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ZeOmega is kicking off a new blog series on risk adjustment to look at where we’ve been, what we’re facing today, what’s on the horizon, and how to best prepare. Over the next several weeks, our ZeOmega risk adjustment solution experts will provide a forecast of regulatory changes and guidance on ensuring risk payment accuracy in both business and clinical operations.

The topics we’ll be covering in this series are:

Today, we will provide an overview and history of the RA program.

What is Risk Adjustment and How Does it Work?

Risk Adjustment is a process for applying statistical methodologies to predict a beneficiary’s utilization of services and their cost.  In Medicare Advantage (MA) it is used to determine the capitated payments contracted Medicare Advantage Organizations (MAOs) receive for each of their members based on their Risk Adjustment Factor (RAF). The MAOs then have the responsibility of managing the care of these members and are incentivized to keep the realized costs for these members below the payment amounts. The MAOs and their contracted providers are also incentivized to ensure that diagnoses are coded accurately and to the highest specificity annually. Traditional or fee-for-service (FFS) Medicare does not incentivize this type of coding since payments are based solely on services rendered.

A similar process occurs in Medicaid Managed Care and although models and guidelines vary state-to-state, federal regulations require that the methodology used is actuarially sound, adequate, and budget neutral. The Center for Medicare and Medicaid Services (CMS) oversees and certifies each state’s risk adjustment and capitation rate methodology to ensure compliance with all applicable state waivers and federal policy. For both Medicare and Medicaid, CMS aims to align rates with an average 85% medical loss ratio (MLR) to keep plan profits within reasonable margins and to ensure neither government sponsored program overpays for administrative costs.  The MLR is the percentage of member premiums spent on services across the population.

CMS and states have the authority to amend RA models, rate methodologies and determine the coding intensity adjustment annually. The coding adjustment is applied to account for the difference in coding practices between FFS and managed care without which, managed care populations would appear to have a much higher health burden than FFS populations.

Risk Adjustment History

The 1997 Balanced Budget Act was the first to mandate risk adjustment to account for the variation in member costs based on a RAF score. The RAF score is the output of CMS’ statistical scoring process based on each member’s diagnostic and demographic data that is used to calculate payments. By 2000, the Benefits Improvement and Protection Act laid out plans to fully implement risk adjustment payments by 2007. This phased approach also refined the use demographic factors like original reason for Medicare entitlement in the RAF score calculation. During the span of 2000 to 2008, Medicare Choice became Medicare Advantage, and the first iterations of Hierarchical Condition Category (HCC) models were implemented. This included models for End Stage Renal Disease (ESRD) populations and Part D models. Later the Accountable Care Act of 2010 and the 21st Century Cures Act of 2016 widened risk adjustment methodologies to account for special needs plans (SNPs), new enrollees, behavioral and substance abuse conditions, and the count of chronic conditions per member.

CMS was originally established in 1977 as a subagency of the Department of Health and Human Services to oversee Medicare and the federal portion of Medicaid. The policy and guidelines for risk adjustment are reviewed annually by CMS and independent bipartisan advisory groups, the Medicare Payment Advisory Committee (MedPAC), and the Medicaid and Chip Payment and Access Commission (MACPAC). These organizations analyze data and policy to report and recommend policy changes to Congress twice a year. Proposed changes to existing regulations are published in either an Advance Notice sent to MAOs, or Proposed Rule entered into the federal register. Comment periods follow which allow stakeholders to submit comments that CMS reviews before publishing the Final Rule. Next in our Risk Adjustment series, we’ll cover the results of risk adjustment policy enactment and the current proliferation of risk adjustment gamification in MA.

Now that you have a good understanding of risk adjustment, read the next post in this series to learn the results of RA policy and how it’s led to gamification of chronic condition coding.