Understanding Medicare Risk Adjustment – Why It Matters for Healthcare Providers

Risk adjustment is a critical component of Medicare Advantage. It’s a complex process that requires vigilance by health plans and providers. Without it, some experts say the system would penalize programs that do a good job caring for sicker patients and give other projects a competitive advantage. Understanding Medicare risk adjustment begins with understanding Hierarchical Condition Categories (HCCs).

What Is It?

The Medicare Advantage risk adjustment process levels the playing field for Medicare Advantage organizations to ensure they can offer comprehensive services for their members. It’s essential to understand what is medicare risk adjustment and how it affects the healthcare industry. Risk adjustment is the system by which Medicare reimburses plans for individual enrollees based on their expected care costs.

CMS adjusts these payments using a variety of ways, including standardized bids. Risk adjustment aims to sever the link between who an insurer accepts as a plan member and the costs that the plan incurs. MAOs receive a per-member-per-month (PMPM) capitation payment from CMS in exchange for accepting full responsibility for their enrollees’ healthcare costs. Enrollees’ medical diagnoses, professional encounter data and additional Medicare-approved services are used to predict healthcare costs for the plan.

This information is collected and analyzed to create a Medicare Advantage member’s risk score, which determines their share of total Medicare Advantage expenditures for the contract year. Each chronic disease has a set of related ICD-9 diagnosis codes grouped and called Hierarchical Condition Categories (HCC). Each HCC is assigned a specific value indicative of its cost pattern.

Within each family of HCCs, the highest severity trumps—or takes precedence over—less severe conditions in that same category. Medicare Advantage enrollees are further divided by their plan service levels, such as platinum, gold, silver, bronze, or catastrophic. Certain diagnoses, such as ESRD and renal failure, have additional risk adjustment values due to their invasive nature.

Several experts have suggested that using encounter data along with, or instead of, diagnoses from health risk assessments may make the Medicare Advantage risk adjustment process more accurate and less prone to gaming. While encounter data is not yet widely adopted, it’s a promising approach to enhance Medicare Advantage risk adjustment.

How Does It Work?

During the yearly Medicare Advantage bid submission process, plans submit their projected budget for member costs and services. The Centers for Medicare and Medicaid Services (CMS) reviews the budget and compares it to a benchmark, then establishes a contracted rate that CMS will pay the plan per beneficiary.

Part of the contracted rate is determined by each enrollee’s risk score, calculated based on diagnosis codes captured on claims submitted to a Medicare Advantage Organization by providers. The International Classification of Diseases, Ninth Revision (ICD-9-CM) is the coding system. Healthcare coders use these diagnoses to calculate the member’s Risk Adjustment Processing System (RAPS) risk score, representing their predicted healthcare costs relative to the average beneficiary.

The risk adjustment model uses a list of “hierarchical condition categories” (HCCs) to group diagnoses into clinically related categories with similar costs to the healthcare system. HCCs are ranked in severity, with the highest severity condition trumping — or taking precedence over — lower-ranking needs within the same family. For example, diabetes is a higher-ranked condition than rheumatoid arthritis and chronic obstructive pulmonary disease.

Why Is It Important?

Risk adjustment provides a level playing field for Medicare Advantage health plans. Unlike the incentives earned through Star Ratings, monthly risk adjustment payments are vital for a plan’s ability to fund its daily operations, member benefits, and care programs. In addition to demographic factors, HHS’s model uses medical diagnoses submitted by providers to create individual enrollee risk scores.

These diagnoses are then grouped into Hierarchical Condition Category groups, each representing higher anticipated healthcare costs for a Medicare Advantage health plan. For example, a person with diabetes with complications has a much higher risk score than a person with diabetes without complications. Medical coders need to understand how these risk scores are calculated so that they can report accurate diagnoses each year.

This is especially important since HCCs reset each January 1, and a person’s final risk score considers their diagnoses for the entire year. For this reason, submitting all relevant diagnosis codes for the calendar year is critical to ensure that all conditions are captured and included in an enrollee’s HCC score.

Recently, CMS targeted 2,000 diagnostic codes for removal from the risk adjustment model to combat up-coding, whereby healthcare providers make patients appear sicker than they are to inflate risk scores and earn higher payments from Medicare.

What Can You Do About It?

As a certified medical coder, you can do your part to ensure a smooth risk adjustment process by supporting accurate medical records and claims. The healthcare industry as a whole has a role to play, too. Engaged partnerships between providers and health plans help document, claim and encounter clear, complete and timely data.

The resulting medical information can support patient engagement and benefit members, including enrollment in exercise programs, case or disease management, transportation to medical appointments and more. HHS has implemented policies and methodologies to ensure a health plan’s actuarial value is accurate.

One is the reinsurance program, which uses individual enrollees’ medical claims to predict their monthly average cost and then provides payments or reimburses plans accordingly. The reinsurance program is important for protecting plans from large gains and losses. It helps cushion plans that serve high-cost patients, helping them maintain coverage and access to care while offering competitive premiums.

To determine individual reinsurance payments, CMS reviews enrollees’ active chronic condition diagnoses that appear on claims submitted by their providers. These diagnosis codes are grouped into Hierarchical Condition Categories (HCCs), with numeric values that indicate relative costs for the enrollee.

These diagnosis groupings are based on an overall list of HCCs that the Department of Health and Human Services publishes yearly, with each model having its variation on this general list.

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