What is Risk Adjustment in Healthcare?

Abby-Bilyeu-Health-Fidelity-SVP-Client-Development discusses healthcare risk adjustment

Risk adjustment is a critical part of both the financial and clinical aspects of healthcare in the United States. Still, even many people working in healthcare don’t really understand what it is, why it’s important, or how it works.

First, what is risk adjustment?

Healthcare for approximately 110 million Americans is provided by the US government through value-based care programs like Medicare, Medicaid, and the ACA exchange. These programs rely on a system called risk adjustment, a financial tool for estimating the cost to provide care to a covered population. To determine the calculations and variables for risk adjustment, the following steps take place:

  • First, a mathematical average for the cost of care for a person based on age and other demographics is established.
  • Then, a mathematical value called a risk adjustment factor (RAF) is determined for each patient based on their various conditions, so as to standardize the measure of disease burden across geographic regions and various demographic cohorts. The sicker a patient is, the higher the number. Or, said differently, the greater the RAF, the more costly the care.
  • Risk adjustment is applying RAF to that estimated baseline (from above), to determine the commensurate reimbursement owed to the organization for assuming the risk to care for that patient, usually a health plan (payer) or in a growing number of cases, health systems (provider). Adjusting for risk prevents something called “adverse selection,” a behavior where an organization only covers or cares for healthier people, artificially lowering their costs.
  • If the cost of care comes in under the adjusted reimbursement, the organization that assumed the risk shares the savings with the federal government, or even keeps the entire difference (as is the case in Medicare Advantage). If the cost of care comes in over, the risk bearing organization can be responsible for that overage, either partially or fully. Both of these circumstances are influenced by what sort of risk program an organization is engaged in- upside only (sharing savings) or upside and downside, sharing in the cost. 

Why is risk adjustment important?

Risk-bearing entities take a fixed fee for covering the future cost of care for their members, before they know the actual costs. Proper reimbursements that account for differences in expected costs is critical to the success of value-based models, which is growing at about 20% annually since 2015. The COVID-19 pandemic has accelerated this, as well. Organizations engaged with value-based care, and therefore using risk adjustment, experienced greater financial stability when patient volumes dropped. Also, the now permanent acceleration in telehealth use took off when CMS  made it risk adjustable, meaning risk-bearing organizations could use data gathered from telehealth visits to impact a patient’s RAF.

Where does Health Fidelity come in?

To establish a complete, accurate RAF for patients, all health conditions need to be accurately identified, addressed, and documented annually via claims submitted to the government for reimbursement. So, if an organization makes sure to regularly see and care for a patient, the patient is by default more closely monitored, and therefore more likely to experience a higher quality of life as conditions are kept in check. This also helps keep costs of care down, as closer monitoring allows for more preventative and palliative solutions for conditions.

Helping organizations ensure their submissions are accurate is a major part of what Health Fidelity enables. Our Lumanent solutions use powerful NLP technology to process every available (and eligible) piece of clinical documentation on a patient. So, when a coder goes to review a chart, if a diagnosis code is absent despite evidence in the documentation (clinical notes, claims, pharmacy, labs, etc.), our NLP presents this evidence and a suggested diagnosis code to the coder. Similarly, if a diagnosis is present without sufficient evidence, the code can be suggested for deletion, protecting the organization from an audit and saving taxpayer money.

Pre-Encounter Prep, a provider-centric solution, takes things further. When a patient is scheduled for an appointment, our NLP analyzes the documentation and notifies providers of any suspected but unconfirmed conditions. In doing so, the level of care is deepened while, at the same time appropriately calibrating the risk adjustment factor for the patient.

Wrapping Up

Risk adjustment is an effective, fundamental element of value-based care. You can learn more about it in a number of our ebooks and white papers, as well as through organizations like RISE and NAACOS, as well as professional coding organizations like AAPC, AHIMA, and AACMA.