Why risk adjust?

Aug. 1, 2022 / By Gretchen Mills

Risk adjustment is used primarily to predict health care costs based on the relative risk of members or patients. Risk adjustment is designed to mitigate the impacts of potential adverse selection by insurers and also to stabilize premiums so they better reflect specific populations. So, why might you want to risk adjust? 

The primary reasons for risk adjusting a population of patients/enrolled health plan members are: 

• To allow for “apples to apples” comparisons of utilization and costs across providers. For example, the expected utilization and costs for a sicker cohort of patients would be higher than a healthier cohort. 
• To allow for budgeting and payment that is adjusted for the underlying disease burden of the cohort of patients/members included, as is done, for example, in the Medicare Shared Savings Program Accountable Care Organization (MSSP ACO) program. 
• To allow for population health management activities such as identifying high risk patients/members for case management outreach and other interventions. 

There are two basic models used for risk adjustment:  

1. Regression model
2. Clinical categorical

The regression risk adjustment model is highly accurate and has been used by Medicare for all its value-based care programs. In the Medicare Advantage program, the Centers for Medicare & Medicaid Services (CMS) a hierarchical condition category (HCC) model is used to make risk adjusted payments to the health plan participants. In the Medicare Center for Medicare and Medicaid Innovation (CMMI) value-based care programs (Medicare ACO, BPCI, etc.), the Medicare HCCs are used to set the prospective annual budgets against the program participants actual costs each performance year, and are compared to determine bonuses and over budget refunds. 

The clinical categorical risk adjustment model provides more granularity in clinical insights and thus can be very effectively used to gain clinical insights needed to create actionable and impactful clinical interventions for members/patients. 

Which risk adjustment model is better? 

The model you select will depend on your use case. If you are trying to project revenue under a government program, like Medicare Advantage, then use a government selected method, Medicare HCCs for example. Conversely if you are trying to gain clinical insights, then a clinical categorical model is going to bring you closer to your goal.  

If you want to learn more about risk adjustment, click here to download a comprehensive overview. Additionally, we recently hosted a webinar that discussed risk adjustment in more detail.  

Gretchen Mills is manager of market strategy for populations and payment solutions at 3M Health Information Systems. 

 Identify medically complex individuals within a population.