As healthcare moves away from fee-for-service to fee-for-value, payment structures have changed significantly. Risk adjustment—the process of capturing demographics and condition data that impacts healthcare utilization and cost—is a foundational part of the reimbursement models used by the Center for Medicaid and Medicare (CMS) and the Department of Health and Human Service (HHS) to compensate health plans that cover care for Medicare Advantage, Managed Medicaid, and Affordable Care Act members. CMS currently uses a standard risk adjustment model across many of its programs.
The CMS-HCC Risk Adjustment model is what the agency uses to determine member risk for Medicare Advantage beneficiaries. Using HCC coding data, CMS develops risk scores for each individual enrolled in a Medicare Advantage plan. The higher the score, the higher the payment. The HCC model allows CMS to pay Medicare Advantage plans—which then pay healthcare providers that deliver care to Medicare Advantage beneficiaries—more accurately than a more generalized model that doesn’t account for differences in members’ needs.
An overview of the CMS-HCC Risk Adjustment Model
Beginning in 2004, the Centers for Medicare & Medicaid Services (CMS) adopted a Hierarchical Condition Category (HCC) risk adjustment model to pay Medicare Advantage Organizations (MAOs) for beneficiaries enrolled in their plans. It bases this per-person amount on the health status of each beneficiary. CMS uses the HCC model, which factors in a variety of data, to determine health status.
The HCC model ranks various diagnoses into categories. These categories are assigned a risk score called a Risk Adjustment Factor (RAF). More serious conditions receive a higher risk score. Acute conditions aren’t part of risk adjustment. Dual Medicaid status, gender, age, disabled status, and whether a beneficiary lives in the community or in an institution also influence risk score.
In addition to the CMS-HCC model for MAOs, CMS uses the HHS-HCC model to pay insurers in the Affordable Care Act (ACA) marketplace. Although the two models have their differences—the HHS HCC model applies to all ages, whereas the CMS-HCC model applies to adults age 65 and up—both rely on risk adjustment to calculate payments to health plans. However, the ACA is also unique in that it is a zero-sum-gain marketplace for plan providers: plans can lose money if their membership has a lower risk score than a competing ACA plan.
The CMS HCC model complies with the Balanced Budget Act of 1997. The Act mandates that MAOs receive payment based on the variation of expected healthcare costs of the population they enroll.
What is the purpose of the CMS-HCC Risk Adjustment Model?
CMS adopted the HCC model primarily to prevent MAOs from favoring healthier beneficiaries over sicker individuals. If CMS simply averaged the annual cost of all Medicare Advantage beneficiaries, plans with mostly healthy patients would profit much more than plans with sicker patients who have higher healthcare expenses. Using the HCC model ensures MAOs are paid accurately and that they design plans and benefits fairly.
How does the CMS-HCC Risk Adjustment Model work?
The CMS HCC model includes 86 HCCs. These HCCs are comprised of more than 10,000 ICD codes. ICDs are mapped into diagnostic groups. Each diagnostic group represents a specific medical condition. Diagnostic groups are then rolled up into condition categories that describe a set of related diseases.
Hierarchies ensure only the highest-risk manifestation of a disease is coded within a category. Each HCC has an associated value that is summed up in a patient’s overall risk adjustment factor (RAF) score.
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. Conditions must be reported annually in order to be included in the risk adjustment score for a given payment year.
Another point to note: The CMS HCC model is prospective. That means CMS examines data from 2019 to predict 2020 costs. If a patient with COPD skips a doctor’s appointment in 2020, and the provider doesn’t submit a claim with the correlating ICD-10 codes, the plan will not get paid more to cover the costs of that patient’s 2021 healthcare needs.
Why is the CMS-HCC Risk Adjustment Model important for population health management?
If a health plan or at-risk provider is running a population health initiative, they can analyze HCC codes to identify potential opportunities to meet the health needs of their patient populations. Using data analytics, plans and providers can hone in on patients or patient groups that may need more focused follow up or support.
For example, if the HCC codes reveal a patient newly diagnosed with diabetes, providers can make sure that patient receives nutrition advice, health and medication information, and anything else they need to manage the condition. Analyzing condition codes with an eye toward population health management can also help providers identify and reach out to patients due for an annual visit who may need assessment for chronic diseases.
How does the CMS-HCC Risk Adjustment model affect revenue?
HCC coding influences the amount CMS pays MAOs, which trickles down to provider payments. Accurate, complete HCC coding data benefits all stakeholders.
If the HCC codes do not capture the full risk burden and expected cost of care for MAO beneficiaries, RAFs will be lower. When RAFs are lower, financial benchmarks and per-member payments will also be lower. In addition, quality benchmarks may also be more difficult to reach without the ability to invest in additional programs to support care quality and measurement.
To add to the challenge, CMS resets RAFs every year, which means medical coding requires constant attention. Plans, at-risk providers, and ACOs that fail to adequately monitor HCC codes and RAFs stand to lose millions in annual payments.
What other programs does the CMS-HCC Risk Adjustment Model impact?
The CMS HCC Risk Adjustment model is used in connection with Medicare Advantage plans; however, HCC coding also plays a role in other value-based plans. Healthcare providers participating in Merit-based Incentive Payment System (MIPS) and providers caring for sicker/higher-risk patients are eligible for five additional points above the base MIPS score. HCC also factors into MIPS’s total cost per capita and Medicare spend per beneficiary.
The Bottom Line
The CMS-HCC Risk Adjustment model is a complex, data-driven system used to estimate the cost of care delivery for Medicare beneficiaries. Accurate ICD coding is important to ensure that plans and at-risk providers can appropriately care for members and maintain a stable financial performance under CMS’s value-based payment programs.
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