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By AGS Health
February 15, 2023
Risk adjustment is a statistical method to predict a patient’s possible use of healthcare services and the associated costs. As defined by the Centers for Medicare and Medicaid Services (CMS), risk adjustment predicts the future healthcare expenditures of individuals based on diagnoses and demographics.
Risk adjustment modifies payments to all insurers based on an expectation of what the patient’s care will cost. Risk adjustment provides more accurate payments for Medicare Advantage (MA) organizations. Payments are higher for unhealthy enrollees and lower for healthy enrollees. MA uses the risk factor to adjust the capitated payments the federal government makes to cover the expected medical costs of enrollees.
Traditionally, payments to MA organizations were based on demographics. The CMS HCC model, launched in 2004 and fully implemented by 2007, has become essential as the healthcare payment model shifts to value-based care.
Critical Risk Adjustment Implementation Dates
The CMS HCC model filters ICD-10-CM codes into diagnosis groups and condition categories. Hierarchies or families of conditions are progressively assigned an HCC numeric code, which is translated to a risk adjustment factor (RAF) value. Not all ICD-10-CM codes carry value in risk adjustment models. Diagnoses that are costly to manage from a medical management or prescription drug treatment perspective are more likely to be found in risk adjustment models.
Each year CMS publishes the list of diagnosis codes and the HCC codes that each adjusts to within the model. Approximately 10,000 out of more than 70,000 diagnoses codes map to HCC codes. There are 19 different HCC categories with 86 total HCC codes.
Hierarchies are listed among related condition categories, hence the term HCC. These hierarchies set values based on the severity of illnesses, with more severe diagnoses carrying the overall risk scores for families.
For example, in the diabetes family:
Diagnoses within families or hierarchies are inclusive of one another. In contrast, any additional diagnoses from other families (hierarchies) or stand-alone diagnoses are additive and increase the patient’s overall RAF score.
The Risk-Adjustment Factor, known as an RAF score, measures the estimated cost of an individual’s care based on their disease burden and demographic information. The demographic information includes the patient’s:
Each HCC associated with a patient is assigned a relative factor that is averaged with any other HCC code factors and a demographic score. The resulting score is multiplied by a predetermined dollar amount to set the per-member-per-month (PMPM) capitated reimbursement for the following coverage period.
The PMPM is the payment amount a provider receives for a patient enrolled in an MA plan, regardless of the services provided.
An RAF score of 1.00 denotes the patient is expected to use average resources. If the RAF score is above that value, it is considered a high RAF score related to the most complicated patients who need complex care and resources.
Healthier patients have below-average RAF scores, while sicker patients will have higher RAF scores. Scores impact the calculated payment amounts and are calculated annually.
Example: A 68-year-old female patient with type 2 diabetes with diabetic polyneuropathy, morbid obesity with a BMI of 38.2, and congestive heart failure.
Demographics (age and gender)
Type 2 diabetes mellitus with diabetic polyneuropathy
E66.01 & Z68.38
Morbid (severe) obesity due to excess calories & body mass index 38.0-38.9
Heart failure, unspecified (includes congestive heart failure NOS)
Disease interaction (DM + CHF)
Total Optimized Risk
HCC coding helps to calculate and communicate patient healthcare complexity and portrays a picture of the whole patient. In addition to helping predict healthcare resource needs, RAF scores are used to risk-adjust quality and cost metrics. By accounting for differences in patient complexity, costs can be estimated more accurately. HCC coding improves patients’ quality of care, again supporting the shift to value-based care.
Learn about risk adjustment and HCC coding, including the differences between the CMS and HHS models and when they are applied from our webinar.
AGS Health is more than a revenue cycle management company–we’re a strategic partner for growth. By blending technologies, services, and expert support, AGS Health partners with leading healthcare organizations across the US to deliver tailored solutions that solve the unique needs and challenges of each provider’s revenue cycle operations. The company leverages the latest advancements in automation, process excellence, security, and problem-solving through the use of technology and analytics–all made possible with college-educated, trained RCM experts. AGS Health employs more than 10,000 team members globally and partners with more than 100 clients across a variety of care settings, specialties, and billing systems.