Risk Adjustment 101: What Medicare Advantage Plans Need to Know

June 29, 2023


For Medicare Advantage plans, few things are more important than risk adjustment. While incentives earned through Star Ratings are vital for motivating plans to pursue year-over-year improvement, risk adjustment has a bigger influence on plans’ revenue and their ability to offer competitive benefits.

Medicare Advantage plans rely on the monthly risk adjusted payments to fund daily operations, member benefits and care programs. When equipped with the right risk adjustment best practices, plans lay the foundation for stronger plan performance and financial stability.

What is Risk Adjustment in Medicare Advantage?

Risk adjustment is a statistical model that estimates the healthcare costs of insuring Medicare Advantage members based on their associated risk. A risk adjustment factor (RAF) is calculated for each member based on individual attributes that contribute to costs of care including age, sex, health conditions and socioeconomic status.

Why Does Risk Adjustment Matter to Medicare Advantage Plans?

The Centers for Medicare and Medicaid Services (CMS) use risk adjustment to determine monthly capitation payments to Medicare Advantage plans. During the yearly bid submission process, the CMS reviews each plan’s projected budget for member benefits and services. The plan’s bid is compared to a base rate to establish a contracted rate CMS will pay the plan. This contracted rate is adjusted by each member’s risk score, and plans are paid more for higher risk score members.

Risk adjusted payments help ensure health plans are paid appropriately for the risk they are assuming by distributing more funds for higher risk members and less funds for lower risk members. The risk adjustment process encourages plans to enroll all members regardless of their risk profile. When used strategically, risk adjustment provides plans with the financial support they need to make continuous improvements in quality of care, benefits and services.

Another key element of risk adjustment is its ability to support whole-person care. By identifying the unique diagnoses for each member, health plans can design programs to address these issues and improve health outcomes. For example, plans can use risk adjustment to identify high-risk members and direct them to programs that address chronic conditions and health disparities. These practices also help reduce risk levels, costs of care and emergency room utilization rates.

How Do Health Plans and Providers Code RAF?

Diagnosis codes are documented by healthcare providers during medical appointments, including wellness visits, physicals, screenings, and health assessments. These diagnosis codes are reported to health plans through claims data, and health plans send the diagnosis information to CMS.

CMS groups diagnosis codes using the Hierarchical Condition Category (HCC) risk adjustment model to identify RAF for Medicare Advantage members. The HCC model organizes diagnosis codes into specific HCC categories based on their related disease states. The HCC model summarizes the thousands of diagnosis codes referenced in the International Classification of Diseases (ICD) to over a hundred HCCs Health plans and CMS use the HCCs to calculate a patient’s risk score.

How Does Risk Adjustment Coding Impact Plan Performance?

Accurate risk adjustment coding ensures plans and providers have the appropriate funds to care for all members’ needs and conditions. By educating providers about coding practices and regularly auditing procedures, health plans improve the accuracy of RAF identification. This continuous flow of information helps plans ensure they are being paid accurately and appropriately.

How is Medicare Advantage Risk Adjustment Evolving?

As reported in the 2024 Medicare Advantage and Part D Final Rule, CMS will phase in a new risk adjustment model over the next three years for Medicare Advantage plans. This new model increases the number of HCC codes used to calculate risk scores, but also significantly decreases the number of diagnosis codes that map to HCCs. This is the result of an update to use ICD-10 rather than ICD-9 codes in the risk adjustment model.

In addition, CMS finalized technical details for the Risk Adjustment Data Validation (RADV) program. CMS uses RADV to audit risk adjustment payments for accuracy to ensure Medicare Advantage plans receive appropriate payments. The latest RADV Final Rule establishes that CMS will begin extrapolating risk adjustment errors beginning in payment year 2018, rather than beginning in 2011 as initially proposed.

Amidst reports that CMS overpaid Medicare Advantage plans by $75 billion in 2023, plans should prepare for their risk adjustment data to be carefully audited under strict regulatory oversight for the coming years.

Improve Risk Adjustment to Ensure Success and Compliance

Navigating the changes coming to risk adjustment models alongside the daily challenges of accurately reporting diagnosis codes requires constant vigilance, but the benefits far outweigh the costs. Investing the time, staff and resources into maintaining compliance with CMS regulations ensures that plans will have the proper funding to support members throughout their health journeys.

Healthmine’s Expert Advisory Services team has years of experience guiding plans through regulatory and business challenges. If you need assistance improving your internal risk adjustment programs or addressing CMS’s new guidelines, reach out to us.

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