Currently, the government delivers global, capitated payments to private Medicare Advantage insurance plans. These insurance companies submit files to demonstrate the patients’ risk level.

It makes sense that the insurance providers have ready access to the demographic data: after all, they are the ones enrolling the patients. But how do the insurance providers know how sick the patients are? How do insurance companies develop the Hierarchical Condition Codes?

Essentially, the insurance companies try to assess a patient’s general health by scrutinizing what they receive from the providers who see their members. These “Encounter Files” provide clues to a patient’s overall health but are not the full picture.

The people working at these health plans understand the system’s economic incentives. The result: Just as hospitals hired armies of consultants and billers, plans hired armies of consultants and coders to parse the medical records. Many times, the insurance plans prod the doctor to suggest a diagnosis may have been missed, which could lead to an HCC being submitted to Medicare.

This has led to several lawsuits. The government claims the insurance plan is defrauding Medicare. The insurance plan claims it is simply following the rules.

Over time, insurance plans have gotten better at “finding” new conditions. In the aggregate, it appears every patient enrolled in every capitated plan is getting sicker, all the time.

We know that’s not happening. The government knows it too. In response to the plans’ increased proficiency in boosting the HCCs, the government “re-bases” the codes down. After all, taxpayers shouldn’t have to pay spiraling upward costs because the system is being gamed. But re-basing only ratchets the incentive to get better at finding new codes. The biggest, most sophisticated players who risk codes better than the next guy are rewarded.

The real failings of risk adjustment

Risk adjustment rewards for uncovering disease, not successfully managing disease. At ChenMed, many of our elderly patients have multiple complicating conditions affecting their care. Our capitation payment will go up if, for example, if we identify that a patient has diabetes—yet the risk adjustment program doesn’t reward or penalize us for how well we manage that patient’s diabetes.

Of course, plans and providers need the money from detecting the disease because that payment funds the resources to successfully manage the disease. The problem, however, is that the incentive to treat—the harder and more important activity—is lost. You can win the “game” by doing a so-so job at care management so long as you diagnose well. Many companies use special providers who only exist to capture all the codes they can find. Insurance plans get a great return on investment from paying a doctor or nurse practitioner—who their member doesn’t know—to visit the patient once, with no intent for follow through. That one visit uncovers valuable HCCs but there is no linkage to ongoing primary care management.

If we focus solely on “over-coding,” we also miss what doesn’t get adequate importance in risk adjustment. Age, gender, diseases all matter. Social factors, however, are some of the most critical and costly challenges we face in caring for patients and they are totally absent.

Social determinants of health (SDOH) impact how hard it is and how much it will likely cost to manage a patient’s disease. If an elderly patient with diabetes has no family support, little money, and no transportation to pick up medication or visit with their primary care provider, that patient’s diabetes is significantly more difficult to manage—and will cost more in direct and indirect care—than someone of the same age with means and a support structure.

Charting the path ahead

Going back to a pre-risk adjustment era would be disastrous. Leaving our status quo system in place has its problems too. Taxpayers lose as payments rise without better care management. The underserved lose because, even with current risk adjustment, it’s insufficient to reverse the shortage of providers treating the most complex patients in the most challenging neighborhoods.

We need to make the program work and make it less susceptible to lawsuit-inducing disputes. It’s not realistic to take health plans out of the picture, and their coders and chart reviewers may help doctors make legitimate findings as often as they drive over-coding. We should, however, change who “counts” and what they count.

Put simply, the diagnoses that should count need to come from the providers involved in the patient’s ongoing care. HCCs from “hired gun” providers who only do a one-time capture of diagnoses should not count. And, when we decide what to count, specific and meaningful financial value must be given to SDOH (which can already be captured nicely through Z-codes) so the incentives are there to create adequate supply of sufficiently resourced doctors to take care of those who will benefit most from good primary, preventive care.

By making risk adjustment the treating provider’s responsibility and incorporating social determinants of health into the process, we can build on what we have and continue to move toward a more just and healthier society.