Medicare's Flawed Adjustment Methodology

The methodology Medicare uses to adjust the billions of dollars it pays health plans and hospitals to account for how sick their patients are is flawed and should be replaced, according to study by Dartmouth Atlas Project investigators published in the journal BMJ in April 2014.

A release from the university explains that the team compared Medicare's current risk-adjustment methodology, which is based on the diagnoses recorded in patients' claims records, against adjustment indices based on wealth and health. The study found that using indices pegged to a region's poverty rate or the overall health of its population do a better job of explaining the mortality rate of local Medicare populations than the current diagnosis-based adjustment method, raising questions about its efficacy.

The study is the fourth in a series to raise important questions about how the government accounts for differences in the severity of illness in populations so it can make "apples to apples" comparisons that do not to penalize plans or health systems whose patients are sicker than average. This risk adjustment is a critical factor in how Medicare evaluates hospitals' readmission rates, which affects their Medicare payments, and how it pays Medicare Advantage health plans. Diagnosis-based risk adjustment is also used in comparative effectiveness research and in academic research into variations in medical care across America.

Medicare payments to Medicare Advantage plans are projected to surpass $154 billion in 2014, and account for more than a fourth of total Medicare spending, according to the Congressional Budget Office. Medicare Advantage plans use the CMS – Hierarchical Condition Category (HCC) risk adjustment methodology to adjust their payments to health plans. HCC risk adjustment, based on the diagnoses recorded in claims, is so important to Medicare Advantage plans' revenue streams that a cottage industry has sprung up to help plans maximize their risk-adjustment revenue.

The release quotes study leader David E. Wennberg, M.D., M.P.H. of Dartmouth Institute for Health Policy & Clinical Practice and the Geisel School of Medicine at Dartmouth College, as saying, "We can and should do better. Our body of work demonstrates that the way we adjust for risk now is biased, and when billions of tax dollars are at stake we need to hit the reset button. This paper gives a very good roadmap of how we can do risk adjustment right."