Unlike Medicare, (services are reimbursed on a fee-for-service basis), Medicare Advantage is a risk-adjustment system where services are reimbursed based on the perceived risk (and associated costs) of treating individual patients. In Medicare Advantage, the more high-risk a patient is, the more CMS will pay a Medicare Advantage plan since the beneficiary is assumed to have higher healthcare costs. However, Medicare Advantage insurers have been known to increase payments by including unnecessary medical conditions (upcoding) for beneficiaries, which in turn, increases their risk scores. Upcoding leads to increased payments, by raising treatment costs beyond what would typically be recorded for beneficiaries under traditional Medicare plans. The industry’s upcoding practices between 2007 and 2022 led to nearly $124 billion in excess payments. To combat this issue, the proposed rule will revise CMS’s risk adjustment methodology to a new classification system that more accurately reflects current costs for medical conditions and eliminates inappropriate or discretionary coding by Medicare Advantage plans and insurers.
CMS estimates that the revision to the risk adjustment system will reduce payments to Medicare Advantage plans by 3.12% and that the full impact of the proposed rule will only increase overall MA payments by a little over 1 percent (1.03%). However, Medicare Advantage insurers and industry groups are pushing for the Administration to withdraw the risk adjustment revision and instead consult with experts and stakeholders about potentially phasing in revisions to the model. A delay or withdrawal of the revision would result in a 4.15% increase in overall MA payments for CY 2024. The revision was proposed to update an outdated system that costs taxpayers billions and damages the long-term sustainability of the Medicare Advantage program. By moving forward with the proposal and cracking down on overpayments, the Biden Administration could save taxpayers $11 billion and lower healthcare services inflation in the process.
The Proposed Rule Has Minimal Inflationary Effects
Medicare Advantage spending was $427 billion in 2022, about 15.7% of total healthcare services consumption, 2.8% of core consumption ("core PCE" — which excludes food and energy), and 2.5% of total consumption ("headline PCE"). The 1.03% bump proposed by CMS would translate to a 0.16 percentage point increase in healthcare services inflation, a 0.03 percentage point increase in core and headline PCE inflation. However, delaying the revision to the risk model would cause at least a 4.15% bump in MA payments resulting in a 0.65 percentage point increase in healthcare services inflation, a 0.12 percentage point increase in core, and a 0.10 percentage point increase in headline PCE inflation. Healthcare services are a significant contributor to core PCE price inflation. In 2022, healthcare services inflation made up roughly 18% of core PCE — the Fed’s preferred inflation metric. While the proposed rule would add to healthcare services inflation, delaying the finalization would more than triple the inflationary impact on healthcare services and simultaneously increase core PCE inflation.
The risk of a recession has grown considerably — a risk that is stronger given the prospect of continued rate hikes if inflation does not cool sufficiently. The Biden Administration must use every part of its toolkit to manage inflation equitably, rather than relying on the Fed’s blunt tools. Therefore, it is crucial that the Administration does not bow to industry pressure, and finalizes its proposed update to Medicare Advantage reimbursement with the full changes to the risk adjustment model.