Risk Adjustment Calculations in the Commercial Line of Business

Risk Adjustment Calculations in the Commercial Line of Business

Small group and individual markets have unique strategic opportunities for coding and operational processes.

Risk adjustment is predictive modeling that assesses members’ risk for incurring medical expenses above or below the average during a defined time. Demographics and health status are used to determine health plan payments, which also can assist with care management needs.

To align with the Medicare Modernization Act of 2003, the Centers for Medicare & Medicaid Services (CMS) implemented a risk-adjustment methodology for all Medicare Advantage patients. Risk adjustment became prominent in 2007 after fully implemented, with hierarchical condition categories (HCCs) being the driving force. Diagnosis codes submitted on claims fuel HCCs.

Medicare and Commercial Models

The Affordable Care Act (ACA) risk model also uses an HCC methodology for the commercial small group and individual market population, but there are significant differences. For example, Medicare has 10,761 ICD-10 diagnoses for 79 HCCs, whereas the ACA model has 8,205 diagnoses for 127 HCCs.

The ACA model caters to a typically healthier population than the elderly Medicare market, which explains the fewer number of risk-adjusted diagnoses. The broader range of HCCs is primarily due to pregnancy and newborn conditions not applicable to Medicare patients.

Risk Score Calculation

Reimbursement from the U.S. Department of Health and Human Services (HHS) to health insurance companies depends on the accurate submission of claims data to designated servers for risk score calculation. Although diagnoses are the primary driving force of this calculation, only diagnoses submitted on claims with at least one specific procedure code (CPT®/HCPCS Level II) from a designated list of 6,522 codes are used. This is to avoid potential risk category errors from claims that often contain “rule out” diagnoses, such as those obtained by diagnostic radiology or laboratory services.

There is also a demographic component to this calculation. There are three age bands considered for risk adjustment: Infant, Child, and Adult. This is to account for the severity variance of certain conditions that can affect health and cost for the age group. There are also five “metal levels” of insurance that can be purchased: Platinum, Gold, Silver, Bronze, and Catastrophic. Combining these factors accounts for 15 possibilities of risk score calculation for a HCC.

Table 1 shows risk adjustment weights across the 15 categories for HCC 161 Asthma. These factors are used as part of the overall patient risk scores, which sums the different HCCs and uses a multiplier to determine payment at an individual level. As you can see, age and benefit level affect the scores.


HCC 161 Asthma
Model Platinum Level Gold Level Silver Level Bronze Level Catastrophic Level
Adult 0.951 0.8333 0.723 0.648 0.646
Child 0.435 0.348 0.231 0.149 0.147
Infant 2.155 1.873 1.549 1.32 1.316


Payment Transfer

After the benefit year concludes, HHS conducts a sequence of events to (theoretically) ensure that insurers receive accurate reimbursement for the risk-adjusted health status of the population. The first step is a risk adjustment data validation (RADV) audit. This is a complex process (You can read more about it in the article “RADV Reality” https://www.aapc.com/blog/36253-radv-reality/ in AAPC’s Knowledge Center.), where HHS samples 200 patients per plan to validate that the medical records substantiate the diagnoses submitted. The resulting error rate is compared to other insurers in the geographic rating area. The final risk scores (after error rate calculation) are used to create a baseline from state averages. The budgeted amounts are divided by the insurer’s average premiums, to be compared against the risk pool’s average premium. High risk plans receive payments, and low risk plans pay into the system. These payment transfers bridge the gap between the plan’s revenue needs and the revenue requirement without risk selection.

Best Practices

Managing the commercial risk adjustment process contains several critical components. First, organizations must identify key stakeholders and establish communication channels to create awareness of all relevant processes and financial impact. Examples of resources needed to succeed in this arena include:

Risk adjustment coders – Experienced coders, especially those with ICD-10 experience, are essential for chart review to ensure accuracy of provider documentation and billing.

Physician educator – This role typically establishes key relationships in the provider community to identify, target, and execute education efforts related to risk adjustment accuracy.

Provider relations – A large volume of medical records is necessary for both standard chart review practices and RADV audit submission.

Analysts – Data analysts are needed to review claims data to identify HCC gaps and other opportunities for missed chronic condition capture or incorrect billing practices for chart targeting.

Vendor management – The scope of managing this program often requires third-party support. HHS mandates contracting an initial validation auditor to conduct the RADV; other common support comes from business intelligence platforms, chart retrieval vendors, and coding vendors.

These are examples of the competencies necessary to be successful. Risk adjustment management can be difficult. Many of the tasks can be seasonal, and competing priorities can create capacity planning challenges. Effective leadership and execution of these tasks can be the difference between whether an insurer is a receiver or a contributor of the budgeted funds in this zero sum competitive market.

Tom Nasadoski, MBA, is manager of risk adjustment at Capital District Physicians’ Health Plan.

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