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Understanding Risk Adjustment in Medicare

Health plans need to understand three critical fundamentals to succeed in risk adjustment. Risk adjustment is the annual process of compensating health plans that serve Medicare Advantage enrollees by considering their incurred costs. Its effectiveness is based on accurately documenting members’ conditions through diagnosis codes.

Hierarchy Elimination

risk adjustment/hierarchical condition category (HCC) model is a set of rules that determine how much healthcare insurance plans are paid by Medicare to cover the health needs of their Medicare beneficiaries. The system is based on complex terms and factors, such as how the health plan’s population compares with fee-for-service Medicare. Generally speaking, Medicare Advantage (MA) plans are paid more for beneficiaries with higher disease burdens. However, the amount is based on several factors, including how many HCCs the beneficiary has and how severe the disease is.

The risk adjustment program uses the patient’s demographic information during enrollment, whether for Medicare, Medicaid, or commercial insurance. These demographic details are then used to identify and match a patient with a specific health plan. Once the match is made, a health plan collects data for each Medicare member. This data includes the member’s medical history, claims records, and physician documentation.

The health plan collects data to calculate a member’s RAF Medicare score, or risk score, which predicts future healthcare costs. Throughout this process, there are some important guidelines to follow. For example, the health plan must use procedures to ensure all diagnosis codes are submitted once per patient. Additionally, the health plan must use hierarchy logic to prevent inflated scores.

Hierarchical Condition Categories (HCCs) List

Regarding Medicare Advantage risk adjustment, HCCs play a crucial role. The Centers for Medicare & Medicaid Services (CMS) uses these medical codes to estimate future healthcare costs and assigns each enrollee a “risk factor” or RAF score, which helps determine reimbursement rates. This process allows for a more accurate picture of patients and the severity of their illnesses and provides a better sense of a patient’s health status than traditional demographics alone.

Each diagnosis code carries different weights in the HCC model and is organized into hierarchies representing more severe diagnoses. The RAF scores assigned to each patient are used as a benchmark to help predict the cost of care for the patient and to allow for equitable distribution of Medicare funds. Without risk adjustment, healthcare organizations could profit from enrolling healthy patients and not caring for the sicker ones.

HCC coding differs from ICD-10 coding, and there are many nuances to understand regarding a successful RAF submission. A healthcare organization’s ability to accurately capture HCC-relevant diagnoses from physician documentation and follow all requisites for a place of service, provider type, and acceptable signatures is the key to optimizing Medicare Advantage risk adjustment.


The CMS-HCC model assigns a risk score to each individual based on their health conditions and demographic details that are expected to impact future long-term healthcare costs. These are identified by the ICD-10-CM diagnosis codes that physicians submit on claims. There are over 10,000 ICD-10-CM codes that can be mapped to HCCs. The Medicare Advantage (MA) and Part D (prescription drug) insurance plans use the HCCs and a crosswalk to calculate their risk-adjusted capitation payments from CMS each year.

Using the risk adjustment process, MAOs are paid, in large part, based on what it would cost to treat each beneficiary annually had they been enrolled in the traditional fee-for-service Medicare program. This is done by multiplying a fixed capitation payment by the beneficiary’s risk factor. This allows MAOs to pay for enrollees who will incur higher costs than the average while also compensating for those who will incur lower charges.

To determine each beneficiary’s annual risk score, the CMS-HCC model uses a “crosswalk” of HCCs to match the ICD-10-CM diagnosis codes submitted on claims. Medical coders can access the HCC crosswalks in a variety of ways.


The CMS risk adjustment process enables the Centers for Medicare and Medicaid Services (CMS) to make payments that reflect each plan’s expected care costs. It helps ensure that plans that enroll a higher-than-average number of high-cost beneficiaries are adequately compensated and can continue to manage their members’ health needs.

Risk Adjustment is an actuarial method of predicting medical costs used to determine the amount that Medicare pays a health insurance company for each member who enrolls in an MA or Part D plan. It is based on a patient’s previous diagnoses and demographics and is prospective rather than retrospective. It compares a beneficiary’s health status and cost to other Medicare patients with similar characteristics and risk scores.

To accurately report diagnosis codes that are reflected in the HCC coding system, healthcare organizations need to document all relevant information. This can be a time-consuming, labor-intensive task. To alleviate this burden, some healthcare providers use software that identifies HCC coding to improve efficiency. Risk adjustment is also used in commercial health insurance to determine how much a health insurer pays for each member. It is a payment model that transfers funds from plans with low-risk enrollees to those with high-risk, thus stabilizing premiums.

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