MA Risk Adjustment Fails to Account for Beneficiaries’ Functional Limitations

Due to current risk adjustment methods, Medicare Advantage (MA) plans may be underestimating annual fee-for-service spending for beneficiaries with functional limitations and overestimating spending for those without them. If true, that could mean an even greater MA role for home health providers, who routinely gather, store and analyze data related to the functional ability of their patients.

In 2017, the federal government spent about $210 billion on the MA program, a private-plan alternative to the basic fee-for-service Medicare that’s rapidly growing in popularity. About one-third of all Medicare beneficiaries are signed up for MA plans, according to the Centers for Medicare & Medicaid Services (CMS).

Under the MA program, CMS pays MA plans a set monthly — or capitated — amount to provide coverage for enrolled beneficiaries. CMS tweaks that amount to reflect the health of beneficiaries, as those in poorer health are generally expected to use more health care services than beneficiaries in better health.


That process is known as risk adjustment, but it may be flawed, a new report from the Government Accountability Office (GAO), the watchdog arm of Congress, suggests.

Although CMS weighs several factors during risk adjustment for MA plans, it does not take into account beneficiaries’ functional status, or their ability to perform routine daily tasks such as getting dressed or taking a shower. As a result, the MA risk adjustment model for community-resident beneficiaries is likely underestimating annual fee-for-service spending for beneficiaries with functional limitations by about $226 on average per beneficiary, while overestimating spending for those without functional limitations by about $995, GAO found in its report.

About four in 10 Medicare beneficiaries had functional limitations in 2016, according to GAO, which investigated incorporating functional status into MA risk adjustment as part of a provision in the 21st Century Cures Act.


GAO conducted its investigation from June 2017 to September 2018 by analyzing health care spending information, along with data on diagnoses and survey data on functional status. Its investigators also reviewed CMS guidance documents and interviewed stakeholders, industry experts and CMS officials.

Including functional status into the MA risk adjustment process may seem like an easy step, but there are big challenges to making that happen.

Although functional status is commonly measured in medical settings — and by home health providers, in particular — it lacks both a universally accepted definition and ubiquitously used assessment tool. A single definition is often difficult to pin down because functional status can relate to self-care, mobility, cognition and a variety of other factors, according to GAO.

In the home health industry, providers regularly measure functional status by a concept known as activities of daily living. If CMS did include function status in its MA plan risk adjustment process, that may make those efforts all the more important and further develop the relationship between MA payers and the home health industry.

CMS collected functional status information for up to 13.4 million Medicare beneficiaries in 2015. Home health agencies, inpatient rehabilitation facilities, long-term care hospitals and skilled nursing facilities accounted for about 7 million of those beneficiaries.

CMS’ most recent risk adjustment model was implemented in 2017. The agency has plans to revise the model in both 2019 and 2020, however.

Besides the lack of a universal definition, expanding the collection of functional status could be resource intensive for CMS, plans and health care providers, and an imposition for some beneficiaries, stakeholders told GAO. Additionally, the potential for higher payments may give MA plans a financial incentive to identify beneficiaries with functional limitations.

Written by Robert Holly

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