Understanding the Differences Between Risk Adjustment Programs

I’ve spent a good portion of the last 10 years of my professional career working directly and indirectly with risk adjustment programs. What has become apparent over that time is there are varying levels of understanding among payers, providers, and vendors alike about the nuances between risk adjustment models. With that in mind, I’m hoping to outline differences and similarities across the three main models: CMS, HHS and Medicaid. It’s complex, often confusing, and much broader than a single post, so we’ll start with some of the higher-level comparisons before moving into the details. But first, a quick overview of risk adjustment as a concept.

What Is Risk Adjustment?

Healthcare for approximately 110 million Americans is provided by the U.S. government through value-based care programs like Medicare, Medicaid, and the ACA exchange. These programs rely on a system called risk adjustment, a financial tool for estimating the cost to provide care to a covered population.

The calculations and variables for risk adjustment are determined as follows:

• A mathematical average for the cost of care for a person based on age and other demographics is established.
• To standardize the measure of disease burden across geographic locations and demographic cohorts, a mathematical value known as a risk adjustment factor (RAF) is determined for each patient based on their various conditions. The sicker a patient is, the higher their RAF score—and the higher the RAF, the more costly the care.

Risk adjustment is the process of applying RAF to the estimated baseline outlined above to determine the appropriate amount of reimbursement owed to an organization—usually a health plan (payer) or, in a growing number of cases, a health system (provider)—for assuming the risk to care for that patient. Adjusting for risk prevents what’s known as “adverse selection,” in which organizations only cover or care for healthier people to artificially lower their costs.

If the actual cost of care comes in under the adjusted reimbursement, the organization that assumed the risk shares the savings with the federal government, or even keeps the entire difference (as is the case in Medicare Advantage). If the cost of care is higher than the reimbursement, the risk-bearing organization can be held either partially or fully responsible for covering those excess costs, depending on their specific risk program. Upside-only programs only share the savings but are fully responsible for any cost overages, while in upside and downside programs, both savings and costs are shared.

While the general concept of risk adjustment is the same throughout value-based care, risk adjustment programs work differently across various lines of business—and not knowing the key differences between them can lead to potential misunderstandings and less-than-desirable financial and patient outcomes.

Let’s look at differences between the risk adjustment programs for Medicare Advantage (Medicare Part C), the Health and Human Services (HHS) Affordable Care Act (ACA), and Medicaid.

Medicare Advantage (CMS-HCC model)

Medicare Advantage (MA) plans, also known as Part C, are offered by private insurers and provide Medicare benefits to enrollees. The risk adjustment program for MA is designed to ensure health plans (payers) are compensated based on demographic characteristics and health status of their members. This program uses the CMS-Hierarchical Condition Categories (HCC) model to derive a RAF that accounts for diagnoses and demographic factors.

The goal is to more accurately predict healthcare costs and ensure that plans serving sicker populations receive higher payments to fund appropriate patient care. The CMS-HCC model is specifically designed to address conditions found in a geriatric population, though there are eligible patients who receive Medicare benefits due to disability rather than age. The CMS-HCC model is updated annually, and proposed and actual program updates are published on a public website.

HHS ACA

The risk adjustment program under the ACA is designed to ensure plans covering sicker individuals are adequately compensated, as well as to mitigate the effects of adverse selection by transferring funds from plans with lower-risk enrollees to those with higher-risk enrollees. This program uses the HHS-HCC model, which is similar to the CMS-HCC model but tailored to individual and small group markets. The HHS-HCC model specifically addresses age-appropriate populations, including all ages and obstetrical-specific conditions not seen in the Medicare populations.

Medicaid

Medicaid risk adjustment programs vary significantly between states, reflecting the diverse populations and healthcare needs they serve. These programs often use state-specific models, such as CDPS/MedicaidRx, CRG, ACG, ERG, and DxCG. Medicaid risk adjustment is typically prospective, meaning issuers know their risk scores in advance. The primary goal is to ensure fair payment to providers based on the health status of Medicaid beneficiaries, promoting equitable access to care.

Key Differences

Risk adjustment is a fundamental part of value-based care. These programs play a crucial role in maintaining the stability and fairness of the healthcare system by ensuring that plans and providers are adequately compensated for the risk profiles of their enrollees.

However, each of these programs has its own strengths and weaknesses. In the weeks to come, we’ll take a closer look at each program, the external forces that can impact risk adjustment processes and programs, and what steps payers and providers can take to ensure optimal risk adjustment performance.