Upcoding: Evidence from Medicare on Squishy Risk Adjustment

Michael Geruso, Timothy Layton

NBER Working Paper No. 21222
Issued in May 2015, Revised in October 2015
NBER Program(s):Aging, Health Care, Health Economics, Public Economics

Upcoding—manipulation of patient diagnoses in order to game payment systems—has gained significant attention following the introduction of risk adjustment into US insurance markets. We provide new evidence that enrollees in private Medicare plans generate 6% to 16% higher diagnosis-based risk scores than they would generate under fee-for-service Medicare, where diagnoses do not affect payments. Our estimates imply upcoding generates billions of dollars in excess public spending annually and significant consumer choice distortions. We show that coding intensity increases with vertical integration, reflecting a principal-agent problem faced by insurers, who desire more intense coding from the physicians with whom they contract.

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Document Object Identifier (DOI): 10.3386/w21222

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