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Is Medicare Risk Adjustment a Good Idea?

CMS has implemented a new health insurance exchange program, risk adjustment, to make Medicare more affordable for low-income Americans. The program has both pros and cons. For one thing, it reduces the incentive to enroll people who are disproportionately unhealthy and, at the same time, increases the incentive for healthy enrollees.


Risk adjustment is a process to determine if a physician is delivering quality care. The medicare risk adjustment information relies on documentation of diagnosis codes, which must follow the International Classification of Diseases (ICD) Clinical Modification Guidelines for Coding and Reporting. This process is crucial for patient safety and care.

It levels the playing field for payers and compensates physicians for accurate reporting. It is a critical part of the fully capitated Medicare Advantage model and applies to some state Medicaid programs. It begins by gathering statistics on members’ health and assigning risk scores. The data is then scrutinized through a rigorous data validation process. In exchange, insurers must meet certain standards, including providing accurate information and adjusting rates accordingly.

Using accurate and stable risk adjustment helps ensure quality care for all Medicare beneficiaries. It also helps care coordination and slows the progression of the disease.


Critics of the current risk-adjustment model argue that it could increase inequities and worsen healthcare disparities. They say that by basing the formula on past medical spending, it can underestimate the true costs of care. Furthermore, it may underestimate costs for populations with lower access to health care, such as minorities and rural residents—critics of the risk-adjustment claim that the program can be improved to address these concerns.

Critics of risk adjustment say it will only be effective if insurers are required to pay the risk-adjustment premiums. Currently, the federal government has not implemented a system that allows insurers to make more accurate risk assessments for individual and small-group markets. The current risk-adjustment system is only in place in a few states.


The Balanced Budget Act of 1997 mandated that the Medicare program use risk adjustment to match payer payments to anticipated enrollee needs. Originally, the HHS measured health status using inpatient and outpatient diagnoses and demographic factors.

The new system relies on CMS-hierarchical condition categories and risk scores that are calculated for each Medicare Advantage enrollee. These risk scores are used to adjust payments to qualified health plans prospectively.

To implement the risk adjustment, plan sponsors must use an application called the External Data Gathering Environment, or EDGE, to submit information on enrollees and medical claims. These submissions are processed by EDGE servers, which contain HHS-developed software that verifies the submitted data and executes the risk adjustment process. CMS also requires submitters to adhere to certain coding guidelines. In addition, to receive a risk adjustment report, the data must be unique and accurate.


While the primary goal of risk adjustment is to align payments with projected needs, social factors can also play an important role in health outcomes. Adding social risk factors to risk adjustment is an important way to address inequities in access and care. But risk adjustment policies must be paired with complementary payment incentives linked to equity measures and social drivers of health.

One way to improve the future of Medicare risk adjustment is by utilizing advanced, accountable care relationships. These relationships support the unique needs of beneficiaries at higher risk for adverse outcomes while reducing costs and improving care quality. Furthermore, relying on disease prevalence data and steps to reduce risk can help risk adjustment data be more reliable.

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