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The Role of Risk Adjustment in Federal Funding Deficits

Prioritization Automation in Utilization Management

The Role of Risk Adjustment in Federal Funding Deficits

How overpayments in risk adjustment threaten federal funding stability

ZeOmega's blog series on risk adjustment looks at where we’ve been, what we’re facing today, what’s on the horizon, and how to best prepare. Over the next several blogs, our ZeOmega risk adjustment solution experts will provide a forecast of regulatory changes and guidance on ensuring risk payment accuracy in both business and clinical operations.

The topics we’ll be covering in this series are:

  1. Brief overview and history of the Risk Adjustment (RA) program.
  2. The results of RA policy and how it’s led to gamification of chronic condition coding.
  3. The value of risk-adjusted data across your organization.
  4. How overpayments in risk adjustment threaten the Medicare Trust Fund solvency.
  5. Recent federal actions and the likely next steps to control overpayments.
  6. Strategy and platform pivots required to move forward successfully in risk adjustment.
  7. ZeOmega’s expert tips and how the Jiva Risk Adjustment Navigator meets the evolving RA

In this fourth blog, we will discuss the causes and effects of overpayments for federally sponsored healthcare funding.

For many Americans, federally sponsored healthcare programs provide a safety net without which, access to healthcare would be out of reach for many. However, beneath the surface of these government-funded programs lies a growing concern that threatens their long-term financial stability – risk adjustment overpayments. The intricate nature of risk adjustment algorithms, designed to ensure fair and accurate reimbursement, has inadvertently opened the door to potential abuse, leading to excessive payments that could compromise the solvency of these crucial healthcare systems.

Risk adjustment seeks to account for variations in patients' health statuses and medical needs. It aims to ensure that healthcare providers are adequately compensated for treating patients with complex conditions, thereby incentivizing them to care for high-risk individuals. While this concept seems reasonable in theory, the execution of risk adjustment methodologies has given rise to unintended consequences, most notably in the form of overpayments. Medical upcoding and suspecting are central causes of rising capitation payments.

Over the years, concerns have been mounting regarding the accuracy and effectiveness of risk adjustment models. This has raised questions about the integrity of the payment systems and their implications for the financial sustainability of Medicare and Medicaid.

How is Medicare Funded?

Medicare is funded by two trusts, first, the Hospital Insurance fund, which covers Part A benefits or inpatient costs. This fund comes from payroll taxes from employees and their employers. The second trust covers Part B, or outpatient care, and Part D, prescriptions. It is funded by premiums and federal revenue.

Medicare Advantage, commonly known as Part C, is combined coverage for both inpatient (Part A) and outpatient (Part B) costs. Some MA payers cover prescription (Part D) costs as well and generally, MA offers a variety of other valuable and competitive benefits packages aimed at attracting new members. With the large boomer population aging into Medicare and out of the workforce, costs are expected to increase while simultaneously, there will be fewer taxpayers.

The Committee for a Responsible Federal Budget projects that Medicare is 6 years away from insolvency and faces $285 billion (about $880 per person in the US) in deficits over the next 10 years. One of the committee’s proposed solutions entails revamping the risk adjustment payment system including recommendations from MedPac to eliminate risk adjustment submissions originating from Health Risk Assessments (HRAs) and chart review. This is projected to save and redirect funds of approximately $100 billion within the next decade.

How is Medicaid Funded?

Medicaid is funded jointly by the government and states. The federally funded portion of Medicaid funding is determined by the Federal Medical Assistance Percentages (FMAPs) which sets the federal matching rates toward state Medicaid expenditures. These rates are calculated and published annually by the Secretary of Health and Human Services. States are responsible for determining their own payment rates but are overseen federally.

Medicaid funding totaled $728 billion in 2021 with states paying about 31% of those expenditures while the federal portion was 69%. Analysis by the Kaiser Family Foundation (KFF) reveals that over half of the federal portion of Medicaid funding went to capitation payments. During the COVID-19 public health emergency, federal fund matching was increased after disenrollment was prohibited via the Families First Coronavirus Response Act (FFCRA).

During periods of economic recession, Medicaid enrollment increases while payroll tax funding decreases at both the federal and state level. As of 2022, the Consolidated Appropriations Act sets forth the end of the public health emergency and an “unwinding” of FFCRA’s eligibility and payment provisions. House Republicans call for reduced federal funding in Medicaid in their 2023 annual budget resolution, and if passed, increases state financial obligation. State contracted payers share a portion of fixed available funds based on risk adjustment. Like Medicare, risk-adjusted payments incentivize care for high-risk, or sicker members but due to the “zero-sum effect”, higher payments to one payer results in lower payments for others to achieve budget neutrality.

The Future of Federally Funded Healthcare Requires Responsible Risk Adjustment

While some argue that projections of funding solvency are misleading, there is no doubt that rising capitation payments stemming from risk adjustment gamification is contributing to deficits. This issue is often heavily debated among payers and politicians but appears to lose sight of the vital lifeline federally funded healthcare provides to its beneficiaries. At the outset, the goal of these programs was not to line the pockets of corporatized payers, it was to provide a safety net for vulnerable populations. Getting back to responsible and fair risk adjustment practices would significantly improve the long-term financial forecast for Medicare and Medicaid.

Ask us how The Risk Adjustment Navigator can add to the value of Jiva, ZeOmega’s Healthcare Enterprise Management Platform.