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GAO Urges CMS to Change Calculation of Private Plan Payments

By Rebecca Adams, CQ HealthBeat Associate Editor

January 26, 2012 -- The Medicare program uses a flawed methodology to pay private health plans that led federal officials to overpay insurers by $1.2 billion to $3.1 billion in 2010, according to a recent study released by the Government Accountability Office (GAO).

GAO analysts urged Medicare officials to change the methodology for these private health plans, known as Medicare Advantage (MA). And House Democrats, who requested the report, pounced on the news as further evidence that Medicare is paying private plans too much.

Medicare payments to private health plans are already poised to go down in 2014 as part of the 2010 health care overhaul (PL 111-148, PL 111-152). But Democrats said officials at the Center for Medicare and Medicaid Services (CMS) should change its methodology as another way to hold down costs for the program.

CMS officials said in a letter to GAO officials that they found the conclusions "informative," but did not say whether they will change the way payments are calculated. CMS officials did not respond to requests for further comment.

The congressional watchdog group is concerned that Medicare Advantage plans are getting paid more to treat patients than providers in the traditional fee-for-service program for beneficiaries with the same medical problems.

Medicare pays health plans a set amount for each patient. The payment is adjusted by the health status of the patient. Plans get paid more for sicker patients and less for relatively healthy people.

But GAO officials found that health plans are categorizing patients differently than the traditional program is. Because of these diagnostic coding differences, Medicare Advantage plans got paid more than they would have if the two programs had used the same criteria.

CMS officials had previously found that coding differences exist and, as a result, reduced Medicare Advantage rates in 2010. But the CMS estimates showed a smaller gap than the GAO estimates found. So even after lowering health plans' payments to make up for overpayments in 2010, the agency still paid more than GAO analysts believe it should have.

The GAO report also said that CMS officials are compounding the problem because they have not recalculated the differences every year. Instead, CMS officials lowered Medicare Advantage payments in 2011 and 2012 by the same percentage that they did in 2010, instead of figuring out what the reductions should have been for each of those years. That exacerbates the overpayments, said GAO officials, because the cumulative effect in later years is greater than it originally was in 2010.

Overpayments to plans could contribute to the high costs of the entire Medicare program, which lawmakers are seeking to cut.

"The accuracy of the adjustments can have important consequences for both Medicare spending and MA plans," the report said.

The federal government spent $114 billion in 2010 on Medicare Advantage, which covers about one-fourth of Medicare beneficiaries.

"As we continue to look for opportunities to eliminate waste, fraud and abuse in Medicare, this should be part of the larger solution to lower the cost curve," Sander Levin of Michigan, ranking Democrat on the House Ways and Means Committee, said in a written statement. "Making this fix would improve payment accuracy for Medicare Advantage and make the program more sustainable."

Ways and Means Health Subcommittee ranking Democrat Pete Stark of California, who has repeatedly characterized MA plans as greedy and a bad value for patients, said in a written statement that the plans shouldn't get more money than the traditional program does for the same types of patients.

"With new data showing the health insurance industry was more profitable in 2010 than ever before, it makes no sense for Medicare beneficiaries and American taxpayers to continue to subsidize them," Stark said.

Lobbyists for health insurers said their plans are doing a better job of overseeing patients' medical services by coordinating their care. They also noted that the report does not say that the Medicare Advantage plans are gaming the system but simply that the fee-for-service and Medicare Advantage programs are not identifying patients' conditions in the same way. The plans may be doing a more thorough job than the fee-for-service system of documenting patients' conditions.

"Conclusions about whether the MA payment system appropriately pays plans should not be based on GAO's analysis," said Robert Zirkelbach, press secretary for the trade association America's Health Insurance Plans (AHIP). "There is widespread agreement among policy makers and stakeholders that our health care system needs to move beyond the outdated fee-for-service system to one that rewards quality, value and better health outcomes.

"Unlike the FFS [fee-for-service] part of Medicare, Medicare Advantage plans work to identify and address beneficiaries' specific health care needs through integrated care coordination, disease management, and quality improvement initiatives,'' Zirkelbach added. "Recent research has found that these programs are improving the quality of care for seniors in Medicare Advantage compared to" the traditional program.

The payment adjustments are a relatively new development. Medicare officials began adjusting plans' payments to reflect the medical diagnoses of patients in 2000 and have taken a series of steps to adjust the way the adjustments were calculated since then.

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