What is Medical Risk Adjustment in Medicare and Medicaid?

What is Medical Risk Adjustment in Medicare and Medicaid?

Medical risk adjustment is a critical component of the Medicare Advantage and Medicaid managed care programs. It helps ensure accurate payments to health plans based on the health status and risk profiles of their enrolled populations.

Read on to learn more about what risk adjustment is, how it works, and why it matters.

What is Risk Adjustment?

Risk adjustment in Medicare and Medicaid refers to statistical models that predict expected healthcare costs based on demographics, diagnoses, and other health information. The risk adjustment model calculates a risk score for each person enrolled in a health plan.

One tool that can make this job easier is an MRA calculator that helps chart audit coders look at MRA coding and model the risk. This risk score reflects how costly that enrollee is anticipated to be for the plan relative to the average enrollee. Using an MRA calculator saves time and speeds up risk adjustment calculations.

Plans with enrollees who are sicker and costlier than average will have higher average risk scores. Conversely, plans with healthier populations will have lower average risk scores.

Risk adjustment ensures that health plans receive capitation payments that accurately reflect the risk profile of their members. Without risk adjustment, plans with sicker members would be underpaid while plans with healthier members would receive overpayments.

How Risk Adjustment Models Work

The Centers for Medicare & Medicaid Services (CMS) develop and maintain the risk adjustment models used in Medicare Advantage and Medicaid. These models analyze historical claims data to identify diagnosis codes that have a statistically significant impact on costs.

CMS runs regressions to determine the incremental cost impact of each diagnosis compared to an average enrollee without that condition.

Risk scores are calculated by adding up the cost weights for each of an individual’s diagnosed conditions. Demographic factors like age and sex may also be incorporated into the model. The risk score then gets converted into a dollar value that represents how much more or less a health plan can expect to spend on that person relative to the average.

Why Risk Adjustment Matters

Accurate risk adjustment ensures health plans receive actuarially sound payments based on the expected costs of their enrollees. It removes incentives for plans to avoid sicker individuals and seek out healthier members. Risk adjustment also allows valid cost and quality comparisons between health plans based on their enrolled populations.

Without risk adjusting capitation rates, plans end up being overpaid for healthier enrollees and underpaid for sicker populations. Payments become disconnected from the true costs of providing care.

Risk adjustment aims to tie payments directly to expected costs as determined by the health status of plan members. This supports a fair competitive landscape between health plans.

Risk adjustment remains an evolving science as models become more sophisticated in predicting costs. However, the overall goal remains to pay plans accurately and remove incentives for biased selection against sicker individuals. Risk adjustment plays a vital role in the success of Medicare Advantage and Medicaid managed care.