Availity Blog
Risk adjustment 101

It is not an overstatement to say the healthcare industry has experienced unprecedented change since the Affordable Care Act (ACA) was passed in 2010. Healthcare has fundamentally evolved in how it is delivered and how payers are reimbursed for the care they give patients.

What Is Risk Adjustment?

Risk adjustment is a statistical technique used to compare the health risk of populations enrolled in health plans, such as Medicare Advantage. Simply stated, if the individuals in group A are older and have more health problems than the individuals in group B, you can expect the cost of group A’s healthcare to be higher. Risk adjustment calculates a relative risk score for each individual, which can be accumulated to compare groups.

How Does Risk Adjustment Affect ACA Plans?

The ACA created health insurance exchanges, which allow consumers to enroll in a health plan regardless of their prior health history. Because it was not possible to accurately predict which individuals would sign up for what plans on the new exchanges, or what their health risk scores would be, ACA established several programs to address potential adverse impacts for the participating health plans known as the “three Rs”: reinsurance, risk corridors, and risk adjustment.

Risk adjustment for ACA plans began in 2014, and the process is slightly different than that used for Medicare Advantage. The process assesses members for a prior year for all plans in a specific marketplace, and money is then transferred from health plans with lower risk members to plans with higher risk members. The amount of money can be significant.

How Is Risk Adjustment Impacted by Providers?

Whether risk adjustment is used for Medicaid, Medicare, or commercial health plans, the methodologies all use ICD-10 diagnosis codes to define the health conditions of each member during a plan year. Providers document the diagnosis codes on claims submitted to the health plan, and the completeness and specificity of the codes is a critical factor in determining the risk score. A member with multiple chronic conditions will have a higher risk score than a member with no conditions, and that risk score is a key factor in determining reimbursement for Medicare Advantage plans and end-of-year financial adjustments for ACA plans.

How Is Risk Adjustment Monitored by the Federal Government?

Health plans are required to submit member-specific diagnosis data to CMS for their Medicare Advantage and ACA plan members. CMS checks and balances include Risk Adjustment Data Validation (RADV) audits to verify that the diagnostic information submitted to CMS by the payer is supported by documentation in the provider’s medical record.