The Proposed 8% Medicare Advantage Bump Will Add To Inflation in 2023

By Edoardo Saravalle, Skanda Amarnath and Arnab Datta, with special thanks to Kahaari Kenyatta

We’ve previously discussed how the Biden Administration should creatively manage inflation (outside of relying on the flawed mechanism of interest rate increases), and the Federal Government’s unique power to do so through healthcare pricing. Earlier this year, the Center for Medicare & Medicaid Services (CMS) released its yearly Advance Notice of Proposed Rulemaking (ANPRM) of methodological changes for Medicare Advantage payments and payment policies for Medicare Part C and D. There are several changes, including some that could advance equity in important ways, but the major headline is a nearly 8% increase in payments to Medicare Advantage plans for 2023. If the rule is finalized in April, it will likely add to inflation in 2023.

Medicare Advantage spending was $348 billion in 2021, about 13.7% of total healthcare services consumption, 2.5% of core consumption ("core PCE" - which excludes food and energy), and 2.2% of total consumption ("headline PCE"). The 8.0% bump proposed by CMS would translate to a 1.1% increase in healthcare services inflation, and 0.2% increases in core and headline PCE inflation.

Now is the time for the Biden administration to think hard about how to encourage greater efficiency for the already elevated set of healthcare costs that the government and the private sector finance in this country, especially with pending decisions on Medicare sequestration at the end of March and June. One place to start would be to forego the risk score trend change, which contributes nearly half of the increase.

Analysis of the Risk Score Trend Change

The Medicare Advantage (MA) payment changes are adjusted each year based on a variety of factors. This year, one major contributor was the risk score trend.

The risk score trend (the average increase in risk scores for beneficiaries) is not usually included in the ANPRM in this format, though it has been disclosed in most recent years. It seems to reflect the generally higher risk of the Medicare Advantage pool of beneficiaries compared to regular Medicare enrollees. However, past research has cast doubt on whether there actually is a discrepancy between the two populations. A source for this higher risk would seem to be “upcoding” by MA plans, that is, the recording of more diagnoses for MA patients than would be recorded for an equivalent fee-for-service patient, resulting in MA providers receiving overpayments. Medicare Advantage benchmarks are on average 108 percent of fee-for-service benchmarks, when adjusted for risk scores. The Medicare Payment Advisory Committee has repeatedly called for ways to reduce the variance between fee-for-service and MA costs. CRFB has also outlined potential ways to adjust coding.

Actions in the 2023 ANPRM could further contribute to the rising costs. For 2023, CMS proposes to use the statutory minimum coding adjustment of 5.9 percent, same as last year, declining to close the gap between MA and fee-for-service. As the Medicare Payment Advisory Committee and the Congressional Budget Office have suggested, CMS could increase the adjustment above the statutory minimum as a way of decreasing the gap between MA and fee-for-service and reducing MA costs. Additionally, in an action applauded by providers but criticized by some advocates, CMS decided to leave its approach unchanged to in-home Health Risk Assessments, which some see as a major driver of the divergence between fee-for-service and MA. Furthermore, though the current approach can theoretically support equity goals, in practice it leaves the door open for upcoding without improved care–ultimately undercutting the goals of equity. Presumably, as these outside actors have suggested, coding adjustments could result in lower expenditures.

In any event, the potential flaws in risk score trend determination and the open questions about whether it even addresses a real discrepancy, coupled with its impact on healthcare services inflation, necessitate reconsideration. Unless CMS can rigorously justify an improvement in quality of healthcare outcomes resulting from the change, containing inflation outcomes likely requires containing the risk score trend.

Another Possible Avenue to Lower the Overall Payment Increase: The Effective Growth Rate

The effective growth rate, the growth rate of the benchmark payment for the basic enrollee (before adjusting it for individual enrollees) increases significantly this year. After the passage of the ACA, benchmarks came down (though in recent years they have started increasing again). The underlying fee-for-service projections used for the benchmarks are calculated by CMS actuaries, suggesting limited administrative flexibility. To be sure, many assumptions and methodological questions are baked into these benchmark calculations, so there are adjustments that might help lower the total cost.

The effective growth rates can change between the advanced notice and the final rate, although they usually move upward. For example, comparing the CY2022 ANPRM and Rate announcement, the effective growth rate increased from 4.55 percent to 5.59 percent. Looking at the components, one can see an increase in the FFS USPCC from 4.52 percent to 5.47 percent.

If the Biden administration is thinking seriously about how to reduce healthcare services inflation, it would aim to limit the Medicare Advantage Risk Score Trend and differences between MA and traditional fee-for-service Medicare, unless it can be shown that these additional payments deliver a higher quantity or quality of healthcare. It seems much more likely that these elevated ad hoc payments to the healthcare industry will push up inflation.