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What is Medicare Risk Adjustment and How Does it Work?

Health plans that offer Medicare Advantage (MA) or Part D services are paid a monthly, per-member payment in exchange for taking on the risk of their enrollees’ healthcare costs. This is accomplished with a process known as risk adjustment.A beneficiary’s medical records are reviewed to calculate a risk score, often called an RAF (medical abbreviation). However, accurate chart documentation or coding can positively impact the outcome of an RAF.

What is it?

Risk adjustment is a statistical method that predicts a person’s likely use and costs of healthcare services. It is used in Medicare Advantage to modify capitated payments the federal government makes to health plans for enrollees. Precisely, it adjusts for the likelihood that a plan’s contracted providers will treat patients with expensive conditions and a high probability of developing those costly conditions.

The program operates on both a prospective and retrospective basis. Coming risk adjustment uses data from medical records before beneficiaries receive any face-to-face encounters with healthcare professionals. This data includes demographics, medical diagnoses (from ICD-9 codes), and professional encounter data. Those diagnosis codes are then grouped into categories of conditions with similar associated costs to the healthcare system. These are called Hierarchical Condition Categories (HCCs). All chronic conditions map to an HCC; a seriously ill patient may have multiple HCCs.

To receive accurate, compliant risk-adjusted payments, the MAO must identify all diagnosis codes in a member’s medical record that map to an HCC and then submit that information to the Healthcare Services Risk Adjustment Processing System (RAPS) and other data elements. This process is often very time-consuming, especially for physicians and coders, who must review a patient’s medical record yearly to identify and document all relevant HCCs. Getting this step right is critical, as failing to do so can result in inflated risk scores that will negatively impact payments.

How does it work?

The risk score is calculated using a model that puts related encounter data like medical diagnoses into groupings based on resource use. These groups are called Hierarchical Condition Categories (HCCs). Each HCC has a set of values assigned to it based on its anticipated costs to the Medicare system. The model also takes demographic factors into account.

Now, how does Medicare risk adjustment work? The current risk adjustment model uses medical spending data to determine a person’s relative cost to the Medicare system. The model identifies individuals requiring higher levels of care and assigns them a risk score, influencing how much they pay for their coverage. The data used to calculate this model are sourced from diagnosis codes submitted on claims by providers and reported to health plans. Health plans and their provider partners can use this information to deliver valuable programs for their members, such as wellness visits, physicals and screenings, case management, or transportation to medical appointments.

Some experts have voiced concern that this approach fails to consider structural differences in the access to and delivery of medical services. These include racial and ethnic minorities, rural residents, and communities with fewer healthcare options.

How does it affect me?

The risk adjustment program helps ensure that Medicare Advantage enrollees’ expected medical costs are accurately calculated so that health plans get the correct reimbursement. It also ensures that a plan’s contracted providers have enough resources to treat the highest-cost patients and don’t have incentives to avoid them.

Ultimately, risk adjustment determines how much money a Medicare Advantage or Part D plan gets each month. That’s why it’s so important to have high-quality and high-integrity encounter data submissions. Health plans with a solid approach to managing these claims receive the best reimbursements.

Each year, risk scores reset based on diagnoses gathered from that year’s claim submissions. These diagnoses are grouped into categories that share similar associated costs with the healthcare system, called Hierarchical Condition Categories (HCCs). The HCC list is updated yearly to reflect the changing healthcare landscape and new ICD-10-CM code additions.

Some experts recommend that Medicare consider incorporating encounter data, or other sources of information, into its risk adjustment model to make it more accurate and less prone to gaming. However, others caution against doing so as it may disrupt existing systems and create perverse incentives that encourage overprescribing and other unproductive practices. Regardless of the future of encounter data, most experts agree that the current Medicare risk adjustment process is worth getting right to ensure that the diseases and conditions a health plan serves are correctly compensated.

How can I get help?

The risk adjustment process is complex and time-consuming, but it’s worth it for health plans that want to maximize their reimbursements. The right Medicare Advantage risk adjustment software can help health plan coding professionals close HCC gaps and improve coding productivity standards before submitting claims to healthcare services.

Healthcare services use the Hierarchical Condition Category (HCC) method to categorize medical diagnoses based on resource use. This creates a risk score that identifies an individual’s anticipated healthcare costs to Medicare Advantage health plans. For example, diabetes with complications is a higher-level HCC and has a higher expected cost than diabetes without complications.

Health plan providers must document HCCs in a member’s medical record each year and do this for all members. This is a significant burden on physicians and their staff, especially those working with high-risk patients. To minimize this burden, some healthcare organizations are turning to Medicare risk adjustment software to help physicians identify HCCs in the member’s medical record during an annual wellness visit and quickly associate evidence of these conditions with a member’s Medicare Advantage diagnosis codes.

Whether you’re a certified medical coder or a senior management leader at a health plan, understanding Medicare risk adjustment is critical to the success of your organization. By following these three fundamentals of risk adjustment, you can focus on improving outcomes, reducing costs, and making smarter decisions for the future.

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