By Stephen Kemble and One Payer States Policy Work Group
October 18, 2022
The Centers for Medicare and Medicaid Services (CMS) announces REACH (“Realizing Equity, Access, and Community Health”)
In early in 2022, CMS announced a major new financing demonstration project for traditional Medicare, REACH. REACH is marketed by CMS as a means to improve equity in health care. In this commentary, we review how the financing mechanisms proposed for REACH seriously undermine that goal.
REACH is the latest effort by CMS to “move away from fee-for-service” and toward “value-based payment” (VBP). Like the CMS “accountable care organizations” (ACOs) that preceded it, REACH shifts insurance risk onto doctors and hospitals. Unlike prior ACOs, it also establishes fiscal intermediary contractors who retain savings as compared with cost benchmarks. The goal is pre-payment with capitation:1 paying a set amount per insured person per month for defined members. The appeal of capitation to payers such as CMS is that pre-payment for the care of a defined population enables a set budget without the inconvenience of year-to-year cost variability with fee-for-service. Capitation is also intended to lower costs, despite its recent history in Medicare Advantage of substantially increasing costs compared with traditional fee-for-service Medicare.2
Problems with capitation and value-based payment
All entities paid with capitation accept insurance risk, covering some or all of the unpredictable variation in healthcare cost. This includes all health insurance plans, Health Maintenance Organizations (HMOs), Medicaid Managed Care Organizations (MCOs), Medicare Advantage Plans, Accountable Care Organizations (ACOs), Direct Contracting Entities (DCEs), and REACH plans. Some of these, including DCEs and REACH in particular, in turn shift insurance risk onto direct providers of care: doctors and hospitals, and especially primary care doctors, by paying them a fixed pre-payment for care (capitation), with the opportunity to profit from delivering less care.
Considerable variation in the cost of care within a population.
A major problem with capitation is the large variation in the cost of care within a population. Unadjusted capitation based on average cost would grossly overpay for the healthy and underpay for the sick, creating an incentive to avoid the sick and skimp on their care. Capitation, therefore, requires “risk adjustment” and quality incentives to mitigate its incentives to deprive sicker individuals and populations of optimal care. Risk adjustment and quality incentives, in turn, require detailed data on diagnoses and treatment, adding administrative costs and burdens not required by fee-for-service (FFS).
The push toward capitation is justified by the common assertion that FFS incentivizes excessive “volume” (over-use) of care and that this can be corrected by shifting insurance risk onto providers of care. However, the four key assumptions – that there is widespread overuse of care due to FFS, that capitation carries improved incentives compared to FFS, that risk adjustment can be done accurately, and that the overhead cost of capitation is worth it to achieve more cost-sensitive care – are all contradicted by available evidence. First, the high cost of health care in the US is explained by prices, not the high volume of services.3,4,5 It appears the demonization of FFS in health policy is mainly a rationale promoted by the insurance industry to justify a central role for themselves in health care since capitation requires their capacity to manage financial risk and capitation processes. But the overhead (administration and profits) required for capitation far exceeds reductions in care, so patients get less care, Medicare pays more, and intermediary insurers take home large profits.
Risk adjustment cannot achieve accuracy
Beneficiaries are enrolled or assigned to capitated plans as individuals and risk adjustment is applied to individuals, but risk adjustment is based on demographic and diagnostic categories.6
The most accurate way to predict future healthcare costs for an individual would be to base prediction on prior year costs. However, this would defeat the goal of using capitation as a cost control strategy since high spending in one year would raise capitation payments the following year. Thus, there is no known viable method to accurately predict costs at the individual level.
Difficulties with individual-level risk adjustment led to using a category-based risk adjuster. The theory is that specific characteristics at the group level can predict individual healthcare costs. Demographic categories were tried first, but they include far too much variability and could predict only 1% of the variability in cost. Diagnostic categories (Hierarchical Condition Categories, or HCC) were added by CMS in 2004 to improve risk adjustment accuracy for Medicare Advantage, but large variability in the individual cost of care remains within almost all diagnostic categories.
To quote from a 2012 MedPAC report to Congress, “. . .we examined FFS beneficiaries who were grouped into the HCC for congestive heart failure (CHF) in 2008 and had no other HCCs. In 2008, the beneficiary at the 95th percentile of costliness had more than $37,000 in Medicare spending, while the beneficiary at the 5th percentile had $115 in Medicare spending.”6 And a 2014 report to Congress on problems with risk adjustment found the HCC accurately predicted the average cost of care for each of 9 common diagnostic categories, yet overpaid for the least costly quintile of beneficiaries by 62% and underpaid for the costliest 5% by 18-29%.7 Multiple attempts to improve the accuracy of the HCC by adding more detailed diagnostic categories or social determinant categories have failed to improve on these results.6,7
The inability of risk adjustment to accurately predict individual cost means that there remains a strong financial incentive to avoid covering or caring for sicker and socially disadvantaged individuals and to selectively enroll healthier and more advantaged individuals, regardless of diagnosis. REACH will pay a small bonus for enrolling vulnerable populations, but it is not at all clear that this will work as intended and not be gamed.
Risk adjustment for capitation is a “damned if you do, damned if you don’t” proposition. Without it, the incentive to enroll healthier patients and avoid sicker ones is severe. With risk adjustment based on prior year health spending, the incentive to maximize the “volume” of care is worse than with FFS. And risk adjustment using diagnostic categories cannot predict individual risk accurately enough to correct the financial incentive to worsen disparities.
Gaming of risk pools by Medicare Advantage Plans
Gaming of risk pools means capturing a population of members or beneficiaries (risk pool) with lower-than-average health risks while getting paid for an average risk pool to profit from the difference. MA plans use marketing tactics2 (including variations in coverage and contracting with employers to directly enroll newly Medicare-eligible retirees) that attract healthier beneficiaries. They employ multiple tactics to deny care to the sick, including narrow networks, formulary restrictions, and prior authorization. Sicker enrollees, such as in the last year of life, who have been frustrated by denial or delay of services tend to disenroll and return to the traditional Medicare program.8 The effect of both marketing tactics (“cherry-picking”) and disenrollment of sicker beneficiaries (“lemon-dropping”) is to create for Medicare Advantage plans a healthier and less costly than average risk pool.9,10
CMS added diagnostic categories to the HCC risk adjustment formula in 2004. This improved its ability to explain variability in future cost (predictive accuracy) from 1% to only 12%,7 but linked payment to diagnosis and introduced a major new opportunity for gaming: up-coding. Up-coding means choosing more specific or severe (and more highly paid) diagnosis codes than would be required for purely patient care purposes and fraudulently adding irrelevant or non-existent diagnoses. All entities paid by the government with risk-adjusted capitation using a diagnosis-based risk adjuster have a strong financial incentive to up-code, including Medicaid managed care plans, Medicare Advantage plans, ACOs, and REACH plans. Up-coding has been extensively exploited by Medicare Advantage plans since soon after diagnoses were added to the HCC, apparently often to the point of fraud11,12. According to one expert estimate, the cost to Medicare of aggressive diagnostic coding by Medicare Advantage plans and the failure of CMS to correct for it will reach several hundred billion dollars in coming years.13
ACOs, DCEs, and ACO REACH plans
Direct Contracting Entities (DCEs) and ACO REACH plans were introduced within Traditional Medicare in 2017 and are paid by Medicare with capitation instead of fee-for-service (FFS). Earlier versions of ACOs shared any savings from reduced Medicare claims with providers and used pay-for-performance bonuses, but Medicare still paid direct care providers with FFS. DCEs and REACH plans may also pay physician practices with full or partial capitation and will share “savings” (lower medical payments) with providers. With DCEs and REACH, expanded use of capitation invites expanded ownership and investment by private equity investors and for-profit insurance companies, who will expect a return on their investment. Increasing ownership of physician practices by for-profit corporations has also accelerated the involvement of profiteers in DCE and REACH plans.
Unlike Medicare Advantage, with ACOs, DCEs, and REACH, individuals do not choose to be members in the plan but are attributed or “aligned” according to which primary care doctor they saw most often over a 2-year “lookback” period or by the individual filling out a form to designate a particular practitioner as their primary care provider. “Alignment” enables Medicare to pay the plan with capitation (per-member), as with Medicare Advantage, but “aligned” members are still free to see any Medicare participating doctor, as with traditional Medicare. ACOs, DCEs, and REACH plans are within Traditional Medicare and are expected to follow Medicare policies on covered benefits and medical necessity.
Some of the capitation payment flowing to these plans goes to administration and profit. With REACH, one hundred percent of the first 25% in savings from reduced Medicare claims stays with the REACH plan (not to CMS), which may share those savings with providers. Payment from the REACH plan goes to participating primary care practices as payment in full and to preferred non-primary care specialists and institutional providers with varying degrees of partial payment. Medicare reduces FFS fees in proportion to the degree of payment via the REACH plan, putting pressure on doctors to earn the reduction back from their share of the plan’s capitated budget. Payment to providers by REACH plans includes some combination of capitation, shared savings or losses, and bonuses and penalties tied to utilization, quality metrics, and cost of care.14 Thus, doctors have “skin in the game” – if they reduce care, they stand to profit personally.
Since DCE and REACH plans don’t process Medicare FFS claims, they can’t use prior authorizations or denial of claims payment to restrict care. They also cannot prevent self-referral to any qualified Medicare provider. And since they don’t enroll subscribers, they can’t use marketing as a cherry-picking tactic.
How REACH ACOs game risk pools, upcode, and skimp on care
However, REACH plans do control physician payment and incentives. They can accomplish the same kind of risk pool gaming as with Medicare Advantage by using annual “wellness” visits to capture more healthy people in their “aligned” beneficiary pool, and they can use financial incentives to encourage their doctors and institutional providers to restrict care and avoid referrals. The incentives inherent in capitated payment encourage doctors to avoid high-risk/high-cost patients and populations.
Adding investor money enables DCE and REACH plans to offer higher pay to primary care doctors upfront to induce them to join while glossing over the strategies they intend to use to extract return on investment down the road. REACH plans can withhold bonuses from doctors whose patients self-refer to non-participating specialists or emergency rooms too often, or they can drop such doctors to improve the plan’s risk pool.15 They can use financial incentives to push doctors and hospitals to up-code diagnoses as much as possible. These perverse incentives are magnified by for-profit investors expecting a return on investment. In other words, they can use financial carrots and sticks to induce doctors to serve corporate financial goals, even when they conflict with the best interests of their patients.
Doctors evicted from REACH plans because they don’t adequately cater to corporate goals are forced back to fee-for-service Traditional Medicare, where they are subject to the onerous data reporting and staffing requirements imposed by the MACRA law and MIPS16, with escalating fee reductions for failure to comply. This is a strong incentive for primary care practices to submit to the corporate pressures of REACH plans.
There is already evidence that earlier versions of ACOs have engaged in risk pool gaming (cherry-picking and lemon-dropping).17,18 And skilled nursing facilities participating in ACO plans have been shown to arbitrarily deny or refuse care more often than before they joined the ACO19.
Although the acronym REACH stands for “Realizing Equity, Access, and Community Health,” payment via capitation undermines the goals suggested by the acronym. CMS believes these problems can be corrected with risk adjustment (which we know is inaccurate and gamed in practice), restrictions on up-coding, and incentives added on to encourage serving underserved populations and to discourage cherry-picking and lemon-dropping of patients. CMS believes these counter-measures or “guardrails” will assure “equity.”
But Medicare Advantage plans have achieved profitability largely by gaming their risk pools, up-coding, and issuing millions of inappropriate denials for care that met Medicare coverage rules,20 and minimally, if at all, by improving care. 21,22 REACH plans will use somewhat different gaming strategies than MA plans, but they are highly motivated to achieve the same goals, encouraged by the impressive profits realized by MA plans and the ability to keep all of the first 25% in savings, and much beyond that. Even with CMS’ “guardrails,” the Financial FAQs for contractors indicate that annual diagnostic upcoding of 3% is permitted.23
Payment with capitation requires much higher administrative costs for both payer and provider than FFS in Traditional Medicare. Typical administrative costs for Medicare Advantage and Medicaid Managed Care plans, including profits, have been in the 15-20% range, compared to 2% for Traditional Medicare.24,25 Thus, it does not appear possible for REACH plans to achieve profitability and also save money for taxpayers purely by improving care without gaming. The numbers don’t add up for the scheme to work the way CMS imagines it should. It appears either 1) REACH plans will find workarounds to game the CMS “guardrails” and continue to cheat to achieve profitability (as Medicare Advantage plans have done), or 2) The “guardrails” will work well enough so that REACH plans will be unable to cheat enough to be profitable and they will drop out of the program. Neither of these outcomes will reduce health inequities or improve access or community health.
All health care funded by the government with risk-adjusted capitation, including Medicaid, managed care, Medicare Advantage, ACOs, REACH, and capitated doctors and hospitals, will have incentives to restrict care, cherry pick and lemon drop to improve their risk pools, and upcode to game risk adjustment. The involvement of for-profit investors greatly amplifies these perverse incentives. Patients will be deprived of care, shareholders and executives will profit, and taxpayers will subsidize the entire sad charade. This is true even with risk adjustment (which is always inaccurate in practice) and “guardrails” because they cannot neutralize the incentives inherent to capitation to worsen economic and health disparities for the community as a whole.
1 Roger Feldman, “The economics of provider payment reform: Are Accountable Care Organizations the answer?,” Journal of Health Politics, Policy, and Law, 2015; 40(4): 745–760.
2 Gilfillan R, Berwick DM. Medicare Advantage, Direct Contracting, and The Medicare ‘Money Machine,’ Part 1: The Risk-Score Game. Health Affairs Blog. Sept. 29, 2021 10.1377/forefront.20210927.6239
4 Deborah Korenstein et al., “Overuse of health care services in the United States: an understudied problem,” Archives of Internal Med 2012 doi:10.1001/archinternmed.2011.772).
5 Katz MH. “Overuse of health care: Where are the data?” 2012;172:178. doi:10.1001/archinternmed.2011.1253)
6 Chapter 4: Issues for risk adjustment in Medicare Advantage (June 2012 report). MedPAC June 1, 2012.
7 June 2014 Report to the Congress: Medicare and the Health Care Delivery System. MedPAC June 13, 2014.
8 Meyers DJ, Belanger E, Joyce N, McHugh J, Rahman M, Mor V, “Analysis of drivers of disenrollment and plan switching among Medicare Advantage beneficiaries,” JAMA Intern Med. 2019;179(4):524–532. doi:10.1001/jamainternmed.2018.7639
9 Brown, J., M. Duggan, I. Kuziemko, et al. 2011. How does risk selection respond to risk adjustment? Evidence from the Medicare Advantage program. NBER working paper 16977. Cambridge, MA: National Bureau of Economic Research. DOI 10.3386/w16977.
10 Neuman P, Jacobson GA, “Medicare Advantage Checkup,” N Engl J Med 2018; 379:2163-2172 DOI: 10.1056/NEJMhpr1804089
11 Schulte F. Researcher: Medicare Advantage Plans Costing Billions More Than They Should. Kaiser Health News. Nov. 11, 2021.
12 Hiltzik M. The government lawsuit against Kaiser points to a massive fraud problem in Medicare. Los Angeles Times. August 4, 2021.
13 Kronick R. Projected Coding Intensity In Medicare Advantage Could Increase Medicare Spending By $200 Billion Over Ten Years Health Affairs 36, no.2 (2017):320-327 doi: 10.1377/hlthaff.2016.0768
14 ACO Realizing Equity, Access, and Community Health (REACH) Model: Request for Applications. CMS Feb. 24, 2022. https://innovation.cms.gov/media/document/aco-reach-rfa
15 Medicare Payment Advisory Committee, Minutes of Public Meeting. April 17, 2022. Page 203, lines 15-18. https://www.medpac.gov/wp-content/uploads/2021/10/April2022_MedPAC_meeting_transcript_SEC.pdf
16 MACRA: MIPS and APMs. CMS web site. https://www.cms.gov/Medicare/Quality-Initiatives-Patient-Assessment-Instruments/Value-Based-Programs/MACRA-MIPS-and-APMs/MACRA-MIPS-and-APMs
17 Markovitz AA, Hollingsworth JM, Ayanian JZ et. al., “Performance in the Medicare Shared Savings Program after accounting for nonrandom exit, Ann Intern Med 2019;171:27-36. doi:10.7326/M18-2539
18 Markovitz AA, Hollingsworth JM, Ayanian JZ et al., “Risk adjustment in Medicare ACO program deters coding increases but may lead ACOs to drop high-risk beneficiaries,” Health Affairs 38 (2) 2019:253-261. doi:10.1377/hlthaff.2018.05407
19 Tyler D, McHugh JP, Shield RR et al. Challenges and Consequences of Reduced Skilled Nursing Facility Lengths of Stay. Health Svcs Research 2018; 53(6):4848-4862. https://doi.org/10.1111/1475-6773.12987
20 Grimm, Christi A, Inspector General. Some Medicare Advantage Organization Denials of Prior Authorization Requests Raise Concerns About Beneficiary Access to Medically Necessary Care. OIG Report OEI-09-18-00260 https://oig.hhs.gov/oei/reports/OEI-09-18-00260.pdf
21 Park S, Jung J. Burke RE et al. Trends in Use of Low-Value Care in Traditional Fee-for-Service Medicare and Medicare Advantage. JAMA Network Open. 2021;4(3):e211762. doi:10.1001/jamanetworkopen.2021.1762
22 Figueroa JF, Wadhera RK, Frakt AB, et al. Quality of Care and Outcomes Among Medicare Advantage vs Fee-for-Service Medicare Patients Hospitalized With Heart Failure. JAMA Cardiol. Published online September 02, 2020. doi:10.1001/jamacardio.2020.3638
23 ACO Realizing Equity, Access, and Community Health (REACH) Model Finance-Focused Frequently Asked Questions. CMS.gov April 2022. https://innovation.cms.gov/media/document/aco-reach-finfaqs
24 McDermott D, Stolyar, L, Hinton E, et. al. Health Insurer Financial Performance in 2020. Kaiser Family Foundation May 3, 2021. https://www.kff.org/private-insurance/issue-brief/health-insurer-financial-performance-in-2020/
25 Day B, Himmelstein DU, Broder M, Woolhandler S. The Affordable Care Act and Medical Loss Ratios: No Impact in First Three Years. Int J Health Svcs 2015:45(1);127-131. http://org.salsalabs.com/o/307/images/JOH45_1_DayArticle(1).pdfPDF Embedder requires a url attribute PDF Embedder requires a url attribute PDF Embedder requires a url attribute PDF Embedder requires a url attribute