The Social Security Act requires that payments to MA plans be adjusted for variation in the cost of providing health care to beneficiaries on the basis of various risk factors, including health status. For most MA beneficiaries, CMS uses its CMS-Hierarchical Condition Categories (CMS-HCC) model to risk-adjust payments to MA plans. HCCs, which represent major medical conditions, are groups of medical diagnoses where related groups of diagnoses are ranked on the basis of disease severity and cost. The CMS-HCC risk adjustment model uses enrollment and claims data from Medicare FFS. The model uses beneficiary characteristic and diagnostic data from a base year to calculate the expected health care expenditures under Medicare FFS for the following year.demographic data for 2009 to determine the risk scores used to adjust payments to MA plans in 2010. For example, CMS used MA beneficiary diagnostic and The Social Security Act further directs CMS to ensure that adjustments to payments for health status reflect changes in treatment and coding practices in Medicare FFS and differences in coding patterns between MA plans and providers under Medicare Parts A and B to the extent differences are identified. To ensure payment accuracy, the act requires CMS to conduct an annual analysis of these coding differences in time to incorporate the results into the risk scores for each year. In conducting such an analysis, CMS is required to use data submitted with respect to 2004 and subsequent years as such data are available. CMS is required to continue adjusting risk scores for coding differences until the time it is able to implement risk adjustment using MA diagnostic, cost, and use data. Beginning with 2014, the diagnostic coding adjustments are subject to a statutory minimum, which was recently amended by the American Taxpayer Relief Act of 2012. Specifically, the Social Security Act, as amended, requires CMS to reduce MA risk scores by at least 1.5 percentage points more than the 2010 adjustment (a total of 4.9 percent) for 2014 and increases the annual minimum percentage reduction to not less than 5.9 percent for 2019 and subsequent years. CMS did not adjust MA risk scores in 2008 or 2009, the first years for which a diagnostic coding adjustment was required under the Deficit Reduction Act of 2005. However, for 2010 CMS estimated that 3.4 percent of MA beneficiary risk scores were attributable to differences in diagnostic coding over the previous 3 years and reduced MA beneficiaries’ 2010 risk scores by 3.4 percent. To calculate this percentage, CMS estimated the annual difference in disease score growth between MA and Medicare FFS beneficiaries for three different groups of beneficiaries who were either enrolled in the same MA plan or in Medicare FFS from 2004 to 2005, 2005 to 2006, and 2006 to 2007. CMS accounted for differences in age and mortality when estimating the difference in disease score growth between MA and Medicare FFS beneficiaries for each period. Then, CMS calculated the average of the three estimates. To apply this average estimate to 2010 MA beneficiaries, CMS multiplied the average annual difference in risk score growth by its estimate of the average length of time that 2010 MA beneficiaries had been continuously enrolled in the same MA plans over the previous 3 years, and CMS multiplied this result by 81.8 percent, its estimate of the percentage of 2010 MA beneficiaries who were enrolled in an MA plan in 2009 and therefore were previously exposed to MA coding practices. CMS applied the same 3.4 percent adjustment to risk scores it used in 2010 to risk scores in 2011 and 2012. CMS’s risk score adjustment for diagnostic coding differences for 2010 through 2012 was too low. Specifically, we estimated that the cumulative impact of coding differences on risk scores increased from 2010 through 2012 and was greater than CMS’s risk score adjustment of 3.4 percent for each of the 3 years. In updating our analysis from the January 2012 report, we estimated that cumulative risk scores in 2010 were 4.2 percent higher than they likely would have been if the same beneficiaries had been enrolled continuously in FFS. Using the methodology described earlier, we estimated that differences in diagnostic coding resulted in 2011 risk scores that were 4.6 to 5.3 percent higher than they likely would have been if the same beneficiaries had been continuously enrolled in FFS. This upward trend continued for 2012, with estimated risk scores 4.9 to 6.4 percent higher (see fig. 1). Because CMS’s adjustment to risk scores for 2010 through 2012 to account for diagnostic coding differences was too low, we estimated that MA plans received excess payments of between $3.2 billion and $5.1 billion over the 3-year period. CMS’s annual 3.4 percent reduction in risk scores is equivalent to reducing total payments to MA plans by an estimated $2.8 billion in 2010, $3.0 billion in 2011 and $3.2 billion in 2012. According to our estimates, the amount of the excess payments to MA plans after accounting for CMS’s adjustments was $0.6 billion in 2010, $1.1 billion to $1.6 billion in 2011, and $1.5 billion to $2.9 billion in 2012. (See fig. 2.) According to CMS officials, the agency used the same methodology to determine the 2013 risk score adjustment as it used in 2011 and 2012, resulting in a risk score adjustment of 3.4 percent for 2013. CMS conducted a data-based analysis of coding differences for 2013 and considered the results, along with other factors, in determining the adjustment provided for in the Social Security Act. To conduct its data- based analysis, CMS officials reported that they used the same methodology they used to calculate the 3.4 percent adjustment for 2010, but incorporated more recent data. In addition to the results of their data-based analysis, CMS officials told us that they took into account other factors when determining the 2013 risk score adjustment, such as payment changes made to the MA program under the Patient Protection and Affordable Care Act, the stability of the MA program, and the maintenance of benefits for seniors. CMS’s risk score adjustment of 3.4 percent for 2013 is the same that it used in 2010, 2011, and 2012. The Social Security Act does not prescribe the methodology that CMS is to use in adjusting for differences in diagnostic coding and, in this regard, it provides the agency with discretion in designing and conducting its analysis of coding differences. However, the express purpose of the requirements to conduct and incorporate a data-based analysis of coding differences into the risk scores is to ensure payment accuracy. The statute does not provide for factors other than the results of the analysis to be incorporated into the adjustment, suggesting that accuracy would be achieved through the incorporation of these analytical results by themselves. In response to our inquiries, CMS officials told us that they reviewed a range of options when determining an adjustment for 2013, but did not explain whether these options were derived from the agency’s data-based analysis. CMS officials did not identify the specific source of their authority to consider factors other than the required data-based analysis when determining the adjustment amount, but stated that they believed that there was policy discretion with respect to the most appropriate adjustment factor for the payment year. While CMS did not change its risk score adjustment methodology for 2013, agency officials said they may revisit their methodology for future years. While diagnostic coding adjustments are subject to a statutory minimum beginning in 2014, CMS may implement a diagnostic coding adjustment that is greater than the statutory minimum if they determine the minimum is too low. Risk adjustment is important to ensure that payments to MA plans adequately account for differences in beneficiaries’ health status and to maintain plans’ financial incentive to enroll and care for beneficiaries regardless of their health status. Our work confirms that differences in diagnostic coding caused risk scores for MA beneficiaries to be higher than those for comparable beneficiaries in Medicare FFS in 2010, 2011, and 2012. CMS’s decision to use a 3.4 percent adjustment to risk scores for 2010 through 2012 instead of the higher adjustments called for by our analysis resulted in excess payments to MA plans. The existence of such excess payments indicates that CMS’s adjustment does not accurately account for differences in treatment and diagnostic coding between MA plans and Medicare FFS—the stated goal of the statute that required CMS to develop a diagnostic coding adjustment. In our January 2012 report, we recommended that CMS take steps to improve the accuracy of the adjustment to account for excess payments due to differences in diagnostic coding. We noted that CMS could, for example, account for additional beneficiary characteristics, include the most recent data available, identify and account for all the years of coding differences that could affect the payment year for which an adjustment is made, and incorporate the trend of the impact of coding differences on risk scores. CMS’s adjustment for 2013 is the same as it used in 2010, 2011, and 2012. However, given our finding that this adjustment was too low and resulted in estimated excess payments to MA plans of at least $3.2 billion, we continue to believe that it is important for CMS to implement our recommendation that it update its methodology to more accurately account for differences in diagnostic coding. We provided a draft of this report to CMS for comment. CMS did not have any general comments. The agency provided one technical comment, which we incorporated. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretary of Health and Human Services, interested congressional committees, and others. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff has any questions about this report, please contact me at (202) 512-7114 or cosgrovej@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix II. This appendix describes the scope and methodology that we used to address our objective to determine the extent to which differences, if any, in diagnostic coding between Medicare Advantage (MA) plans and Medicare fee-for-service (FFS) affected risk scores and payments to MA plans in 2010, 2011, and 2012. This methodology includes enhancements from the methodology we used in our January 2012 report. To determine the extent to which differences, if any, in diagnostic coding between MA plans and Medicare FFS affected MA risk scores in 2010, 2011, and 2012, we compared actual risk score growth for beneficiaries in our MA study population with the estimated risk score growth these beneficiaries would have had if they had been enrolled in Medicare FFS. For our estimates, we assumed MA plans and Medicare FFS had equivalent coding patterns in 2006—the year of coding upon which 2007 risk scores were based—and therefore calculated the cumulative effect of coding differences starting with risk score data from 2007. Because 2010 risk score data were the most current data available at the time of our analysis, we projected the extent of coding differences in 2011 and 2012 on the basis of trends from 2005 through 2010. To do these analyses, we used Centers for Medicare & Medicaid Services (CMS) enrollment and risk score data from 2004 through 2011. Risk scores for a given calendar year are generally based on beneficiaries’ diagnoses in the previous year, so we identified our study population on the basis of enrollment data for 2004 through 2009 and analyzed risk scores for that population for 2005 through 2010. Our MA study population consisted of a retrospective cohort of 2010 MA beneficiaries who were enrolled in MA for all of 2009 and either MA or FFS in 2008, and we followed them back for the length of their continuous enrollment to 2004. Beneficiaries remained in our cohort for as many years as they were continuously enrolled in MA, plus (if applicable) the year of Medicare FFS enrollment immediately preceding their MA enrollment. We calculated disease scores using the 2010 version of the CMS-HCC risk adjustment community model (used for payment in 2010), and summed the appropriate coefficients for each of the HCC variables. We normalized disease scores for each year to 2005 by using the FFS normalization factor that CMS used to normalize risk scores in 2010. Normalization keeps the average Medicare FFS risk score constant at 1.0 over time and is necessary to compare disease scores across years. change in disease scores that would have occurred if those MA beneficiaries had been continuously enrolled in FFS. We then compared these estimates of disease score growth under FFS to the MA beneficiaries’ actual disease score growth and, because the regression model accounted for other relevant factors affecting disease score growth, we identified the difference as attributable to coding differences between MA and FFS. To calculate the cumulative impact of coding differences on 2010 MA risk scores, we summed the 2007 to 2008, 2008 to 2009, and 2009 to 2010 impact estimates for our retrospective MA cohort, weighting each impact estimate by the percentage of 2010 MA beneficiaries that could have experienced risk score growth due to coding differences during that period. To convert the cumulative impact of coding differences on 2010 MA risk scores into a percentage, we divided by the average MA risk score in 2010. To calculate the cumulative impact of coding differences on 2011 and 2012 MA risk scores, we used a similar methodology, except that we had to estimate the risk score growth due to coding differences for 2010 to 2011 and 2011 to 2012. To estimate the risk score growth due to coding differences for 2010 to 2011 and 2011 to 2012, we used the estimates based on our 2010 retrospective cohorts for five time periods—2005 to 2006, 2006 to 2007, 2007 to 2008, 2008 to 2009, and 2009 to 2010—and made two different projection assumptions. One projection, which we used to calculate our high cumulative impact estimate, assumed that the trend over 2005 to We also provided a more conservative 2010 continued through 2012.estimate that assumed the annual growth trend in coding differences from 2010 to 2012 stabilized at the same level as 2009-2010. We provided this lower estimate to account for the possibility that the growth rate will flatten as MA plans improve their systems for comprehensively coding diagnoses. Our updated methodology includes two major enhancements to the methodology used for our January 2012 report. First, we altered our methodology to make a more conservative assumption of the risk score growth due to coding differences for beneficiaries that recently enrolled in MA without any prior Medicare FFS enrollment. These beneficiaries are new to the Medicare program and tend to be healthier than other beneficiaries. Therefore, they may have less contact with their health plan physicians and less information in their medical records that plans could use to adjust risk scores. As a result, for MA beneficiaries that had a risk score based on MA coding for the second year of the period but did not have a risk score based on either MA or FFS coding for the first year of the period, we altered our methodology to assume that these beneficiaries had zero risk score growth due to coding differences during the period. For the January 2012 report, we had assumed that these beneficiaries experienced the same risk score growth due to coding differences, on average, as did those beneficiaries for which we could measure risk score growth due to coding differences. Second, we adjusted our cumulative impact estimates for 2011 and 2012 to account for the effect of beneficiaries who died after June 30, 2010, or otherwise left MA since 2010. We determined an adjustment was needed after observing that the impacts of coding differences for the time periods 2005-2006, 2006-2007, and 2007-2008 were smaller for the 2010 retrospective cohort used for this study than for the 2008 retrospective cohort used for our January 2012 report. We attributed these differences to beneficiaries who were in our 2008 cohort but not our 2010 cohort as having, on average, greater differences between their actual and estimated disease scores than those beneficiaries who remained in MA. It is possible this is due to sicker beneficiaries with greater coding differences relative to Medicare FFS leaving the study cohort as they aged, either because of death or to rejoin Medicare FFS. We expect that beneficiaries who leave MA or die after 2010 would have a similar effect on our 2011 and 2012 projections. To address this, we adjusted our estimates of the impact of coding differences on the basis of the magnitude of differences in the impact of coding differences for our 2008 and 2010 retrospective cohorts during each period. We applied these adjustments relative to the projection year (i.e., half of the differences between the 2008 and 2010 cohorts for periods 2005-2010 were applied to 2006-2011 for our 2011 projection and the full difference between the cohorts was applied to 2007-2012 for our 2012 projection). To quantify the impact of both our and CMS’s estimates of coding differences on payments to MA plans in 2010, 2011, and 2012, we used data on MA plan bids—plans’ proposed reimbursement rates for the average beneficiary—which are used to determine payments to MA plans and information on MA plan enrollment. We analyzed monthly MA enrollment for 2010 and 2011, and because enrollment data for 2012 was incomplete, we used the annual trend for these 2 years in conjunction with actual enrollment for the first 9 months of 2012 to estimate total 2012 MA enrollment. We used these data to calculate total risk-adjusted payments for each MA plan before and after applying a coding adjustment, and then used the differences between these payment levels to estimate the percentage reduction in total projected payments to MA plans resulting from adjustments for coding differences in 2010, 2011, and 2012.associated with each adjustment to the estimated total payments to MA plans—$114.8 billion in 2010, $122.9 billion in 2011, and $133.5 billion in 2012—and accounted for reduced Medicare Part B premium payments Then we applied the percentage reduction in payments received by CMS, which offset the reduction in MA payments (see table 1). We analyzed data from CMS on Medicare beneficiaries, including data collected from Medicare providers and MA plans. We assessed the reliability of the CMS data we used by interviewing officials responsible for using these data to determine MA payments, reviewing relevant documentation, and examining the data for obvious errors. We determined that the data were sufficiently reliable for the purposes of our study. In addition to the contact named above, Christine Brudevold, Assistant Director; Alison Binkowski; William A. Crafton; Gregory Giusto; Andrew Johnson; Richard Lipinski; Elizabeth Morrison; and Jennifer Whitworth made key contributions to this report.

Summary: CMS pays plans in MA--the private plan alternative to FFS--a predetermined amount per beneficiary adjusted for health status. To make this adjustment, CMS calculates a risk score, a relative measure of expected health care for each beneficiary. Risk scores should be the same among all beneficiaries with the same health conditions and demographic characteristics. Differences in diagnostic coding between MA plans and Medicare FFS led to inappropriately high MA risk scores and payments to MA plans, and CMS adjusted for coding differences in 2010. In January 2012, GAO reported that CMS's adjustments to risk scores did not sufficiently correct for coding differences, resulting in excess payments to MA plans. Since completing the analysis for the January 2012 report, risk score data for two additional years have become available. GAO (1) determined the extent to which differences, if any, in diagnostic coding between MA plans and Medicare FFS affected MA risk scores and payments to MA plans in 2010, 2011, and 2012; and (2) identified what changes, if any, CMS made to its risk score adjustment methodology for 2013 and intends to make for future years. To do this, GAO compared risk score growth for MA beneficiaries with an estimate of what risk score growth would have been for those beneficiaries if they were in Medicare FFS for 2010 and projected the growth to 2011 and 2012, and determined if there were changes to CMS's methodology by reviewing agency documentation and interviewing agency officials. GAO found that the cumulative impact of coding differences on risk scores increased from 2010 through 2012 and was greater than the Centers for Medicare & Medicaid Services' (CMS) risk score adjustment of 3.4 percent for each of the 3 years. In updating the analysis from its January 2012 report, GAO estimated that cumulative Medicare Advantage (MA) risk scores in 2010 were 4.2 percent higher than they likely would have been if the same beneficiaries had been enrolled continuously in Medicare fee-for-service (FFS). For 2011, GAO estimated that differences in diagnostic coding resulted in risk scores that were 4.6 to 5.3 percent higher than they likely would have been if the same beneficiaries had been continuously enrolled in FFS. This upward trend continued for 2012, with estimated risk scores 4.9 to 6.4 percent higher. CMS's adjustment to risk scores for 2010 through 2012 to account for diagnostic coding differences was too low, resulting in estimated excess payments to MA plans of at least $3.2 billion. CMS's annual 3.4 percent reduction in risk scores is equivalent to $2.8 billion in 2010, $3.0 billion in 2011 and $3.2 billion in 2012. According to GAO's estimates, the amount of the excess payments to MA plans after accounting for CMS's adjustments was $0.6 billion in 2010, between $1.1 billion and $1.6 billion in 2011, and between $1.5 billion and $2.9 billion in 2012. Cumulatively across the 3 years, this equals excess payments of between $3.2 billion and $5.1 billion. For 2013, CMS continues to use the risk score adjustment of 3.4 percent it used in 2010, 2011, and 2012. To conduct its data-based analysis, CMS officials reported that they used the same methodology used in 2010, but they incorporated more recent data. CMS officials told us that, in addition to the results of the data analysis, they incorporated additional factors such as recent payment changes made to the MA program under the Patient Protection and Affordable Care Act and the maintenance of benefits for seniors. The Social Security Act does not prescribe CMS's methodology for adjusting for differences in diagnostic coding. However, the express purpose of the requirements to conduct and incorporate into the risk scores a data-based analysis of coding differences is to ensure payment accuracy. The act does not provide for factors other than the results of the analysis to be incorporated into the adjustment, suggesting that accuracy would be ensured solely through the incorporation of analytical results. CMS officials stated that they believed there was policy discretion with respect to the most appropriate adjustment factor but did not identify the specific source of their authority to consider factors other than the required data analysis when determining the adjustment amount. While CMS did not change its risk score adjustment methodology for 2013, agency officials said they may revisit their methodology for future years. GAO's findings underscore the importance for CMS to implement the recommendation from GAO's January 2012 report that the agency improve the accuracy of its MA risk score adjustments by taking steps such as using the most current data available and incorporating adjustments for additional beneficiary characteristics. CMS reviewed a draft of this report and stated that it had no comments.