Medicare Risk Adjustment: Financial Incentives May Lead to Bad Practices

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  • October 1, 2012
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By Mary A. Inman, JD, and Timothy P. McCormack, JD

As Medicare-managed care health plans (Medicare Advantage (MA) plans) expand—especially in the past five years—providers are more regularly affected by “risk adjustment.” When done properly, the risk adjustment model has great potential to enhance the quality of patient care. Unfortunately, risk adjustment is also susceptible to fraud by the proverbial “bad apple.”
Risk Adjustment Basics
Risk adjustment is a modified version of the traditional capitation system. Under traditional capitation, a managed care organization or provider group is paid a fixed amount per member per month (PMPM) to pay for all services the member requires during that period. Traditional capitation sets the PMPM rate based on demographic factors such as the member’s age, gender, and geographic location.
Risk adjustment enhances traditional capitation by adding payments for patients who are being actively treated for certain diseases and conditions known to be expensive to treat. Risk adjustment classifies patient sickness using hierarchical condition categories (HCCs), which are groups of related diagnosis codes. HCCs are similar to diagnosis-related groups (DRGs) or ambulatory payment classifications (APCs) used for hospital reimbursement, but they are based on diagnosis codes rather than procedure codes. Individual patients may fall into multiple HCCs. For each additional HCC, the MA plan is paid an extra amount.
Unlike traditional managed care, where there is a strong financial incentive to seek out only healthy members, the risk adjustment model rewards managed care organizations and provider groups to care for sick members, as well. They can see a significant financial reward if they actively manage those sick members to reduce health care costs.
Risk Adjustment Fraud: “Upcoding” DxCodes

The current design of the risk adjustment system largely relies on MA plans to police themselves. MA plans are responsible for determining which diagnosis codes its members were treated for in the prior year, using a combination of traditional claims data and other medical documentation (such as the patients’ medical charts). The plan then submits the diagnosis codes to the Centers for Medicare & Medicaid Services (CMS) to get the increased risk adjustment capitation payments.
Unethical MA plans and vendors take advantage of the system’s structure to essentially “upcode” the diagnoses they submit to CMS. They do this by submitting a risk adjustment claim to CMS for a diagnosis the member either did not have or was not treated for in the year in question. In such cases, “risk adjustment” may be offered as an explanation for why patient medical records should be changed or “supplemented” (sometimes a year or more after the patient was treated). Or the MA plan, or its vendor, may suggest that a provider call a patient in for an office visit so certain diagnosis codes can be “captured” for “risk adjustment purposes” (regardless of whether the patient actually needed any medical treatment).
CMS rules are clear that a risk adjustment claim may be submitted only if the diagnosis meets ICD-9-CM standards and there is documentation in the medical record that the member was treated face-to-face by a qualified provider in the year questioned.
Common schemes used to upcode diagnoses for risk adjustment purposes include the following:
Coding from Problem Lists: CMS rules explicitly state that a “problem list” may be used only to code a diagnosis if it is “comprehensive and show[s] evaluation and treatment for each condition that relates to an ICD-9-CM code on the date of service.” It is improper to submit risk adjustment claims for diagnoses that are merely mentioned in the member’s problem list if the diagnoses were not treated or considered by the provider during that visit.
Improper Linkages: The risk adjustment system pays MA plans a higher capitation rate when certain conditions are “linked.” For example, a patient may have both diabetes and nephropathy. CMS will pay the MA plan more if the diabetes caused the nephropathy because diabetes with renal complications is generally significantly more severe than diabetes without complications. Diabetes without complications, which falls within HCC 19, has an average value of $1,500 per year. In contrast, diabetes with renal manifestations, which falls within HCC 15, is valued at over $4,500 per year.
For an MA plan to submit a linked diagnosis code to CMS, the provider must document the linkage between the two conditions in the medical record. It is improper for an MA plan or vendor to assume the two conditions are linked.
Coding from Test Results or Prescriptions: CMS prohibits the submission of risk adjustment claims based solely on laboratory or radiology test results, drug prescriptions associated with particular diagnoses, or durable medical equipment (DME) services. Nonetheless, certain MA plans and vendors include diagnosis codes in their risk adjustment submissions even though they appear only on those invalid sources of documentation.
Chronic Conditions: While it is true that some conditions (such as Parkinson’s) never go away, this does not mean that the diagnoses can be submitted to CMS every year. Risk adjustment rules explain that a condition may only be submitted for reimbursement if it is actively treated (or affects other treatment) in the year in question. It is not enough that the patient was diagnosed or treated for the condition at some point in the past.
Targeted Coding: Some organizations pressure coders to focus on identifying high-value diagnoses, rather than coding just what is in the medical record. Some common high-value targets include:

Certified Professional Medical Auditor

  • Cachexia/Malnutrition (HCC 21) – value of $7,800 per year
  • Old myocardial infarction (MI) (HCC 83) – $2,200 per year
  • Diabetes with complications (HCC 15) – $4,600 per year
  • Major depression (HCC 55) – $3,200 per year

Know the Red Flags
If a coder involved in chart reviews or an audit related to risk adjustment sees any of these activities, there is a strong likelihood the coder is dealing with fraud. If someone tells a coder to use a diagnosis code that doesn’t meet ICD-9-CM standards and says it is OK because “risk adjustment coding is different than regular coding,” that is a major red flag indicating the health plan or vendor is engaged in fraud.
At its core, risk adjustment coding is “regular coding,” but stricter. Even where a diagnosis meets traditional ICD-9-CM standards, it may not be submitted for risk adjustment purposes unless the diagnosis is: (1) documented by the provider in the medical record as having been treated or as affecting the patient’s treatment; (2) made during a face-to-face encounter; (3) submitted to the MA plan from a qualified provider type; and (4) made during the specified calendar year.
Risk Adjustment Fraud and the False Claims Act

At a May 31, 2012 MA compliance conference, federal prosecutor Robert Trusiak noted that MA fraud—in particular risk adjustment fraud—is a “hot button issue” for the Department of Justice (DOJ). Trusiak further noted that MA plans face potential liability under the federal False Claims Act (FCA) for false risk adjustment claims, even when the upcoding or other fraud was perpetrated by a vendor on the plan’s behalf.
The FCA says any person who submits a false or fraudulent claim to the United States or causes someone else to submit a false or fraudulent claim may be liable for three times the amount of the false claim, plus an additional penalty of up to $11,000 for each false claim. To encourage whistleblowers to report fraud, the FCA contains a qui tam provision awarding whistleblowers 15-30 percent of what the government recovers as a result of whistleblower lawsuits they file against individuals and entities committing fraud.
The government has already begun enforcement against unscrupulous MA plans attempting to game the risk adjustment system. In United States v. Janke, the government sued an MA plan under the FCA for submitting upcoded (or non-existent) diagnosis codes for risk adjustment payments. The DOJ settled with the MA plan and its owners for $22.6 million in November 2010.
Be Cautious and Speak Up
As Trusiak cautions, the FCA targets not only the person or organization submitting a false claim, but also anyone who “causes the submission” of a false claim. This means that MA plans are not the only ones who face potential liability under the FCA for false or fraudulent risk adjustment claims. Hospitals or physician groups could be liable, as well, if they submit false information about their MA patients’ diagnoses to MA plans and that false information is used to submit a false risk-adjustment claim to CMS.
To avoid this risk, you should ask to review rules used by vendors when those vendors are identifying “new” diagnoses. Don’t hesitate to speak up if the standards being used by an outside reviewer don’t line up with the established CMS coding rules your organizations are using. Providers should insist on reviewing any code submissions made for their patients—especially when an MA plan or vendor has reviewed the providers’ medical record and identified new diagnoses—to ensure the patient actually had that particular diagnosis and was treated for it during the visit. Coders, administrators, and providers can all take steps to prevent or stop risk-adjustment fraud.
Mary A. Inman, JD, and Timothy P. McCormack, JD, are partners at Phillips & Cohen LLP, a law firm representing whistleblowers ( Whistleblower cases brought by the firm involving Medicare and Medicaid fraud, and other types of fraud against the government, have returned more than $8.5 billion in civil settlements and related criminal fines to federal, state, and local governments.

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