This article provides a framework for understanding medical risk adjustment and an overview of business processes critical to successfully performing under a global capitation arrangement.

Medical Risk Adjustment: Foundations

Medical Risk Adjustment, as discussed in this article, refers to a process by which funds, in the form of healthcare premiums, are allocated to efficiently match expected medical costs. Medical Risk Adjustment emerged from the challenges of administering Global Capitation agreements. Broadly speaking, these agreements are provider payment models in which a sponsoring party (i.e. sponsor) on a prospective basis provides a fixed pro-rata funding allocation to a service-providing party (i.e. health plan or provider) for the benefit of an eligible population (i.e. member).

The earliest example of a global capitation program that faced challenges was the Medicare+Choice program administered by Center for Medicare and Medicaid Services (CMS). In the late 1990’s, many health plans chose to exit the program chiefly due to losses arising from members with complex conditions for whom sufficient revenue was not provided. Over the next decade, CMS introduced the complex HCC-based framework that underpins Medicare Advantage.

The underlying challenge is this simple problem: sponsor organizations contracting to pre-pay for services (and those entering agreements to provide them for an upfront fee) must find a way to estimate an appropriate amount to pay (and receive). Since the primary drivers of cost are a) how many members are in the population and b) how likely any one of them is to need medical care, a medical risk adjustment system typically involves a per-member payment formula in which the payment made for an individual depends on his or her health status.

This simple framework turns out to be complex to operationalize. Evaluating an individual’s health status requires knowing their documented health conditions. Pre-paying requires that you know them in advance. Building models from this data to forecast cost requires that you have them codified to compare with other similarly codified cost data. Further, health status changes over time, so estimates based on prior periods of good health will create funding shortfalls during periods of acute conditions or initial onset of chronic conditions. Conversely, allocations made based on periods of documented illness need to be adjusted after resolution of acute conditions. Finally, since gathering information about health status is typically done through the clinical encounter process, typically the provider has to do the work to help the sponsor make the right allocation. In this context, mechanisms to accomplish Medical Risk Adjustment are complex.

Practical Considerations

Medical risk adjustment is relevant in multiple contexts. CMS administers a risk adjustment program for its Medicare Advantage program. Many state-based Medicaid plans, and Next Generation Accountable Care Organizations (ACOs) have adopted Medical Risk Adjustment methods to accomplish similar goals through different means. They share the following practical considerations for designing patient management processes:

  • Risk adjustment model data requirements make data capture in the clinical encounter vital
  • Long adjustment cycles make patient re