Risk Adjustment 101: Ignoring these Could Cost You Millions
Guest post by Abhinav Shashank, CEO and co-founder, Innovaccer.
For a long time, healthcare insurance companies used to overlook people who were likely to be high-cost. As the landscape changed with new regulations, insurance providers have started offering new policies in the individual market without identifying any pre-existing conditions while enquiring about their health status. Even so, there have been many loopholes, and every administration has and continues to aim at minimizing these gaps. The one good answer thus far: risk adjustment.
What is risk adjustment?
Risk adjustment over the years has become a key mechanism used in healthcare to predict the costs incurred and ensure appropriate payments for Medicare Advantage plans, Part D plans, and health plans. Historically, it was only used in Medicaid and Medicare but lately has been an actuarial tool to ensure that health insurance plans have adequate funding and no financial hindrance in providing care to high-risk, high-need patients. Insurance companies and their plans are compared on the basis of quality and services they offer, providing a strong foundation to value-based purchasing.
Why is risk adjustment so important?
Risk adjustment advocates fair payments to health insurance plans by judging them on their efficiency and encouraging the provision of high-quality care. Beyond that, here’s why risk adjustment is important:
- A critical tool in quality reporting and monitoring measures.
- Provides a neutral field where providers and payers can be compared to their peers on the basis of their quality and efficiency.
- Combining risk scores and evidence-based models with risk adjustment helps providers and care teams design post-discharge plans with intense follow-ups.
- With predictive analytics, risk adjustment models may be used to capture all the dimensions of relevant patient risk.
How is risk adjustment used in healthcare?
Healthcare risk adjustment methodologies can be used to account for changes in severity and case mixes for patients over time. Risk adjustment has been critical in reducing “cherry picking” among health plans. Dimensions of risk in care can broadly be categorized into three categories:
- Health status
- Patient health-related behavior
- Social determinants
It’s important to ensure that by providing incentives to enroll high-cost individuals, there are necessary resources available to provide efficient and effective treatment to the relatively healthy population without overcompensation. The methodology used to risk-adjust premiums varies on the following:
- Patient population and their breakdown
- Source of payment
- Healthcare market regulation
On the macro level, unless the state combines its individual and small group markets, separate risk adjustment systems operate in each market. The Department of Health and Human Services (HHS), developed a risk adjustment methodology, where individual risk scores are assigned to each enrollee. The diagnoses are grouped into a Hierarchical Condition Category (HCC) and are assigned a numerical value which is averaged to calculate the plan’s average risk score. Payments and charges are calculated by comparing each plan’s average risk score to a baseline premium.