Why Is Medicare Advantage So Popular? A Real Life Squid Game

TL;DR: Medicare Advantage (MA) is so popular and growing because of the increase in Medicare enrollees, the intricate business model based on overpayments, risk-score gaming, and relationships with healthcare providers. The Medicare Gold Rush, involving billions of dollars in recent investments, is linked to these dynamics, creating a distorted market that ultimately drains taxpayers and obstructs serious healthcare reform. The Medicare Advantage game is a way some health companies make extra money by taking advantage of the rules in the Medicare system. They do this by finding more health issues to report, getting paid more from the government, and then using those extra payments to offer more attractive insurance plans to seniors. The government pays more than it should for these plans, while the involved companies make a bigger profit. This game includes companies paying doctors to report more health problems, sharing the extra money with doctors, and even owning the doctor's offices. However, it's important to remember that not all Medicare Advantage plans are part of this game.

What percentage of Medicare is private today?

Medicare Advantage (MA) plans have gained traction, with enrollment nearly doubling in the past 15 years. As of 2023, 49% of Medicare enrollees are enrolled in privatized Medicare or Medicare Advantage over traditional fee-for-service (FFS) Medicare. Although this growth is often attributed to the private sector's efficiency and cost-saving abilities, closer examination reveals that factors like induced utilization, legislated payments, and risk-score gaming contribute significantly to MA rebates and profitability. As MA plans continue to grow, they represent a shift towards privatizing healthcare in the US.

Data suggests that risk scores in MA plans are approximately 8% higher than in FFS, despite no evidence of worse health conditions. This risk score inflation results in an overpayment of about $10 billion annually, casting a shadow on the apparent savings in MA plans.

Why is Medicare Advantage so popular?

1. Increase in Medicare Spending and Predicted Growth in Baby Boomers

One of the primary drivers behind the boom in Medicare Advantage is the expected rise in Medicare spending. Over the next ten years, spending is anticipated to double from $800 billion in 2019 to $1.6 trillion in 2028 as Baby Boomers age. This demographic shift creates an attractive investment opportunity for healthcare organizations and investors alike.

2. Lots of Money To Be Made Due To Overpayments

Over the past 12 years, the Medicare Payment Advisory Committee (MedPAC) has documented approximately $140 billion in MA overpayments. Risk-score gaming in MA leads to CMS consistently overpaying MA Plans with little-to-no demonstrable clinical benefit to patients. The inflated HCC risk scores allow MA plans to draw enormous overpayments by submitting diagnosis codes, enabling MA Plans to maximize profits without necessarily improving patient care. These overpayments create heavily subsidized and distorted market dynamics that contribute to the rise of MA.

3. Convoluted Dynamics of Costly Plans = Easier to Sell 

The market dynamics in MA are perverse due to the overpayments received by MA Plans are being used to bolster the extra benefits to make it more attractive to consumers. Consequently, the more costly a plan is to the payer (CMS), the easier it is to sell to the consumer and the greater the profit. These subsidized dynamics have led to significant start-ups in healthcare, creating a pillaging effect in the industry, with healthcare providers and insurers capitalizing on the financial gains generated from these overpayments.

4. Direct Contracting: The Ultimate Catalyst

The Trump administration introduced Direct Contracting as a new financial intermediary between CMS and non-MA beneficiaries. The aim was to move traditional Medicare beneficiaries into fully capitated, privatized Medicare coverage. This launch has provided an added boost to the MA boom, as organizations are encouraged to tap into the billions of dollars in traditional Medicare spending that would otherwise be directed towards fee-for-service (FFS) beneficiaries.

This new model inadvertently converts traditional Medicare beneficiaries into Medicare Advantage-like arrangements without consent or knowledge. 

The Medicare Gold Rush & Risk Scoring Game: A Simplified Explanation

The risk scoring game in Medicare Advantage (MA) can be compared to a restaurant that earns more money by adding extra items to customers' orders, regardless of the actual consumption or necessity. And, in this case, the customers (patients) aren’t the ones directly paying for the bill, they won’t know if extra items were added. 

MA plans submit diagnosis codes that create more Hierarchical Condition Category (HCC) risk scores to make the patient population appear sicker, therefore get paid more by the Centers for Medicare and Medicaid Services (CMS). The problem lies in the fact that, currently, most Medicare enrollees are being “under-coded” and that there are a lot of opportunities to attach more diseases to each patient. 

Magnitude and Impact: Micro Level

Let's consider a physician's panel of 400 MA patients. With each 0.1 increase in risk scores, annual payer cost per beneficiary grows by $870 - leading to $3.5 million in extraneous payouts. This significantly boosts physician profits, enticing private investors.

Magnitude and Impact: Macro Level

The risk-score gaming phenomenon adds up to overpayment of around $140 billion in MA programs over the past 12 years, as per the Medicare Payment Advisory Committee (MedPAC). Furthermore, if risk-score-related overpayments were eliminated, an estimated $355 billion could be saved over the next eight years, according to Kronick & Chua. 

Risk-score gaming alone increases costs by an estimated $15 billion or 10%  for every 0.1 increase in risk scores across the entire MA population, with CMS paying $13 billion and Medicare Part B beneficiaries contributing an additional $2 billion in inflated premiums.

Profiting Off Overpayments -  The Medicare Advantage Money Machine

To tackle the risk score game limitation, MA plans have found innovative methods, often known as "Deals", to maximize profitability. These Deals involve establishing strategic relationships between insurers and providers, sharing risk premiums, and even acquiring providers outright to harvest the financial windfall from the inflated risk-score model. While appearing beneficial for MA plans and providers, Deals can lead to inaccurate reporting of medical expenses and obscure motives behind acquiring diagnosis codes, rather than focusing on actual patient care.

Pay Providers for Submitting More Codes: 

MA plans pay providers to code more diagnoses, using pay for performance metrics and AI tools to identify coding opportunities.

Data shows that plans like Clover Health pay Medicare (and Direct Contracting) physicians $30 per visit to use its AI platform, "Clover Assistant," which identifies coding opportunities. This tactic incentivizes providers to submit more codes and influences their financial gains.

Share the Risk Premium with Providers: 

MA plans sign "Percentage of Premium" contracts with healthcare providers, encouraging them to focus on increasing risk scores, which in turn, results in a financial windfall for both parties.

For every 0.1 increase in risk-adjustment factor (RAF) score, an additional Part A and B revenue of $87 per member per month (PMPM) is generated, with $71 going to the provider and $15 to the plan. This inflates the total costs by $370 million per 100,000 beneficiaries. In other words, the "Percentage of Premium" contracts are pushing providers to focus on increasing risk scores, causing a massive financial windfall for both parties.

Own the Providers: 

Some insurers and investors have chosen to own healthcare providers outright, giving them full control over data submission and coding.
United Healthcare, the most profitable of the large national MA plans, has adopted this approach by making strategic acquisitions, such as Monarch and Applecare PCP Networks in 2014. With over 50,000 physicians owned or affiliated, United could be the largest employer of physicians in America and plans to add another 10,000 physicians in 2021. This approach integrates the healthcare providers into the "MA Money Machine," giving the insurers full control over data submission and coding.

Do Medicare Advantage Plans Actually Save Tax Payers Money? 

The short answer is not at this point. 

Consider a store offering a significant discount on a product. At first glance, this discount (apparent saving) seems beneficial. However, if the original price was inflated, then the discount is just an illusion, and the actual price (real saving) might not be significantly lower than elsewhere.

Real vs. Apparent/Phantom Savings: Understanding the Difference. 

Real savings: Tangible reduction in healthcare costs. In the context of Medicare Advantage (MA), real savings refer to a reduction in the actual healthcare costs associated with providing medical services to enrollees. A key objective of managed care plans like MA is to improve efficiency and reduce expenses by focusing on preventive care and better care coordination.

Apparent (or phantom) savings: Inflated cost reductions unrelated to better care. In MA plans, apparent savings largely arise from inflated benchmarks and risk score gaming - tactics that increase payments from the Centers for Medicare & Medicaid Services (CMS) without delivering real value. By making the patients appear much sicker while still delivering care at the same cost, MA plans make it seem as though they generate savings while in actuality no cost saving is realized. 

How Medicare Supplements Help MA Plans Win the Bidding Process

A study by the CMS in 2022 found that those with additional coverage on top of Medicare ended up costing 18% more or $1992 per year than those without. 

Medicare Supplement makes traditional Medicare more costly, hence making Medicare Advantage seem like a better deal. Medicare Supplement, also known as Medigap, plays a significant role in influencing the Medicare Advantage (MA) game. These supplemental insurance policies cover the out-of-pocket medical costs that traditional Medicare does not cover, effectively turning traditional Medicare into a first-dollar coverage (think $0 copay for everything). It is essential to understand that first-dollar coverage leads to higher utilization of medical services, a phenomenon known as "induced utilization." 

The average costs of traditional Medicare beneficiaries with supplemental coverage are significantly higher than those without it, increasing the overall weighted average cost for Medicare and consequently the MA benchmarks. This inflated benchmark creates additional "apparent savings" for MA plans, enabling them to offer attractive benefits and premium reductions through rebates.

The inflated benchmarks created through induced utilization and the role of Medicare Supplement policies enable some MA plans to offer zero-premium products, even if they do not provide any actual cost savings compared to FFS Medicare. These zero-premium plans result from benchmark inflation and bonuses, rather than real medical cost savings. This illustrates the role of Medicare Supplement policies in the MA marketplace dynamics, making it easier for MA plans to sell their products to customers while offering the illusion of increased benefits and seemingly lower costs to Medicare beneficiaries. 

Implications for MA enrollees and taxpayers

As a result of the inflated benchmarks and risk score gaming, rebates for MA plans have doubled from $80 per beneficiary per month (PBPM) in 2012 to $164 PBPM in 2022. These apparent savings are used to offer attractive benefits and low premiums to enrollees, driving MA plan enrollment and growth.

Implications on Impact on Medicare Trust Fund and Healthcare Delivery

The concerning rise in Medicare Advantage has several implications for healthcare delivery, taxpayers, the Medicare Trust Fund, and the healthcare system as a whole. The current Medicare Gold Rush is distorting healthcare delivery, creating excessive costs for taxpayers and beneficiaries, draining the Medicare Trust Fund, obstructing the value transformation of American healthcare, and diverting resources that could be used for essential social services and goods. Against the backdrop of the COVID-19 pandemic, understanding these implications is crucial for ensuring a sustainable and efficient healthcare system in the long run.

The excessive financial rewards driven by inflated MA payments and risk score gaming create market distortions that affect health care delivery across the United States. Physicians and health care organizations may feel compelled to focus on coding optimization rather than providing high-quality care to patients. The inducement to increase coding and risk scores may steer providers to unnecessary and potentially harmful undertreatment and overtreatment of patients.