What is risk adjustment?

• Risk adjustment levels the playing field among health insurers by transferring funds from plans with relatively lower-risk (i.e., young, healthy) enrollees to plans with relatively higher-risk (i.e., old, sick) enrollees. Section 1343 of the Affordable Care Act provides for a permanent risk adjustment program that compensates insurers that disproportionately attract higher-risk populations.
• Risk adjustment models are actuarial tools used to predict healthcare costs based on the relative actuarial risk of enrollees in risk adjustment-covered plans. Each enrollee risk score, or risk adjustment factor (RAF), is based on the individual’s demographic and health status.
• Suggested reading: "Understand Risk Adjustment Basics", by Colleen Gianatasio, CPC, CPC-P, CPMA, CPC-I.