State of Affairs of the Medicare Advantage Risk Adjustment Model

Due to allegations of fraud and billions in potential overpayments, risk adjustment in Medicare Advantage—also known as Medicare Part C—is currently under intense scrutiny. Healthcare finance isn’t on everyone’s radar, but if you’re in the Medicare Advantage (MA) business, either as a provider or a health plan, you need more than a passing familiarity with the issues at hand. CMS recently announced the fast-tracking and expansion of federally executed risk adjustment data validation (RADV) audits, which should be top of mind for anyone involved. We discussed the implications of fast-tracked RADV audits for health plans and providers in a recent blog post.

Risk Adjustment in Medicare Advantage

Medicare Advantage is a model that enables private insurance companies to administer and manage Medicare benefits for eligible and enrolled patients. Medicare-eligible individuals can elect Part C when selecting their initial Medicare benefits or during the annual open enrollment period (AEP). Once enrolled in a Part C plan, the patient is required to receive care from providers participating in the plan network. Healthcare providers submit and are paid on the basis of claims for care rendered unless the organization has entered into an accountable care (ACO) contract. Financial arrangements between the health plan and CMS are separate and distinct from transactions between the provider and the plan.

The funding that flows from CMS to health plans is driving the current scrutiny, as the payments are determined in large part by individual patient risk adjustment scores: the “sicker” the patient, the greater the funding amount. As previously discussed, risk adjustment is an actuarial tool designed to ensure appropriate healthcare funding and to alleviate potential adverse selection of healthier, less costly members. It’s like a financial equalizer that adjusts payments to plans based on how sick—or not sick—their members are reported to be.

To maximize their federal funding, health plans are incentivized to capture as many risk-adjustable diagnoses as possible. To ensure a more level playing field between health plans and their eligible members, CMS uses “two principal components to calculate the risk-adjusted payment that it will make to an MA organization for an enrollee: a base rate that CMS sets using bid amounts received from the MA organization and the risk score for that enrollee.” Most risk-eligible diagnosis codes are collected from individual patient – healthcare provider encounters via the claim submission process however, alternate submission methods can be used such as retrospective chart reviews. The more complex the health conditions reported, the higher the risk score, and the higher associated payment from CMS to the plan.

A crucial point is that diagnoses must be reported to or gathered by the MA plan which, in turn, reports the HCC-eligible conditions to CMS to receive funding. For the purposes of calculating the risk score, CMS uses diagnoses that the enrollee receives from acceptable data sources, including certain physicians and hospital settings. CMS requires all submitted diagnosis codes to be documented in the medical record and as a result of a face-to-face encounter, and these diagnoses must be coded according to current ICD-10-CM guidelines.

In short, risk scores drive payments; a higher risk score means a higher payment.

Why It Matters

Risk adjustment isn’t just a behind-the-scenes financial calculation. It shapes how plans design benefits, manage member care, and even market their coverage plans to potential enrollees. Done right, it ensures plans are paid fairly and that sicker or more medically complex health plan patients have access to the care they need. Over the past decade, CMS has worked to modernize their risk adjustment model including transitioning from the Risk Adjustment Payment Systems (RAPS) to the Encounter Data Process System (EDPS) and more recent implementation of HCC Model Version 28. When announcing the model change from V24 to V28, CMS stated, “The goal of updating the underlying data and the clinical reclassification was to improve predictive ability by better reflecting current disease patterns, treatment methods and costs, and diagnosis and coding practices.”

Risk adjustment programs, most notably the Part C Medicare Advantage model, are not without controversy. Critics argue there is opportunity for plans to upcode—documenting more diagnoses than necessary—to inflate risk scores and boost CMS payments. For fiscal year 2024, the estimated improper payment rate for Medicare Part C was 5.61%, totaling $19.07 billion in improper payments. CMS has responded with audits, penalties, and tighter rules to ensure the stability of the model. However, CMS has fallen far behind in its oversight of Medicare Advantage Organizations (MAOs) and the completion of risk adjustment data validation audits (RADV) is years behind current operations.

To ensure operational integrity and address concerns with inflation of risk scores and payments, CMS recently announced sweeping changes to the RADV process (published in May 2025) that include increasing the scope and volume of federal audits. This was quickly followed by a published schedule of RADV data submission deadlines for code deletes: diagnosis codes found not to be supported by the patient medical record. The tight timeline for deletion submissions means that if a health plan does not already have the necessary technology and processes in place to examine its data for errors, it is too late to start now.

CMS has been clear in its message: health plans should expect to be under a microscope for risk adjustable diagnosis codes, particularly those garnered from retrospective chart reviews or gathered during an in-home assessment (IHA). As reported by the OIG in their October 2024 report to Congress, diagnoses reported only on in-home health risk assessments and not on any other service record resulted in an estimated $7.5 billion in risk adjustment payments in 2023. In-home assessments and HRA-linked chart reviews are more vulnerable to misuse and conditions reported only for these types of services raise concern for the validity of the conditions and the coordination of needed care for patients.

It’s a high-stakes operation with billions of dollars on the line. Health plans and even their provider partners must be aware of and proactively manage their risk adjustment reporting processes to ensure all captured conditions reported to CMS are fully substantiated in the clinical record. Risk-adjusted health plan models are designed to ensure appropriate funding for individual patients based on their medical needs. Questions surrounding potentially inflated payments will need to be addressed, and it appears CMS is taking their oversight very seriously.