NCPA - National Center for Policy Analysis

Medicare Advantage Plans and "Upcoding"

July 6, 2015

In the Medicare fee-for-service (FFS) option most reimbursement is independent of recorded diagnoses. Under Medicare Advantage (MA) plans, which use a private insurer, payments are assessed by diagnosis of the enrollee. This incentivizes intense coding depending on the plans\' ability to influence the providers that assign diagnosis codes.

The diagnoses used to determine insurer payments are reported by physicians and aggregated into a risk score. A higher score yields a higher payment to the insurer, often at a cost to the taxpayer. Therefore, insurers are incentivized to influence physicians to "upcode" diagnosis information to maximize the subsidy, for instance by paying physicians based on the codes they assign.

  • Upcoding impacts the cost of Medicare to taxpayers.
  • The differential payment creates a voucher that is larger when consumers choose a plan with higher coding intensity.
  • A 10 percent increase in Medicare Advantage penetration in a county leads to a 6.4 percent increase in the risk score.
  • The size of the coding difference is related to the vertical relationship between insurers and providers.

For example, physician owned plans generate 16 percent higher risk scores for the same patients compared to FFS. A seven percent increase in the average risk score is equivalent to seven percent of all consumers in the market becoming paraplegic over a year.

Medicare is the costliest public health insurance program in the world. Absent a coding correction, Medicare will pay out an excess of $10.5 billion per year. Payments to federal and state Health Insurance Exchanges are adjusted using a model similar to the MA model.

To induce efficient health plan benefit design, risk adjustment must focus on generating insurer incentives rather than predicting expected costs. One way to reduce the impact of upcoding would be to expand the look-back period over which risk scores are calculated.

Source: Michael Geruso and Timothy Layton, "Upcoding: Evidence From Medicare on Squishy Risk Adjustment," National Bureau of Economic Research, May 2015.


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