The Importance of Medicare Risk Adjustment in Healthcare

In most contexts, risk adjustment relies on prior year health claims data. Unfortunately, enrollee churn in the individual market makes this data collection difficult.

The ACA’s permanent risk adjustment program must account for enrollee churn while capturing the full range of diagnosed conditions that increase each beneficiary’s health risks. It is accomplished with complicated algorithms and an equally complex collection of medical records.

Risk Adjustment

The ACA’s risk adjustment program is a vital component of the Three R’s that ensures insurers are compensated for enrolling higher-cost individuals. It ensures that the insurance marketplace is fair and allows consumers to shop for the plan that best meets their needs.

What is Medicare risk adjustment? It is a calculation based on diagnoses recorded in a patient’s medical claims data submitted for reimbursement. This type of risk adjustment system is known as a concurrent model. For example, a member’s risk score for a chronic health condition is only determined by the ICD codes reported to CMS in that calendar year.

Certified medical coders and healthcare professionals must understand how the ACA’s risk adjustment program works, especially regarding hierarchical condition categories (HCCs). HCCs are groups of clinically related diagnoses with similar costs to the healthcare system. They are grouped and assigned a value for use in the Medicare risk adjustment processing system. HCCs are also subject to hierarchy elimination. If multiple ICD codes map to the same HCC family, only the highest-valued HCC is used for risk adjustment calculation.

For this reason, accurate and complete encounter submissions are crucial for a health plan’s risk adjustment success. Without a robust and engaged partnership between the health plan and its provider network, it is challenging to capture patients’ disease burden with substantiated claim data accurately.

Hierarchical Condition Categories (HCCs)

HCCs are used to stratify patient risk, enabling insurers to predict costs based on capitated payments to healthcare organizations. They are created annually based on the International Classification of Diseases (ICD-10)-CM codes submitted by physicians and other eligible non-physician providers during face-to-face encounters with Medicare Advantage and ACA-administered health plans. This redocumentation process is known as the health risk assessment and is a requirement for MA and commercial payers under CMS guidelines.

HCC coding and documentation must be accurate to represent the proper diagnoses. Incorrect diagnosis coding and documentation can harm the RAF score and reimbursement payments. For example, documenting that a patient has diabetes is not enough; it must be noted that the patient has either type 1 or type 2 diabetes and whether they have complications such as neuropathy or diabetic nephropathy.

This best practice enables providers to develop care plans tailored to each patient’s needs and improve outcomes. It also helps to align healthcare costs with expected patient health status, ensuring fair reimbursement and resource allocation. In addition, HCC coding can help promote a value-based model of healthcare that incentivizes quality of care and reduces disparities in health outcomes. It also encourages patients to take responsibility for their health, leading to better adherence to treatment plans and improved patient satisfaction.

RAF Scores

Risk adjustment helps level the playing field between physician groups that serve patients with varying health needs and ensures that plans are adequately compensated for managing those complex members. RAF scores are based on a combination of diagnostic and demographic information that physicians report to CMS during professional encounters.

While the process is complicated, everyone is vested in ensuring it works well. RAF programs must gather and document each beneficiary’s medical history in detail. It includes the identification of diagnoses, their severity, and how they interact with each other and other conditions.

This information is collected and compiled into a risk score for each Medicare Advantage member, then used to determine reimbursement rates. It also serves as a benchmark for comparing performance between physician groups. That is why coding and reporting are critical for physician groups to achieve the best possible outcome.

The information that goes into a person’s RAF score is gathered from their enrollment application for either Medicare Advantage or commercial insurance. This process collects several demographic details about the enrollee. It links their ICD-10 diagnosis codes to HCCs, diseases, or conditions grouped into 86 categories by CMS because they are believed to be associated with higher-than-average healthcare costs.

RAF Payments

A health plan must have an effective system for collecting and documenting medical records and claims data to ensure accurate RAF payments. It includes a cadence for monitoring coding accuracy regularly.

Risk adjustment levels the playing field between insurers so that those who enroll higher-risk patients are rewarded for their efforts. In Medicare Advantage, this approach also encourages payers to manage the care of these members to control costs.

The current ACA-required risk adjustment model uses a concurrent payment model, meaning that this year’s diagnoses are used to predict the cost of this year’s healthcare. Unlike commercial, risk adjustment models typically use a prospective model and rely only on diagnosis codes submitted for reimbursement in the previous year.

This approach is necessary due to the significant enrollee churn in the individual, employer-sponsored, and Medicaid markets. A prospective reinsurance or risk adjustment model would need to collect data from multiple payers to accurately estimate the costs of a given year’s medical services, which is difficult and costly to implement.

To succeed, the various stakeholders must work together to ensure that the healthcare system collects and evaluates the correct medical information at the point of care. It requires an engaged partnership between the members, providers, and payers to ensure that medical records are correctly documented and coded.