According to a story from the Wall Street Journal, the U.S. healthcare system might be able to learn a thing or two from Netflix. A well understood aspect of healthcare is that fact that healthcare spending tends to vary significantly from person to person. Naturally, people sho are generally healthy most of the time tend to spend very little on healthcare. However, around ten percent of Americans are responsible for two thirds of spending. This ten percent accounts for mostly for people who are very sick or who have a long term, chronic illness.

A major factor of developing health plans and determining the amount of coverage that person receives from Medicare or an ACA plan is the process of risk adjustment. This adjustment is based on how sick a person is likely to be. As a result, someone who has a long term illness is going to receive a greater subsidy than someone that is not sick most of the time. This adjustment is an essential incentive that makes it easier for insurance companies to cover the sickest Americans. The risk adjustment, however, sets up its own incentives. Since disease diagnosis and assessment of its severity is mostly a matter of clinical judgment, health providers can make a person’s healthy appear worse than it actually is in order to receive more coverage.

This exploitation is called up-coding. A study from the Government Accountability Office suggests that the practice could be costing billions of dollars in overpayments. A solution to the problem, called “coding intensity adjustment” unfortunately does not address the root of the issue and is projected to drop premiums across the board by almost six percent, meaning that even people who are not up-coding will see a loss in premiums.

Additionally, current methods for risk adjustment are poorly configured. Generally, Medicare only uses information from previous claims as its primary source for adjustment, but research indicates that this only accounts for 36 percent of disparities in patient spending. This system is clearly due for a reboot.

Back in 2006, Netflix started a contest to help improve its Cinematch algorithm, which was meant to determine how users would review movies that they hadn’t seen. With a grand prize of $1 million, Netflix got a new and improved algorithm without having to spend the time or money developing it. Medicare could run a similar contest to improve its outdated risk adjustment model, and it could continue this process every five to seven years in order to curtail the systematic exploitation of loopholes that is responsible for so much waste currently.

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