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. 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