Risk Adjustment 101

The expansion of risk adjustment across payers is the most groundbreaking initiative involving reimbursement models since their inception.

You are likely already aware of being personally risk adjusted – insurers have been using risk adjustment to determine life insurance and car insurance for years; however, what is health care risk adjustment?

It’s a modified version of the traditional capitation system, where a managed care organization or a provider group is paid a fixed amount per member per month (PMPM) to pay for all services the member requires during that period. The traditional capitation PMPM amount is set based on demographic factors (age, gender) and geographical location and is limited in its ability to differentiate payment for the healthy person who rarely sees a physician and the person with multiple co-morbid conditions who requires complex management.

Risk adjustment uses an actuarial tool to predict the cost of health care for covered beneficiaries for whom a forecasting perspective can be derived not only for future financial implications, but more importantly, to predict future patient care management needs and plan for potential complications. It essentially levels the playing field and allows each individual’s health to be reflected as it truly is.

Risk adjustment payment methodology was mandated for implementation in the Medicare+Choice (M+C) program (now Medicare Advantage program) no later than January 2000 under the Balanced Budget Act of 1997 with a phased-in approach using the Principal Inpatient Diagnostic Cost Group (PIP-DCG) model. The draft CMS-HCC risk adjustment model was released in March, 2002 with the proposed final version of the CMS-HCC risk adjustment model for use in payment beginning in January 2004.

Risk adjustment continues to gain momentum with implementation of the prescription drug benefit (Medicare Part D) and commercial risk adjustment for the Accountable Care Organizations (ACOs), and recently with the marketplace under the Affordable Care Act (ACA). Risk adjustment is also used for the Hospital Value-Based Purchasing (HVBP) program.

Taking into consideration the individual’s health conditions, a risk adjustment score is determined using a combination of demographic factors such as age and gender, along with disease information from ICD-10-CM codes, and additional factors for disabled status, Medicaid eligibility and interaction factors. The score is highest for the patients who are either sicker, or whose conditions utilize the most resources. The accumulation or sum of these factors to predict costs is called the risk score.

Diagnosis codes are collected by the Medicare Advantage plan from hospital inpatient, hospital outpatient and physician office claims over the course of the year. The model is most heavily influenced by Medicare costs associated with chronic disease.

Key points about CMS-HCCs:

  • CMS-HCCs are prospective. Diagnoses in one calendar year are used to predict costs in the following year.
  • The diagnosis must be coded according to ICD-10-CM Guidelines for Coding and Reporting.
  • Support for the diagnoses must be documented according to the respective inpatient and outpatient guidelines.
  • CMS-HCCs are derived from ICD-10-CM codes. No procedure codes (CPT, HCPCS, PCS) are used in CMS-HCC.
  • The only acceptable data sources are hospital inpatient facilities, hospital outpatient facilities, and physicians.
  • The slate is wiped clean every January 1st. All of the ongoing conditions must be addressed again each calendar year.
  • The diagnoses must be documented as a result of a face-to-face visit.
  • There is no sequencing in CMS-HCC.
  • You can have more than one HCC on a record.

Approximately 70,000+ ICD-10-CM codes begin the model process. Risk adjusted payment is based on assignment of diagnoses to disease groups, also known as Condition Categories (CCs). There are 189 Condition Categories, which are then placed into hierarchies, reflecting severity and cost dominance. Beneficiaries get credit for the disease with the highest severity or that subsumes the costs of other diseases. Hierarchies allow for payment based on the most serious conditions when less serious conditions also exist.

For the 2017 payment model, CMS-HCC version 22, there are 79 HCCs.

HCCs reflect hierarchies among related disease categories. For unrelated diseases however, HCCs accumulate; therefore, in this way, the model is also “additive.”

For example, a male with heart disease, stroke, and cancer has (at least) three separate HCCs coded, and his predicted cost will reflect payment increments for each of the three conditions.

In addition, the CMS-HCC model includes a set of two-way interactions between certain pairs of disease groups, those which together have clinical validity and most strongly predict higher additional costs. Interactions allow for higher risk scores for certain conditions when the presence of another disease or demographic status, e.g., disabled status, is indicative of higher costs. Disease interactions are additive factors and increase payment accuracy.

The documentation of acuity and specificity can be significant in risk adjustment due to the specificity and acuity needed in ICD-10-CM. The identification of which conditions risk adjust can be simpler if two questions are considered:

  • Which conditions are currently affecting the patient’s health status?
  • Which conditions have the potential to affect the patient’s health status in the future?

A few examples of the increased specificity needs that are important to include in the documentation for risk adjustment are…

  • Secondary cancers – all currently treated cancer sites should be documented.
  • Alcohol dependence:
    • Uncomplicated
    • In remission
    • W/withdrawal, uncomplicated
    • W/withdrawal delirium
  • Phantom limb syndrome, with or without pain
  • Polyneuropathy – specify type
  • CAD
    • With angina
    • With unstable angina

Status codes can be important

  • Amputation status – even a toe amputation
  • Ostomy status – for example, tracheostomy, gastrostomy, ileostomy, colostomy
  • Dependence on renal dialysis
  • Patient’s noncompliance with renal dialysis

Because a single individual may be coded for none, one, or more than one HCC, the CMS-HCC model can individually price tens of thousands of distinct clinical profiles. The model’s structure thus provides, and predicts from, a detailed comprehensive clinical profile for each individual that best reflects the individual’s true health status. Risk adjustment in general, and CMS-HCC as the model, lays the foundation to guide a complete and impartial depiction of the patient’s disease burden which will continue to change the face of healthcare.

Respectfully submitted,
Karen Newhouser, RN, BSN, CCM, CCDS, CCS, CDIP
Director of Education


CMS-HCC 2017 Model Relative Factors

CMS Medicare Advantage 2017 Midyear Final ICD-10 Mappings

CMS. Risk adjustment. Chapter 7, Medicare Managed Care Manual. Retrieved from https://www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/Downloads/mc86c07.pdf

Smith, D.M. December 2015. Risk Adjustment: Leveraging HCCs. SC ACDIS PPT. 3M. Retrieved from http://blogs.hcpro.com/acdis/wp-content/uploads/2015/12/12.4.15-HCCs.pdf


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