This morning’s Wall Street Journal cover story describes how Medicare Advantage (MA) plans billed the government $50B for illnesses that these insurers diagnosed, but did not actually treat, in their health plan members.

While this probably isn’t news to people steeped in the healthcare space, it was an interesting expose to read just a few months after some of the biggest Medicare insurers (Humana, CVS/Aetna, etc.) attributed their Q1 financial woes to unsustainable adjustments to MA payment rates. At the same time, a few players such as UnitedHealthcare and Alignment Healthcare boasted strong performance and machinations to take market share from their struggling competitors.

Let’s unpack and de-jargonize this.

What is Medicare Advantage?

During insurance enrollment, American senior citizens can choose to sign up for a traditional Medicare plan or a Medicare Advantage (MA) plan. Traditional Medicare works similarly to most health plans - every time you visit the doctor or receive a service, Medicare pays the provider. 

Medicare Advantage is a program in which the government pays private insurers (aka “payors”) a lump sum to manage all healthcare costs for an individual. The program’s initial intent was to incentivize payors to invest in keeping their members healthier, as this would presumably keep their healthcare costs down and allow the payors to make more profit on each member (now subject to the Affordable Care Act’s requirement that payors spend at least 85% of premiums on claims).

Medicare Advantage enrollment has more than doubled since 2010 due to a number of factors explained well in this KFF article.

The WSJ article says that payors went H.A.M. diagnosing illnesses but then didn’t treat them. Why would they do this?

Some patients are sicker than others and will presumably incur higher healthcare costs. The government created a system known as “risk adjustment” to adjust how much it pays a Medicare Advantage plan for a given beneficiary based on that person’s demographics and illness burden. In this system, the health plan would get paid more for someone who is older and has more chronic illnesses than someone who is younger and relatively healthy. One might argue that risk adjustment is a good thing because it can help to identify sicker patients, prioritize their care, and project future medical costs.

In practice, the way risk adjustment occurs is that a clinician needs to assess the patient, diagnose their healthcare condition(s), and document them in the medical record. Since documenting a patient’s illnesses directly impacts a Medicare Advantage plan’s reimbursement, health plans have invested a lot of resources in getting this done – through Annual Wellness Visits, home visits, new AI-driven software that parses doctor’s notes and medication lists to identify missed diagnoses (e.g., Credo Health, Keebler Health), contracting this out to vendors focused on “patient outreach”, etc. The financial performance of some of the most successful MA companies is often attributed to their well-oiled risk adjustment machinery.

The way Medicare Advantage is set up incentivizes these health plans to document the diagnoses, but apparently, not always to provide the right care for diagnosed illness. According to the WSJ article, MA payors taking advantage of the risk adjustment architecture has resulted in lots of incorrect diagnoses or shoddy care where the diagnosis was made but the patient didn’t receive any follow-up treatment.

This chart from the article shows the huge gap in patients receiving treatment when their health condition was diagnosed by their insurer instead of by a doctor:

What does this have to do with current MA market dynamics?

The MA program has come under fire for what some say is vast overpayment to MA health plans. In response, the Biden administration has now cut MA payment rates to insurers for two years in a row. Last year the government also announced significant changes to how the risk adjustment program (“v28”) works.

These changes have put pressure on every insurance company that offers MA plans, but it’s interesting to see the recent bifurcation between the haves and have-nots. While Humana, CVS, and others have shared that they will be paring back unprofitable MA plans and costly supplemental benefits they had included in plans to attract more members, UnitedHealthcare attributed its Q1 on-target MA performance to internal cost-cutting and staying on track with its overall 3-year plan to respond to v28.

Is this the full story? The WSJ article suggests otherwise. The WSJ data suggests that UnitedHealth is the best at gaming the risk adjustment system, adding diagnoses at a higher rate than any other major insurer and reaping the rewards of higher payment from the government for each Medicare Advantage member.

Moreover, the data demonstrates that UnitedHealth did an abysmal job treating most of the patients it gave new, serious diagnoses like HIV:

With increasing media and policymaking attention on MA payments, it’s hard to see how the payors that grew fat on risk adjustment can sustain their past financial performance, even with cost-cutting. A conglomerate like UnitedHealth can potentially cross-subsidize reduced profits from MA with growth from its other healthcare businesses. Or perhaps it even has the resources to fulfill the initial intent of the MA program and actually improve care for its sickest health plan members, not just diagnose them. It will be fascinating to see how this plays out.