	Risk Adjustment Generally

"Risk adjustment is the process of adjusting payments to organizations (usually health insurance plans) based on differences in the risk characteristics of people enrolled in each plan." In either of these situations, all other things being the same, insurers should be indifferent between enrolling men or women into their plan. Immediately below, this report describes how the Centers for Medicare & Medicaid Services (CMS) pays private health plans under Medicare Advantage (MA or Medicare Part C) and how these payments are risk adjusted. Subsequent sections describe how risk scores for MA enrollees are initially generated and change over time. The report concludes with a discussion of how CMS audits risk-adjusted MA payments and some potential issues associated with risk adjustment and the audits. By contract with CMS, a health plan agrees to provide all required Medicare benefits (except hospice) to a group of Medicare beneficiaries enrolled in the plan in return for a capitated monthly payment adjusted for the demographics and health status of the beneficiaries who actually enroll in the plan. Payments to MA plans are based on a comparison of each plan's estimated cost of providing Medicare covered benefits (a bid) relative to the maximum amount the federal government will pay for providing those benefits in the plan's service area (a benchmark). Risk Adjustment Under Medicare Advantage

The current MA risk adjustment methodology relies on demographic, health history, and other factors to adjust payments to plans. In addition, short-term illnesses, even if expensive, are not captured. Risk Adjustment Data Validation (RADV) Audits

Since there can be error in the information that plans provide to CMS to justify risk-adjusted payments as well as error in the updating process, CMS audits Medicare Advantage plans to ensure that the risk-adjusted payments plans are claiming and being paid for are in fact supported by the medical record (referred to as RADV audits). If the medical record does not confirm the underlying diagnosis, the payments based on the diagnosis were considered in error. The FFS adjuster accounts for the fact that the documentation standards used in RADV audits are different from the documentation standards used to develop the risk adjustment model; this adjuster may address a methodological concern raised by the American Academy of Actuaries, as discussed in the " Concerns with CMS Audit Process " section of this report. While the crux of the AAA's position is presented below in full, their position can be summarized as concern that:
the Medicare fee-for-service data used to estimate risk adjustments were never validated and therefore may also contain errors, and the methodology was designed to estimate payment errors not adjust premiums and the resulting premiums may not reflect the risk profiles of actual enrollees: 
Our primary concern with the proposed audit process is that it creates an inconsistency between how the risk adjustment factors were developed and how they now would be applied. Others have raised concerns about using Medicare fee-for-services data—which have not been audited for accuracy—to generate the risk adjustment coefficients for Medicare Advantage plans. Some plans have expressed concern that recoveries from RADV audits may place them at substantial financial risk. Payments to individual plans were not adjusted for enrolling very ill beneficiaries. The CMS-HCC takes into account the severity of a beneficiary's illness (and only compensating for the most severe manifestation reported), the accumulated effect of multiple (unrelated) diseases, as well as interactive effects—instances where having two or more specified diseases or characteristics results in expected health care expenditures that are larger than the simple sum of the effects.
According to the American Academy of Actuaries, "[h]ealth risk adjustment is the process of adjusting payments to organizations (usually health insurance plans) based on differences in the risk characteristics of people enrolled in each plan." By adjusting payments to compensate organizations for the relatively higher medical costs associated with an ill individual, plans should, all other things being equal, be indifferent between enrolling the sicker person or the relatively healthier one.
Medicare Advantage (MA) is an alternative way for Medicare beneficiaries to receive covered benefits. Under MA, private health plans are paid a per-person amount to provide all Medicare-covered benefits (except hospice) to beneficiaries who enroll in their plan. The Centers for Medicare & Medicaid Services (CMS) risk adjusts the payments to MA plans. The size of the adjustment depends on the demographic and health history of each plan enrollee. The payment adjustment takes into account the severity of a beneficiary's illness, the accumulated effect of multiple diseases, as well as interactive effects—instances where having two or more specified diseases or characteristics results in expected health care expenditures that are larger than the simple sum of the effects. The payments are not adjusted for short-term illnesses because they are assumed to be poor predictors of future health spending.
MA plans provide information to CMS to justify the risk-adjusted payments; CMS therefore audits the plans to ensure that the risk-adjusted payments that the plans are claiming are in fact supported by the medical record. Based on the audit findings, plans may have to pay back money when the medical record does not provide evidence for the risk-adjusted payment they had received. Alternatively, the audit may reveal additional illnesses that had not previously been taken into account. Previously, MA plans were only required to pay back money (or receive money) based on the findings from the audited enrollee records. CMS has proposed extrapolating the audit findings to apply to all enrollees in the audited plan.
Some concerns have been raised about risk adjustment under Medicare Advantage and the MA plan audits. First, risk adjustment compensates plans for the average predicted cost of any particular diagnosis. To the extent that MA plans could enroll beneficiaries with below-average expenditures relative to the average for their disease, those plans would be over-compensated by risk adjustment. Second, according to the American Academy of Actuaries, the Medicare fee-for-service data used in the MA risk adjustment model were not audited for accuracy and may contain errors. The audits under MA, however, would apply the risk adjustment factors to data that were validated. The inconsistency of using audited data in one circumstance and non-audited data in another could create uncertainty; however, a for-for-service adjustment factor added by CMS in the final notice of payment methodology may remedy this concern. Third, some plans have expressed concern that recoveries from the audits may place them at substantial financial risk.
This report describes how CMS pays providers under Medicare Advantage and how these payments are risk adjusted. In addition, it describes how risk scores for individual Medicare Advantage enrollees are initially generated and change over time, and it discusses how CMS audits risk-adjusted MA payments. It concludes with a short discussion of several concerns raised with risk adjustment and the audit process.