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Risk Adjustment

A Five-Part Series by Will Stabler

About This Series

I wrote this article series in five parts over two months during early 2017 when there was much discussion of what was termed “value-based care.” This series examines risk adjustment and the role it can play in such systems.

Articles in This Series

1. The Influence of Risk Adjustment in Health Care
As America’s healthcare system transitions toward payment models that reward what many call value-based care, risk adjustment is playing an increasingly important role. For many health plans, it is an integral part of operations.
 
In this article I look at how risk was modeled in the Medicare Advantage program and by the ACA before diving into more advanced risk adjustment concepts.
 
Risk adjustment models and their reporting requirements continue to evolve. With this evolution, it becomes critical for us to appreciate how risk adjustment, quality and care management measures can work together for success.
 
In achieving accurate risk adjustment results there are two main issues where plans fall short: not properly identifying the illness burden of the population, and not closely monitoring and managing their data submissions.
 
In risk adjustment, variation can be the enemy. It can also provide opportunities if properly managed. The point of care is one place where we can do that.
 

The Influence of Risk Adjustment in Health Care

By Will Stabler

First published on Feb. 2, 2017

(Part 1 of a five-part series) Risk adjustment has been a critical component in health care for a few decades now. As America’s healthcare system transitions toward payment models that reward what many call value-based care, risk adjustment is playing an increasingly important role. For many health plans, it is an integral part of operations. It affects their provider networks, products, and reimbursement, so innovative risk adjustment strategies are essential to their success.

What is Risk Adjustment and What is its Purpose?

Defined by the American Academy of Actuaries as “an actuarial tool used to calibrate payments to health plans or other stakeholders based on the relative health of the at-risk populations,” risk adjustment deserves some deference due to its influence on payment in healthcare for a range of plans and providers.

The definition above touches on the fundamental elements of risk adjustment, which is a statistical process that considers health status and health spending in light of outcomes or costs. To begin to explore this vital tool, we need to take a closer look at some of the fundamentals and early history of healthcare risk management, what it does, and how it is used.

According to the Centers for Medicare and Medicaid Services (CMS), the following is the purpose of risk adjustment:

“Risk adjustment allows CMS to pay plans for the risk of the beneficiaries they enroll, instead of an average amount for Medicare beneficiaries. By risk adjusting plan payments, CMS is able to make appropriate and accurate payments for enrollees with differences in expected costs. Risk adjustment is used to adjust bidding and payment based on the health status and demographic characteristics of an enrollee.”

The Early History of Risk Adjustment

Risk adjustment got its start in health care in the mid-1980s with a model known as Adjusted Average Per Capita Cost (AAPCC), which estimated how much Medicare would spend in a year for an average beneficiary. The word “average” would cause any current risk manager to take a cautionary step back. Through AAPCC, CMS would make projections at the county level to set fee-for-service spending for the coming year to set the reimbursement rates for Medicare health plans. The model resulted in wide variations in costs even among adjacent counties, and it was eventually replaced in 2000.

Modern risk management in healthcare got its first big start when the Balanced Budget Act (BBA) of 1997 created the Medicare + Choice Part C Program (now known as Medicare Advantage). As part of the BBA, CMS was given a mandate to implement risk adjustment payment methodology to Medicare + Choice starting in 2000.

As our healthcare system started to move slowly away from a volume-based, fee-for-service model, new and more accurate models of risk adjustment were necessary. Since 2000, risk adjustment models have been through at least three major redesigns, and they continue to evolve through another major change that is in process now.

In the next installment of this series I will explore how the more precise risk adjustment models of the past decade have evolved and where they have brought us in the present.