Feds Set Up Medicare “Advantage” So Insurance Firms Earn Higher Profit When They Deny Prior Authorization of Medically Beneficial Services

Medicare “Advantage” insurers earn higher profits when they refuse to pay for medical services, whether the services benefit patient health or not.
This is what is known as a perverse incentive. The firms often respond to such an incentive, especially when the services are expensive.

The federal designers of Medicare “Advantage” plans thought the plans would both save taxpayers money and provide more services to patients. Instead they have done the opposite. To taxpayers and patients, such a plan is a disadvantage. Only to insurance firms is such a plan an advantage, handed to them members of congress, some of whom receive benefits from lobbyists and some of whom are well-intentioned, but ignorant of the plans’ perverse incentives and unanticipated consequences.

[In the first paragraph below it is perhaps misleading to say that the federal funds per patient are “fixed.” It is true that they do not vary based on actual medical services the patient receives (as is the case with traditional Medicare). So in that sense they are “fixed.” But they do vary based on the diagnostic codes assigned to each patient. So in that sense they are not “fixed.” Congress set the plans up so that insurance firms can make more profits either by assigning more diagnostic codes to patients, or by providing patients with fewer services.]

(p. D3) Medicare Advantage plans are capitated, meaning they receive a fixed amount of public dollars per patient each month and can keep more of those dollars if prior authorization reduces expensive services. “Plans are making financial decisions rather than medical decisions,” Mr. Lipschutz said. (Medicare Advantage has never saved money for the Medicare program.)

Such criticisms have circulated for years, bolstered by two reports from the Office of Inspector General in the Department of Health and Human Services. In 2018, a report found “widespread and persistent” problems related to denials of prior authorization and payments to providers. It noted that Advantage plans overturned 75 percent of those denials when patients or providers appealed.

In 2022, a second inspector general’s report revealed that 13 percent of denied prior authorization requests met Medicare coverage rules and probably would have been approved by traditional Medicare.

By that point, a KFF analysis found, the proportion of prior authorization denials overturned on appeal had reached 82 percent, raising the possibility that many “should not have been denied in the first place,” Dr. Biniek said.

. . .

Responding to the inspector general reports, and to a rising tide of complaints, the federal Centers for Medicare and Medicaid Services has established two new rules to protect consumers and streamline prior authorization.

. . .

“Medicare Advantage makes us jump through so many hoops,” said Dr. Sandeep Singh, chief medical officer of the Good Shepherd Rehabilitation Network in Allentown, Pa. “It’s created such stress in the health care system.” A few years ago, his organization had one “insurance verification specialist” whose job was to handle prior authorization requests and appeals; now, it employs three.

. . .

Will Medicare’s new rules make a difference? So far at Good Shepherd, “we continue to see the same level of resistance” from Advantage plans, Dr. Singh said.

Mr. Lipschutz, of the Center for Medicare Advocacy, said, “It’s clear the intention is there, but the jury’s still out on whether this is working.”

“It comes down to enforcement,” he said.