Orlando Harmon
Risk adjustment is a statistical process used to predict healthcare costs by assigning a risk profile to an individual's health status. It is a critical component of health plan operations, especially for plans paid on a capitated basis like Medicaid Managed Care Organizations (MCOs) and Medicare Advantage Organizations (MAOs). Risk adjustment payment models reflect how an insurance company gets paid for covering the healthcare needs of its members. These models are based on patient characteristics and conditions, particularly those that affect spending. For example, an older person with multiple chronic conditions will require more care and cost more to treat than a younger, healthier person. Risk adjustment helps ensure that providers receiving capitated payments will be paid enough to care for the sicker patient just as well as the healthier one.
| Characteristics | Values |
|---|---|
| Purpose | To ensure that payments to model participants, such as doctors, are fair and accurate and reflect the health status of the patients being served by the model |
| Basis | Patient characteristics and conditions, particularly those that affect spending |
| Patient Scoring | Patients are assigned a risk score based on demographic information, like age and sex, as well as current health status, including existing chronic conditions and disabilities |
| Payment | Scores are then applied to the baseline payment for each patient, resulting in higher payments for patients with higher risk scores and lower payments for those with lower risk scores |
| Data Collection | The External Data Gathering Environment (EDGE) is a data collection service that insurers must use to submit enrollee information as well as medical and pharmaceutical claims |
| Data Verification | An EDGE server runs HHS-developed software designed to verify submitted data, execute risk adjustment processes, and generate summary reports for submission to HHS |
| State-Run Programs | States have the option to establish their own state-run risk adjustment programs or allow the federal government to run the program |
| Federal Model | States that choose not to operate an exchange or marketplace must use the federal model and cannot run their own risk adjustment programs |
| Federal Charges | In states where HHS operates risk adjustment, issuers are charged a fee to cover the costs of administering the program |
| Federal Methodology | HHS developed a federally-certified risk adjustment methodology to be used by states or by HHS on behalf of states |
| Alternative Models | States electing to use an alternative model must first seek federal approval and must submit yearly reports to HHS |
| Notice of Benefit | States electing to run their own risk adjustment program must publish a notice of benefit and payment parameters by March 1 of the year prior to the benefit year |
| Auditing | CMS is addressing the issue of inaccurate coding of patients' health by implementing stronger auditing rules |
| Chronic Conditions | CMS is also reducing the number of chronic conditions that can be included in risk scores |
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What You'll Learn
Commercial risk adjustment
Risk adjustment is a method for modifying capitated provider payments based on patient characteristics and conditions, especially those that affect spending. Commercial risk adjustment is a concurrent payment model where current-year diagnoses are used to predict current-year healthcare costs. This payment model serves individuals and small groups who purchase insurance through the Health Insurance Marketplace, an online insurance exchange.
The commercial risk adjustment payment model is a "risk stabilization program" where a plan collects premiums from its enrolled members, but funds are distributed from plans with low-risk enrollees to plans with high-risk enrollees. The Department of Health and Human Services (HHS) administers and regulates commercial risk adjustment and has two programs: HHS-HCC for diagnosis-related risk and Prescription Drug Categories (RXC) for prescription-related risk. Enrollees in commercial risk adjustment are identified by age (adult, child, or infant) and are also classified by the level of the plan purchased. The level of the plan determines the percentage of healthcare costs a member pays, with platinum being the least out-of-pocket expense after premiums.
The HHS updates a list of Hierarchical Condition Categories (HCCs) yearly, which is a list of diagnoses that have been assigned a value for risk adjustment. Each risk adjustment payment model uses its own variation of this general HCC list. The risk adjustment model's HCC crosswalk contains only conditions that are costly to manage from a medical or prescription drug treatment perspective. The sicker the patient, the higher the healthcare cost expenditures are predicted to be, and therefore the higher that patient's risk factor.
The External Data Gathering Environment (EDGE) is a data collection service that insurers must use to submit enrollee information and medical and pharmaceutical claims. An EDGE server runs HHS-developed software designed to verify submitted data, execute risk adjustment processes, and generate summary reports for submission to HHS.
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Diagnosis-related programs
Risk adjustment payment models are a reflection of how insurance companies receive payment for covering the healthcare needs of their members. Diagnosis-related programs are smaller programs within most payment models. These programs are focused on medical costs to manage the clinical treatment of a condition.
In a risk adjustment model, a patient is given a risk score based on their demographics, such as age and gender, as well as their health status. The ICD-10-CM codes, which represent a patient's diagnoses, provide data about their health status and the expected costs of care. The sicker the patient, the higher the healthcare costs are predicted to be, and therefore the higher the patient's risk factor.
The Hierarchical Condition Categories (HCCs) list is a list of diagnoses that have been assigned a value for risk adjustment. The Department of Health and Human Services (HHS) updates the list annually and publishes it in a spreadsheet format. Each risk adjustment payment model uses its own variation of this general HCC list. However, it is important to note that not all ICD-10-CM diagnoses are linked to an HCC that affects risk scores, and therefore not all health conditions are risk-adjustable.
The reporting of chronic conditions is necessary at least once each calendar year for an accurate risk score calculation. Routine audits for proper medical record documentation are vital for the success of a risk adjustment program. Some electronic medical record systems use "flags" to remind providers of previously diagnosed conditions that have not been addressed in the current calendar year. This helps ensure continuity of care and an accurate picture of the patient's overall health status.
Risk adjustment is critical to ensuring adequate compensation for health insurance plans, so they can maintain coverage and access to care for beneficiaries likely to incur higher-than-average costs.
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Prescription-related programs
Risk adjustment payment models reflect how an insurance company is reimbursed for covering the healthcare needs of its members. Within most payment models, there are smaller programs. One of the most notable is prescription-related programs, which reimburse the health plan for covering medication needed to treat conditions that are on the crosswalk for that risk adjustment model.
The MRx program is a pharmacy-based program in the Medicaid risk adjustment payment model that uses National Drug Codes (NDCs) to assess risk. In the CDPS+Rx payment model, both diagnosis codes and NDCs are combined to determine the patient’s risk score. This model takes into account the patient's prescription use, which can impact their risk score.
Insurers may also use risk adjustment payments to offer their members additional services, such as enrollment in exercise programs, case or disease management, and transportation to medical appointments. By offering these services, insurers can help to improve the overall health and well-being of their members, which may also impact their future healthcare costs.
Risk adjustment helps to ensure that providers receiving capitated payments are reimbursed fairly for treating patients with varying healthcare needs. It is a method for modifying capitated provider payments based on patient characteristics and conditions, particularly those that affect spending. By using statistical models and assigning risk scores, insurers can adjust payments to providers based on the expected future healthcare costs of their patients.
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Medicare Advantage upcoding
Risk adjustment payment models reflect how an insurance company is reimbursed for covering the healthcare needs of its insured members. Within most payment models, there are smaller programs, notably diagnosis-related and prescription-related programs. Diagnosis-related programs focus on medical costs to manage the clinical treatment of a condition, while prescription-related programs reimburse the health plan for covering medication needed to treat conditions.
Commercial risk adjustment is a concurrent payment model where current-year diagnoses are used to predict current-year healthcare costs. The sicker the patient, the higher the healthcare costs, and the higher that patient's risk factor. Risk adjustment helps to ensure that providers receiving capitated payments will be paid enough to care for the sicker patient just as well as the healthier one.
Medicare Advantage (MA) plans, offered by commercial insurers, receive monthly payments from Medicare to cover each enrollee's cost of care. MA plans receive higher payments when they enrol sicker people. This is called risk adjustment and is intended to ensure that all people with Medicare have access to MA plans. However, this also gives MA plans an incentive to make their enrollees look sicker than they are, a process known as upcoding.
Upcoding involves reporting that patients have more severe health issues than they actually do, resulting in higher payments for the MA plan without providing more care. This can be done through recording paper-only diagnoses or through in-home health risk assessments (HRAs) that diagnose the individual with conditions that make them look sicker than they are without leading to any follow-up care or additional spending. A 2024 report found that most of the $7.5 billion in additional payments to MA plans resulted from questionable patient diagnoses based on in-home health risk assessments and medical chart reviews.
The practice of upcoding has drawn scrutiny from regulators, lawmakers, and consumer advocates due to concerns about its potential impact on Medicare finances and beneficiaries' premiums. AARP has endorsed the No UPCODE Act, which aims to base risk adjustments that determine MA payments on two years of diagnostic data instead of one year and apply a coding-intensity adjustment to offset any remaining differences in coding between MA plans and original Medicare.
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Risk adjustment in value-based payment models
Risk adjustment is a method for modifying capitated provider payments based on patient characteristics and conditions, especially those that affect spending. It is intended to encourage providers to treat all patients, regardless of their care needs, and to ensure that providers are paid enough to deliver appropriate care. Risk adjustment is necessary for a well-functioning value-based care ecosystem.
In a value-based payment (VBP) model, the ability to predict the relative needs and costs of care for patients is important for achieving success. Risk adjustment is an essential tool to help inform that understanding. For example, an older person with multiple chronic conditions requires more care and costs more to treat than a younger person with no health issues. Risk adjustment helps ensure that providers are paid enough to care for the sicker patient just as well as the healthier one.
Insurers and other healthcare payers use statistical models to determine what providers should be paid based on their patients' expected future healthcare costs. Patients are assigned a risk score based on demographic information, such as age and sex, as well as current health status, including existing chronic conditions and disabilities. These scores are then applied to the baseline payment for each patient, resulting in higher payments for patients with higher risk scores and lower payments for those with lower risk scores.
Hierarchical Condition Category (HCC) coding is a risk-adjustment model created by the Centers for Medicare and Medicaid Services (CMS) to estimate future healthcare costs for patients. The ICD-10 coding system classifies the diagnoses, signs, and symptoms that healthcare professionals use to code and bill for healthcare services. Payers assign patients a risk-adjustment factor (RAF) using HCC scores and demographic factors, which factor into the calculation.
Risk adjustment is also used in quality measurement to ensure fair evaluations. For example, CMS uses risk adjustment to set financial targets in CMS Innovation Center models, which can affect how much healthcare providers are paid by Medicare.
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Frequently asked questions
Risk adjustment is a statistical process used to predict healthcare costs by assigning a risk profile to an individual’s health status. Risk adjustment payment models reflect how an insurance company gets paid for covering the healthcare needs of the members they insure.
Patients are assigned a risk score based on demographic information, like age and sex, as well as current health status, including existing chronic conditions and disabilities. Scores are then applied to the baseline payment for each patient, resulting in higher payments for patients with higher risk scores and lower payments for those with lower risk scores.
Commercial risk adjustment, created by the Patient Protection and Affordable Care Act (ACA) of 2010, serves individuals and small groups who purchase insurance through the online Health Insurance Marketplace. Another example is the Medicaid Chronic Illness and Disability Payment System (CDPS), which is the risk adjustment payment methodology used by states for Medicaid beneficiaries who enroll in a Managed Care Organization (MCO).
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