Is Medicare Advantage Risk-Based?

Medicare Advantage is a type of health plan that offers an alternative way to receive Medicare benefits. Medicare Advantage Plans are offered by private insurance companies that contract with Medicare to provide coverage for Medicare Part A (hospital insurance) and Part B (medical insurance). Some Medicare Advantage Plans also include Part D (prescription drug coverage) and other benefits such as vision, dental, and wellness programs. Medicare Advantage Plans are also known as Part C or MA plans.

Medicare Advantage Plans are risk-based, meaning that they receive a fixed payment from Medicare for each enrollee, regardless of the actual costs of care. This payment is adjusted based on the health status and expected utilization of each enrollee, using a statistical method called risk adjustment. Risk adjustment is a key component of Medicare Advantage, as it ensures that plans are paid appropriately for the risk they assume and encourages plans to enroll and care for beneficiaries with different health needs.

Risk Adjustment in Medicare Advantage Health Plan

Risk adjustment is a statistical process that assigns a risk score to each Medicare Advantage enrollee based on their age, gender, and diagnoses. The risk score reflects the expected costs of providing care for that enrollee compared to the average Medicare beneficiary. The higher the risk score or claim data, the higher the payment that the plan receives from Medicare.

The risk score is calculated using a risk adjustment model developed by the Centers for Medicare and Medicaid Services (CMS), the federal agency that oversees Medicare and Medicaid. The current risk adjustment model uses diagnosis codes from medical claims and other sources to assign enrollees to different hierarchical condition categories (HCCs). HCCs are groups of related health conditions that have similar clinical characteristics and costs. For example, diabetes, heart failure, and chronic kidney disease are some of the HCCs used in the risk adjustment model.

The risk adjustment model assigns a weight to each HCC based on its relative costliness and impact on health outcomes. The weights are derived from historical fee-for-service data and updated annually. The risk score for each enrollee is the sum of the weights of all the HCCs that they have, plus a base factor that accounts for their age and gender. The risk score is then multiplied by a county-level factor that reflects the geographic variation in health care costs.

The risk-adjusted payment for each enrollee is the product of their risk score and a national base rate that represents the average per capita expenditure for Medicare beneficiaries. The base rate is also updated annually based on the growth in Medicare spending and other adjustments. The total payment for each plan is the sum of the risk-adjusted payments for all its enrollees, plus any additional payments or adjustments based on quality, performance, or other factors.

Benefits and Challenges of Risk-Based Medicare Advantage Plan

Risk-based Medicare Advantage has several benefits and challenges for both health plans and beneficiaries.

Some of the benefits are:

• Risk-based Medicare Advantage promotes competition and innovation among health plans, as they have an incentive to offer high-quality, cost-effective, and coordinated care to attract and retain enrollees.
• Risk-based Medicare Advantage encourages health plans to enroll and care for beneficiaries with complex and chronic conditions, as they receive higher payments for higher-risk enrollees.
• Risk-based Medicare Advantage allows health plans to offer more benefits and lower premiums than traditional Medicare, as they can use their savings from managing care efficiently to enhance their plan offerings.
• Risk-based Medicare Advantage gives beneficiaries more choice and flexibility in selecting a health plan that suits their needs and preferences, as they can choose from a variety of plan types, networks, benefits, and costs.

Some of the challenges are:

• Risk-based Medicare Advantage requires accurate and timely coding of diagnoses by health plans and providers, as coding errors can affect the risk scores and payments for enrollees.
• Risk-based Medicare Advantage may create incentives for health plans to overcode or undercode diagnoses to increase or decrease their payments, which can lead to inaccurate risk adjustment and unfair competition.
• Risk-based Medicare Advantage may result in adverse selection or cream-skimming, where healthier beneficiaries enroll in lower-cost plans and sicker beneficiaries enroll in higher-cost plans, which can distort the risk pool and affect the sustainability of the program.
• Risk-based Medicare Advantage may increase administrative costs and complexity for health plans and CMS, as they have to collect, verify, and analyze large amounts of data to perform risk adjustment.

Future Trends in Risk-Based Medicare Advantage

Risk-based Medicare Advantage is expected to grow in popularity and importance in the coming years, as more beneficiaries enroll in these plans and more health systems enter this market. According to CMS projections, nearly 60% of all Medicare beneficiaries will be enrolled in Medicare Advantage Plans by 2029, up from 42% in 2021. Moreover, according to a survey by Guidehouse, 44% of health systems plan to launch or expand their own Medicare Advantage Plans by 2022 and 2023.

As risk-based Medicare Advantage evolves, CMS is also making changes to improve the accuracy and fairness of risk adjustment. Some of these changes include:

• Using more recent and comprehensive data sources, such as encounter data and electronic health records, to capture diagnoses and utilization more accurately.
• Updating the risk adjustment model to account for new and emerging health conditions, such as opioid use disorder and dementia.
• Adjusting the risk scores for enrollees who are dually eligible for Medicare and Medicaid, as they tend to have higher costs and lower quality of care than other enrollees.
• Implementing a new risk adjustment model for Medicare Advantage Plans that are vertically integrated with health systems, as they may have different cost structures and incentives than other plans.

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Conclusion

Medicare Advantage is a risk-based health plan that offers an alternative way to receive Medicare benefits. Medicare Advantage Plans are paid by Medicare based on the health status and expected utilization of their enrollees, using a statistical method called risk adjustment. Risk adjustment ensures that plans are paid appropriately for the risk they assume and encourages them to enroll and care for beneficiaries with different health needs. Risk-based Medicare Advantage has several benefits and challenges for both health plans and beneficiaries, and it is expected to grow and change in the future.

FAQS

What are risk-based Medicare Advantage models?

A: Risk-based Medicare Advantage models are programs in which physicians and healthcare organizations take on financial risk for managing the care of Medicare Advantage beneficiaries enrolled in their plans. This includes receiving capitation payments.

How does Medicare Advantage use hierarchical condition categories (HCC)?

A: Medicare Advantage uses HCC categories and codes to risk-adjust payments to plans based on the health conditions and expected costs of their enrollees. This aims to pay plans appropriately based on the risk profile of their population.

What is coding intensity in Medicare Advantage Plans?

Coding intensity refers to how aggressively plans code diagnoses for their enrollees. Higher coding intensity leads to higher risk scores and higher payments from Medicare Advantage, which could overpay plans.

How can vertically integrated plans manage utilization in Medicare Advantage?

Vertically integrated health systems can better manage utilization through tools like care management and utilization management. This can reduce avoidable costs and readmissions.

What are the challenges for new entrants in Medicare Advantage?

Key challenges for new Medicare Advantage entrants include building risk-adjustment capabilities, managing medical claims and coding practices, and developing networks and governance structures to manage risk-based models.

How are direct-to-employer Medicare Advantage Plans disrupting the market?

Direct-to-employer Medicare Advantage Plans allow employers to contract directly with plans, disrupting traditional models. This is an emerging alternative payment model deploying risk-based Medicaid and Medicare Advantage approaches.

How are improvements in quality measured in Medicare Advantage Plans?

A: Quality in Medicare Advantage is measured through HEDIS audits of process measures, outcomes like readmissions, and enrollee satisfaction surveys. High-performing plans can qualify for bonus payments.

What percentage of Medicare beneficiaries are enrolled in Medicare Advantage Plans?

A: Nearly 60% of Medicare beneficiaries were enrolled in Medicare Advantage Plans in 2022, up from just over 25% in 2010. Enrollment has steadily increased over the past decade.

How do Medicare Advantage Plans aim to reduce out-of-pocket costs?

Plans attempt to reduce out-of-pocket costs through tighter provider networks, utilization management, and offering plans with lower premiums or copays. This aims to improve affordability.

What external challenges do Medicare Advantage Plans face?

Key external challenges plans face include changing CMS risk-adjustment models, Medicare Advantage funding changes, increased CMS audits, and disruptive new entrants and payment models in the market.