What is Risk Adjustment and Risk Adjustment Validation?

2023 Updates You Need to Know

In January, Centers for Medicare & Medicaid Services (CMS) announced its final rule on updated details regarding the Medicare Advantage (MA) Risk Adjustment Data Validation (RADV) program. Below is a brief overview on risk adjustment, the RADV program, and what health plans can do to manage the impact of the new changes.  

Risk Adjustment 101  

CMS will pay Medicare Advantage Organizations (MAOs) a set monthly amount for managing the care of their enrollees that is adjusted based on differences in demographics and health status (“risk adjustment”). Generally, this means that healthier enrollees will incur lower costs to the MAO and, therefore, lower payments from the MA program compared to less healthy enrollees. The enrollee's prior year’s medical records are used to support the health status determination. 

There are two key inputs to the risk adjustment factor (RAF) calculation:

1. ICD-10 codes: There are nearly 100,000 unique ICD-10 codes used to classify and code all diagnoses, symptoms and procedures for claims processing. 

2. HCC codes: The ICD-10 codes are then mapped to hierarchical condition category (HCC) codes to estimate the future healthcare costs for patients and provide differences in health status.

An additional 1,176 new codes were added at the start of 2023, covering themes such as dementia and social determinants of health. CMS has also announced the addition of forty-two new codes, effective April 2023, focused on individual-level, adverse social conditions that negatively impact a person’s health or healthcare, are significant risk factors associated with worse health outcomes as well as increased healthcare utilization.

Each HCC (e.g., diabetes, COPD, CHF) has a coefficient that represents that disease’s incremental contribution to overall costs - the higher the RAF score, the sicker the individual. Let’s take a look at how this math works for two members of a hypothetical MA plan. If the base monthly payment for a particular plan is $1,000, the final payment amount after RAF adjustment will differ quite a bit:

The individual on the right has been identified by her provider, through coding and chart documentation, to have more chronic diseases that will require a higher level of engagement and clinical management. Given the meaningful impact on payments, it is essential to communicate patient complexities via accurate and exhaustive coding. 

RADV

The RADV program was established as part of the Improper Payments Elimination Act of 2010. The program is used to recover risk adjusted payments made to MA plans that are, upon review, unable to be supported by medical records. CMS identifies these improper payments via an audit, wherein a sample of medical records are provided by the health plan and reviewed for accuracy. Diagnoses reported for payments must be supported in the medical records to avoid recapture. Discrepancies within the sample are then extrapolated against the overall plan population to determine an overall level of payment error.

While RADV evaluations have been conducted since 2008, the government has not recouped erroneous payments from MAOs since 2007.

New This Year

The most recent final rule has generated considerable debate among MAOs, and legal challenges to all or parts of the rule are likely. In particular, MAOs are paying attention to two specific elements of the final rule: 

• RADV audits will date back to 2018. CMS will begin recouping funds from MAOs (although no specific payback schedule has been established), and there are also changes to the statistical sampling approach employed in the audits.

• Removal of the Fee For Service (FFS) Adjustment. The FFS adjuster accounts for the difference in documentation standards between original FFS payments (which do not require medical records) and MA payments under the RADV standard. The FFS Adjuster provides a permissible level of payment error, which has historically limited audit recovery to payment errors above that level.

Focus on the Fundamentals

For MAOs concerned about the impacts of this final rule, focusing on the fundamentals of member experience will help protect against potential recoupments in the future. 

1. Work with provider offices. Plans and providers can collaborate to ensure accuracy and completeness is charting at the time of the patient visit. This is especially critical for providers who participate in value-based agreements. Investments in software to ensure coding accuracy and efficiency can help in managing day to day operations and accommodate the addition of new ICD-10 codes with minimal disruption.

2. Excel at the member experience and address barriers to care. Successful plans and provider practices understand the needs of their members or patients. They promptly personalize their services to the needs of the individual and resolve barriers to care early in the year to support the individual's care pathway. Each member interaction then increases the health plan experience and value proposition.

3. Ensure that the encounter data submissions submitted to CMS are accurate, comprehensive, and compliant with current regulations.