The costs of decedents in the Medicare program: implications for payments to Medicare + Choice plans.

Medicare's payment system for health maintenance organizations (HMOs) would ideally reward plans that efficiently deliver care. In practice, however, Medicare's capitated payment system instead gives health plans and subcapitated providers incentives to attract low-risk patients and disenroll high-risk patients. One well-known way to mitigate such risk selection is to “risk adjust” payments to providers so they view all enrollees, sick or healthy, as equally profitable. A risk adjusted payment system thus pays more for enrollees with predictably higher costs. The closer such a risk adjusted payment system comes to reflecting what individual enrollees are expected to cost, the fewer incentives providers have to discriminate among potential enrollees or to configure themselves to attract certain types of enrollees. Payment does not, however, need to reflect all of the components of actual spending, which vary in random, unpredictable ways. It is well known that Medicare beneficiaries who die are, on average, very costly, and thus predictors of death would seem to be obvious candidates for risk adjusters. Although the figures vary slightly from year to year, the 5 percent of the Medicare beneficiaries who die each year account for 25–30 percent of Medicare spending (Lubitz and Riley 1993; Hogan et al. 2001). The average Medicare decedent has costs in the last year of life six times those of the average survivor (Hogan et al. 2001). Most of these costs are incurred at the very end of patients' lives: 36 percent of the costs of Medicare beneficiaries in their last year of life are incurred in their last 30 days, and nearly 60 percent are incurred in their last 90 days (Riley et al. 1987). However, predicting time to death is sometimes difficult for clinicians, much less rate-setters armed only with administrative data (Lynn 2001). Questions remain, therefore, about the magnitude of the incentives to select against the terminally ill and whether predictors of death can be found and used effectively as risk adjusters. This article shows that the diagnosis-based risk adjustment system the Centers for Medicare and Medicaid Services (CMS) is implementing does not predict the costs of decedents well. Thus it does little to alter incentives that plans face to avoid enrolling the terminally ill.1 This is not a surprise; many limitations of this risk adjustment system resulted from deliberate policy decisions to make the system easier to implement and harder to “game.” However, we also show that several potential risk adjusters, currently unused, could improve prediction of costs of people with life-threatening conditions. Risk adjusters that explain these costs are thus an area that researchers could explore further. In addition, we show that certain increases in costs at the end of life cannot be predicted easily using administrative data, but could be predicted by a plan or provider with more clinical data about an enrollee. We conclude that Medicare needs another strategy for adjusting payments for these types of beneficiaries. The article is organized into four parts. The first section begins by describing the high costs of care incurred by Medicare decedents and their underrepresentation in Medicare plans. A substantial part of the observed favorable selection into Medicare HMOs is attributable to this underrepresentation. It then discusses risk adjustment in more detail, including the potential of risk adjustment to increase plans' incentives to enroll persons with heightened probabilities of dying. The second section introduces the data and methods that will be used to address the paper's two empirical objectives: (1) gauging the performance for terminally ill patients of the risk adjustment payment system that CMS began to implement in 2000 and (2) suggesting the outlines of an improved risk adjustment system. The third section quantifies some limitations of the current CMS risk adjustment system. It describes the financial incentives plans would face under CMS's Principal Inpatient Diagnostic Cost Group (PIP-DCG) risk adjustment system were it fully implemented. It then investigates predictors of Medicare costs for beneficiaries at the end of life that could supplement the PIP-DCG payment system. The conclusion identifies ways that Medicare's payment system could better match plan payments to terminally ill beneficiaries' expected costs.