Upcoding: Evidence from Medicare on Squishy Risk Adjustment

Abstract

In most US health insurance markets, plans face strong incentives to "upcode" the patient diagnoses they report to the regulator, as these affect the risk-adjusted payments plans receive. We show that enrollees in private Medicare plans generate 6% to 16% higher diagnosis-based risk scores than they would under fee-for-service Medicare, where diagnoses do not affect most provider payments. Our estimates imply upcoding generates billions in excess public spending and significant distortions to firm and consumer behavior. We show that coding intensity increases with vertical integration, suggesting a principal-agent problem faced by insurers, who desire more intense coding from the providers with whom they contract.

Plan responses to diagnosis-based payment: Evidence from Germany’s morbidity-based risk adjustment

“…This could indicate that the substantial and historical local ties of regional plans provide an effective means to shape physician coding practices, and may act as a substitute for explicit vertical integration in settings like the United States (Geruso and Layton, 2015). Our results are robust to excluding those codes and groups of codes that changed over time because of revisions of the RA system or the ICD catalog.…”

“…The SHI is tightly regulated, including with regards to vertical integration which has been proposed as mechanism for increases in coding intensity in Medicare Advantage (Geruso and Layton, 2015). Despite these restrictions and the 11 We find similar patterns across all diagnoses that were always in the RA and were associated with stable set of ICD categories (results not shown).…”

“…Finally, we examine plan responses in a regulatory environment that is very different from the US and more similar to that of other European countries. For instance, US plans may be able to address principal-agent problems related to coding behavior through mechanisms not available to German plans, e.g., vertical integration (Geruso and Layton, 2015).…”

“…A possible increase in nominal coding due to morbidity-based payments raises several concerns (Geruso and Layton, 2015;Kronick and Welch, 2014). First, in settings without overall budget cap, as in the US Medicare Advantage program and the Health Insurance Exchanges, increases in nominal coding and coding intensity that have no real basis can unduly increase government spending.…”

“…Finally, this behaviour can divert health plans' attention from organising provision to engaging in rent-seeking. Plans that successfully manipulate coding may then use some of the additional earnings to distort consumer choices of plans, e.g., by offering premium rebates or supplemental benefits (Geruso and Layton, 2015).…”