In Their Own Words

When A Resolved Billing Scandal Becomes Embedded In New Payment Policy

CMS Should Ensure That Temporary Spending Shocks—Such as the Recent Spike in Skin Substitute Costs—Are Not Mechanically Carried Forward Into Future MA Payments for 2027 and Beyond. But CMS Should Also Move Beyond the Decades-Old HCC Framework and Modernize its Risk Adjustment Approach.

April 1, 2026

By:

Ezekiel J. Emanuel, MD, PhD
Thomas Kornfield, and Daniel K. Shenfeld

Print:

A calculator next to a stethoscope on a blue table and background.

Cross-posted with permission from Health Affairs Forefront.

[Original Post: Thomas Kornfield, Daniel K. Shenfeld, Ezekiel J. Emanuel. “When A Resolved Billing Scandal Becomes Embedded In New Payment Policy”, Health Affairs Forefront, April 1, 2026. https://doi.org/10.1377/forefront.20260330.249946, Copyright © 2026 Health Affairs by Project HOPE – The People-to-People Health Foundation, Inc.]

Between 2019 and 2024, fee-for-service (FFS) Medicare spending on skin substitutes—wound coverings used to treat chronic ulcers and similar skin conditions—rose nearly 40-fold, from roughly $256 million to more than $10 billion. This spike wasn’t driven by a sudden epidemic of skin ulcers. Perverse payment rules allowed providers to bill at an extraordinary scale: An investigation by the New York Times found cases of $14 million charged for a single patient’s bandages in one year, $6 million for coverings that failed to heal a wound, and $1.3 million for a patient who did not have a wound. The Centers for Medicare & Medicaid Services (CMS) eventually acted, overhauling skin substitute payment rules for 2026 and projecting nearly $20 billion in savings as a result.

How A FFS Spending Spike Could Distort Medicare Advantage Payment Rates and Incentives

That should have been the end of the story. Instead, CMS now risks exacerbating the financial damage by embedding it in Medicare Advantage (MA).

At virtually the same moment CMS corrected the distortion in skin substitute payments, it was working on updating the MA payment rules for 2027. These updates are constructed mechanically based on recent patterns of spending in FFS Medicare. When spending in a particular category rises—regardless of whether that increase reflects underlying clinical need or documented billing abuses—the higher costs are incorporated into future MA payment rules. Consequently, the surge in skin substitute spending was transferred directly into the proposed 2027 MA update, reshaping relative payments, distorting incentives, and potentially increasing overpayment for enrollees with skin conditions.

The mechanism that spreads this distortion is CMS’s Hierarchical Condition Category (HCC) risk adjustment model, which determines payments to MA plans. HCC assigns payment weights to diagnoses based on how costly beneficiaries with those conditions are in FFS Medicare. To maintain payment accuracy, CMS periodically recalibrates those weights using recent FFS spending data. The last major update was based on 2019 spending; the proposed 2027 update relies on 2024 data—the year in which skin substitute spending spiked.

Because the model updates mechanically based on observed FFS costs, a sharp increase in spending for one set of conditions raises their relative payment weights while reducing the relative weights of others.

The Impending Impact of the Medicare FFS Skin Substitute Spending Spike On MA

Using CMS’s published coefficients for the current and proposed models, we estimated how the 2027 recalibration changes relative payments on a per-member-per-year (PMPY) basis across major disease groups (exhibit 1). The shifts are highly concentrated: Skin disease categories receive the largest positive adjustment—approximately $132 PMPY, roughly four times larger than the next-highest group. By contrast, lung and heart disease categories experience the largest negative adjustments, with relative impacts of about -$76 and -$54 PMPY, respectively.

**Exhibit 1. Estimated change in relative payment weights (PMPY) by disease area under the proposed 2027 CMS-HCC Update**.
*Source: Authors analysis for Navlin price database.*

*Notes:*
– Estimated per-member-per-year (PMPY) changes in relative payment weights by major disease group under the proposed 2027 CMS-HCC recalibration. Incorporation of 2024 fee-for-service spending increases the relative weight assigned to skin conditions while reducing weights for other categories. Positive values indicate increases in relative payment weight; negative values indicate decreases.
– Coeﬀicient changes were calculated as the difference between proposed 2027 and prior model coeﬀicients (Δ). For each HCC, the change in relative weight impact was computed as Δ multiplied by model segment and HCC prevalences. These HCC-level impacts were aggregated to disease categories, weighted by the prevalence of individual HCCs within each category.
– *Data sources:*
— *Current (v28) model coeﬀicients were obtained from the CMS 2026 model software ICD-10 mappings file (“C2824T2N.csv”)*
*— Proposed 2027 model coeﬀicients were obtained from the CMS proposed Part C model software file (“C2827Y3N.csv”), available at:.*
— *Enrollment weights across risk model segments were obtained from Table 2-4 of Report to Congress, Risk Adjustment in Medicare Advantage (December 2024), p. 31.*
— Classification of HCCs into disease areas was based on Table II-4 of the Advance Notice of Methodological Changes for Calendar Year 2024 for Medicare Advantage Capitation Rates and Part C and Part D Payment Policies, pp. 50–56.
– *Prevalence of v28 HCC indicators was estimated using a 5 percent sample of 2023 fee-for-service (FFS) Medicare beneficiaries from the Limited Data Set (LDS).*

Nationally, nearly $3 billion is expected to flow toward beneficiaries carrying skin diagnoses relative to a scenario where the skin-related weights were held constant at their prior levels. Because beneficiaries often carry multiple conditions, the resulting payment effects for plans depend on how those diagnoses co-occur in practice. The large negative impact on lung, heart, and other chronic diseases suggests that plans disproportionately serving beneficiaries with complex chronic illness would be disadvantaged relative to those with greater exposure to skin diagnoses. While these numbers represent less than 1 percent of MA payments, their impact on plan behavior is real: consider that the entire controversy over Medicare Advantage star ratings, and the prolonged litigation associated with it, is worth $13 billion.

Importantly, the immediate redistribution of payments is only part of the story. The deeper concern is how these shifts reshape incentives in Medicare Advantage. Research has shown that MA plans respond to relative profitability. When payment weights rise for one set of diagnoses and fall for others, the incentives to attract and retain different types of beneficiaries change accordingly. Estimates based on work from the Medicare Payment Advisory Commission (MedPAC) suggest that this practice, known as “favorable selection”, will result in $730 billion in overpayments over the next decade. By increasing the relative profitability of beneficiaries with skin diagnoses while reducing payments tied to complex chronic conditions, the proposed recalibration risks further intensifying selection incentives.

Moving Forward: Fix The Immediate Issues, But Also Modernize MA’s Risk Adjustment Model

These dynamics expose a broader governance challenge in MA risk adjustment. The HCC model was first developed decades ago and has long faced concerns related to coding intensity, accuracy, and favorable selection. Yet it has remained structurally similar even as MA has grown into a program governing hundreds of billions in annual payments and tens of billions in estimated overpayments, according to MedPAC. CMS treats recalibration primarily as a technical updating exercise, even though coefficient changes can materially alter incentives across diagnoses and populations. In a program of this scale, model updates are not merely statistical tinkering—they are policy decisions with predictable behavioral consequences.

In the immediate term, CMS should follow MedPAC’s recommendation and correct the distortion embedded in the proposed update; the agency should ensure that temporary spending shocks—such as the recent spike in skin substitute costs—are not mechanically carried forward into future MA payments for 2027 and beyond. CMS should also improve transparency by publishing sensitivity analyses and key methodological details prior to the publication of the Advance Notice so that stakeholders can assess how recalibration would affect relative payment weights and plan incentives before changes are finalized.

But CMS should also take steps to move beyond the decades-old HCC framework and modernize its risk adjustment approach. The agency should comprehensively re-evaluate the data and structure used to calibrate risk adjustment and adopt modern analytic methods, including machine learning and AI, to better align payments with true clinical risk and create more transparent, appropriately aligned incentives. The shortcomings of the proposed 2027 model underscore the urgency of the need for this modernization.

Authors’ Note

Thomas Kornfield is a consultant for Medicare Advantage health plans and health plan trade associations. Clients include AHIP; Blue Cross Blue Shield Association; Elevance; HCSC; and the SNP Alliance. Kornfield is also an advisor for EBG Advisors, which does work for health plan clients.

Ezekiel Emanuel reports the following grants: HMSA Care Models Alternative Payment & Care Models SOW #10 (8/15/25-8/14/26); Lifespan Disparities in LMICs, Bill & Melinda Gates Foundation (11/18/2024-4/30-2027); HMSA Alternative Payment & Care Models SOW #9 (11/1/2024-10/31/2026); Bergen Centre For Ethics And Priority Setting in Health University of Bergen(8/1/2023-9/30/2032); Schmidt Futures Schwab Charitable Fund (12/21/2022-12/31/2024); Laura And John Arnold Foundation (1/31/2022-2/28/2027); Hogan Lovells (12-3-2023-12/2/2025); Mendell Health Inc. (8/17/2023-8/31/2025); and Janssen Pharmaceuticals Inc. (12/13/2022-7/31/2025).

Dr. Emanuel reports travel reimbursement from Employer Direct Healthcare; UCLA; UVA Darden School of Business; New York Historical Society; Amangiri Executive Retreat; BCEPS International Symposium; Arendaluska Meeting; Baylor College of Medicine; CEO Council Cedar Cares; Koo Foundation; Brown University; CVS Accountable Care; Building Together HC Summit; California Orthopaedic Association; TUM Institute for History & Ethics of Medicine; HCRX; RAISE Symposium; and Spring Tide Annual Meeting.

Dr. Emanuel reports honorarium from Employer Direct Healthcare; UCLA Distinguished Visiting Professor; Baylor College of Medicine; Grand Rounds; CEO Council Cedar Cares; Koo Foundation; Brown University Emergency Medicine; 10th Symposium CVS Accountable Care; Building Together Healthcare Summit; California Orthopaedic Association; HCRX; Brocher Summer Academy; RAISE Symposium; Spring Tide Annual Meeting; Avalon HealthCare Solutions; Massachusetts Association of Health Plans; and UCSF Department of Medicine Grand Rounds.

Dr. Emanuel serves on the Clinical Advisory Board of Daymark Health; Internal Advisory Board Penn Parity Center; Advisory Board Peterson Center on Healthcare; and Advisory Board JSL Health Capitol. He is a consultant for Healthcare Foundry Inc. and Korro/Coach AI Ltd. Dr. Emanuel has options for Healthcare Foundry Inc.; Korro/Coach AI, Ltd.; FeelBetter Inc.; Dendro Technologies Inc. (CalmiGo); Cellares Corp,; Notable Health; Smirk Health; and Clarify Health.

Dr. Emanuel reports royalties from his books and William Morris Endeavor. Dr. Emanuel has interests in Sunstone Consulting, Applecart Project Inc., Maniv, and Oak/HC/FT Venture Fund.