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The Center for Medicare & Medicaid Services (CMS) uses a Hierarchical Condition Category (HCC) risk adjustment model to calculate risk scores. The HCC model ranks diagnoses into categories that represent conditions with similar cost patterns. Higher categories represent higher predicted healthcare costs, resulting in higher risk scores.

Long-term conditions such as diabetes, chronic obstructive pulmonary disease (COPD), chronic heart failure (CHF), and diabetes will “risk adjust,” or fall within an HCC; whereas, acute illnesses and injuries will not because acute conditions are not reliably predictive of ongoing healthcare costs. To factor into risk adjustment, a diagnosis must be based on clinical medical record documentation from a face-to-face encounter, documented at least once per year, and coded according to the ICD-10-CM guidelines.

The CMS-HCC risk adjustment model is prospective: it uses health status in a “base year” to predict costs in the following year. In addition to diagnoses, base year factors include Medicaid status (defined as having at least one month of Medicaid eligibility during the base year), as well as gender, aged/disabled status, and whether a beneficiary lives in the community or in an institution. The community segment of the model predicts costs for beneficiaries who reside in the community or have been in an institution for fewer than 90 days. The institutional segment of the model predicts costs for beneficiaries who have been in an institution for 90 days or longer.

Risk scores are applied to adjust capitated payments made for beneficiaries enrolled in Medicare Advantage (MA) plans and certain demonstration projects. Different patients may have a different payment rates, based on each patient’s predicted level of risk (e.g., the expected cost to maintain the patient’s health). Ideally, this allows CMS to reimburse plans based on the actual costs of care for each individual beneficiary, rather than to apply an “average” per-capita payment for all beneficiaries.

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