Doctors, hospitals and health plans supply diagnoses, the raw material for risk-adjustment algorithms. But diagnoses reflect the aggressiveness of workups and coding, not just the patient’s clinical condition. Under risk-adjusted capitation and bundled payment, making patients look sicker on paper yields higher payments.

Overdiagnosis appears widespread. In high-cost regions, aggressive testing is common and labels patients with more seemingly serious diagnoses.6 But this apparently greater severity-of-illness is artifactual.6 How could aggressive testing lead to overdiagnosis? Obtaining echocardiograms on asymptomatic octogenarians would turn up many stiff ventricles, allowing diagnoses of “diastolic congestive heart failure (CHF)”. While few such patients would have the grave prognosis and high costs of symptomatic CHF, the diagnosis would boost their risk scores, and hence ACOs’ capitation payments (and risk-adjusted outcomes).

“Upcoding” is ubiquitous among hospitals paid diagnosis-related groups (DRG)s (bundled payment per admission) and capitated Medicare Advantage (MA) plans, which use it to extract overpayments of $30 billion annually.7 Paradoxically, Centers for Medicare & Medicaid Services’ (CMS) efforts to refine risk adjustment probably increased gaming-induced overpayments7; boosting capitation payment for comorbidities made asymptomatic CHF very profitable. Outright cheating may also be common; an Inspector General’s audit found unsupported comorbidities in 45 % of cases.

We’ve seen first-hand how coding practices impact quality scores. A public hospital where we worked scored poorly on risk-adjusted mortality—42 % above expected. In response, administrators hired consultants to comb charts for ill-described comorbidities and coach interns on wording choices that would boost risk scores; e.g. “hypo-magnesemia” rather than “Mg = 1.6” ups the risk score (and DRG payment). Within 6 months, risk-adjusted mortality fell to 14 % below expected, and Medicare reimbursement climbed $3 million.

Sadly, the upcoding/overdiagnosis arms race makes such practices mandatory. Our hospital looked bad because it was judged against hospitals that had already adopted coding coaches—we’d encountered them for years at the prosperous medical mecca nearby. Similarly, the 95 % of MA plans that cheated on a quality measure pushed down the rankings of the 5 % that told the truth.8 In quality measurement, honest guys finish last, as do primary care doctors caring for the poor, the mentally ill and non-English speakers.9

Less skillful gaming is one reason that mission-driven providers lose under bundled payment. But even if good-guy ACOs play the seemingly victimless upcoding game, they face daunting odds. Less scrupulous rivals willing to overdiagnose, cherry-pick and skimp on care can outcompete them on price and “quality”.

Moreover, giant organizations enjoy a decisive advantage. When one patient can cost millions, deep pockets are essential to assume risk. Even more important, insurers and hospital systems that dominate local markets can extract deals, and hence profits, not available to smaller competitors. The profit-advantage of bigger, more ruthless players makes them more attractive to investors and bondholders, vital sources of the capital needed to expand and modernize.

During the HMO era, many local providers entered the capitated market, but few survived. Undercapitalized, saddled with unprofitable patients and lacking clout to get the best price, some folded; others were swallowed by large national insurers.

Currently, insurers and hospital systems are bulking up. In 45 states one or two insurers now control more than half the market.10 UnitedHealth bought a Medicare ACO with 2,300 physicians; Wellpoint a chain of clinics; and Humana an in-home care manager with 1,500 providers and an urgent care/occupational health clinic firm. The proportion of office-based physicians employed or closely affiliated with hospitals grew from 41 % in 2000 to 72 % in 2010.10 In the past 5 years alone, 835 hospitals have merged; today “the typical hospital market . . . has one dominant system [and] two to three smaller systems.”.11 Even the largest cities will soon be left with only a handful (or less) of mega-ACOs.

The SGIM Commission rests its hope for cost control on ACO-type payment. Yet a system dominated by profit-maximizing oligopolies is a perilous route to savings. Moreover, the studies most often cited as evidence that ACO-like contracts bend the cost curve provide scant reassurance; the claimed savings from utilization reductions evaporate after factoring in bonuses providers earned for “shared savings” and “quality”.12 , 13 In Medicare’s demonstration program, upcoding created an illusion of lower costs, but (according to the Congressional Budget Office) virtually no real savings.