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Medicare Advantage Risk Adjustment and Risk Adjustment Data Validation Audits

CRS Report for Congress
Prepared for Members and Committees of Congress
Medicare Advantage Risk Adjustment and
Risk Adjustment Data Validation Audits
Paulette C. Morgan
Specialist in Health Care Financing
March 5, 2012
Congressional Research Service
7-5700
www.crs.gov
R42134
Medicare Advantage Risk Adjustment and Risk Adjustment Data Validation Audits
Congressional Research Service
Summary
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 Medicarecovered
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-forservice
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.
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Contents
Risk Adjustment Generally.............................................................................................................. 1
How CMS Pays Plans Under Medicare Advantage......................................................................... 1
Risk Adjustment Under Medicare Advantage.................................................................................. 2
Incorporating Demographic and Other Non-health Factors into Payments .............................. 3
Incorporating Health Status into Payments ............................................................................... 3
Hierarchies .......................................................................................................................... 3
Additive Model ................................................................................................................... 5
Interaction Terms................................................................................................................. 6
How CMS Estimates the Relative Risk Factors ........................................................................ 7
Risk Scores for Medicare Advantage Enrollees............................................................................... 7
New Enrollees ........................................................................................................................... 7
Non-new Enrollees .................................................................................................................... 8
Sources of Error......................................................................................................................... 8
Risk Adjustment Data Validation (RADV) Audits .......................................................................... 9
Sampling.................................................................................................................................. 10
Medical Record Review .......................................................................................................... 12
Payment Error Calculation ...................................................................................................... 12
Concerns with Risk Adjustment and the Audit Process................................................................. 15
Concerns with Medicare Risk Adjustment Generally ............................................................. 15
Concerns with CMS Audit Process ......................................................................................... 16
Conclusion ..................................................................................................................................... 17
Figures
Figure 1. Aggregation of ICD-9-CM Codes into Hierarchical Condition Categories ..................... 4
Figure 2. Process of Generating HCC Codes from ICD-9-CM Codes............................................ 5
Figure 3. CMS Data Validation Process ........................................................................................ 11
Figure 4. Hypothetical Example of Payment Error Calculation .................................................... 14
Figure 5. Hypothetical Distribution of Costs for All Beneficiaries with the Same HCC .............. 16
Tables
Table 1. Hypothetical Example of CMS-HCC Expenditure Predictions and Risk Score................ 6
Table 2. Typical Risk Adjustment Implementation Calendar .......................................................... 8
Table A-1.Medicare Managed Care (Part C) Historic Risk Adjustment Models........................... 18
Table B-1. Preliminary Community and Institutional Relative Factors for the CMS-HCC
Risk Adjustment Model .............................................................................................................. 21
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Appendixes
Appendix A. History of Part C Risk Adjustment........................................................................... 18
Appendix B. CMS-HCC Risk Adjustment Model......................................................................... 21
Contacts
Author Contact Information........................................................................................................... 26
Acknowledgments ......................................................................................................................... 26
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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.”1 In the
simplest case, assume that on average the costs of providing a package of health care benefits to
women are $100 more than the cost of providing the same set of benefits to men. In this
hypothetical situation, if a payer, such as Medicare, paid the same amount to insurers for covering
both men and women, insurers would have a strong financial incentive to enroll men and avoid
enrolling women. One mechanism for leveling the playing field, could be to risk adjust the
payment to insurers by paying them $100 more for women than for men. Conversely, a riskadjusted
payment for men would be $100 less than that for women to reflect their relatively lower
level of expected health expenditures. In either of these situations, all other things being the same,
insurers should be indifferent between enrolling men or women into their plan.
Health care costs vary by more than just gender, and sophisticated risk adjustment models are
designed to take into account additional factors that can include age, geography, health status,
tobacco use, family size, and other factors. But even the most sophisticated risk adjustment
models do not explain a substantial proportion of the differences in expected health care
spending.
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.2
How CMS Pays Plans Under Medicare Advantage
Medicare Advantage provides private plan options, such as managed care, for Medicare
beneficiaries who are enrolled in both Medicare Parts A and B.3 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.4 The same
1 American Academy of Actuaries, Issue Brief, Risk Assessment and Risk Adjustment, Washington, DC, May 2010,
http://www.actuary.org/pdf/health/Risk_Adjustment_Issue_Brief_Final_5-26-10.pdf. One can also risk adjust in other
contexts. For instance, one might want to risk adjust quality measures if one has evidence to suggest that patient
responses to quality surveys or measured patient outcomes are affected by the patient’s health status or demographics.
Section 3007 of ACA, “Value-Based Payment Modifier Under the Physician Fee Schedule”, provides “The Secretary
shall establish appropriate measures of the quality of care furnished by a physician or group of physicians to individuals
enrolled under this part, such as measures that reflect health outcomes. Such measures shall be risk adjusted as
determined appropriate by the Secretary.” This report does not address risk adjustment of quality measures.
2 While this report focuses on risk adjustment in Medicare Advantage, the Patient Protection and Affordable Care Act
(ACA, P.L. 111-148, as amended) incorporates risk adjustment into the payment of insurance companies in the Health
Insurance Exchanges.
3 For a general description of the Medicare program, see CRS Report R40425, Medicare Primer.
4 Prior to 2000, the risk adjustment of Medicare private plan payments was based only on demographic data. Risk
adjustment under Part C evolved over time to include health status data collected from a variety of health care settings.
(continued...)
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monthly payment is made regardless of how many or few services a beneficiary actually uses.
The plan is at-risk if costs, in the aggregate, exceed program payments; conversely, the plan can
retain savings if costs are less than payments. 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).
Bids reflect each plan’s estimate of how much it requires to cover an average, or standard,
beneficiary. “The bid includes plan administrative costs and profit. CMS also sets a benchmark,
or bidding target, and if a plan’s standard bid is above the benchmark, the plan receives a base
rate equal to the benchmark; if the plan’s bid is below the benchmark, the plan receives a base
rate equal to its bid.”5 In addition, CMS adjusts the payment to private plans, in part, on the
characteristics of the Medicare beneficiaries actually enrolled in each plan. For instance, a plan
may, on average, enroll healthier or sicker Medicare beneficiaries than the average or standard
beneficiary. Part of CMS’s payment to plans, as described below, reflects the age, gender, and
other characteristics of plan enrollees.
Risk Adjustment Under Medicare Advantage
The current MA risk adjustment methodology relies on demographic, health history, and other
factors to adjust payments to plans.6 These factors are identified in a base year, and used to adjust
payments to plans in the following year. In other words, since MA payments are based on a
prospective payment system, CMS is attempting to estimate next year’s health care expenditures
as a function of beneficiary demographic, health, and other factors identifiable in the current year.
This section describes how CMS determines the risk adjustment to be applied to MA plan
payments.
(...continued)
Appendix A provides a brief description of the history of risk adjustment under Medicare Advantage, and
Medicare+Choice—the predecessor to the MA program. Appendix A summarizes the degree to which each model is
able to explain differences in beneficiary expenditures.
5 MedPAC, Medicare Advantage Program Payment System: Payment Basics, October 2008, http://www.medpac.gov/
documents/MedPAC_Payment_Basics_08_MA.pdf. Plans that bid below the benchmark also receive a percentage of
the difference between the bid and the benchmark which they must use to provide some combination of (1) extra
benefits not covered under Medicare, (2) reduced cost sharing, or (3) reduced Part B or D premiums. For more
information, see also CRS Report R41196, Medicare Provisions in the Patient Protection and Affordable Care Act
(PPACA): Summary and Timeline.
6 While there are different models for Medicare subpopulations such as the disabled, those with end-stage renal disease,
the institutionalized, dual-eligibles (individuals eligible for both Medicare and Medicaid), and new Medicare enrollees,
this report primarily focuses on the non-institutionalized, non-disabled, non-ESRD Medicare beneficiaries. For more
information, see U.S. Government Accountability Office, Medicare Advantage, Changes Improved Accuracy of Risk
Adjustment for Certain Beneficiaries, GAO-12-52, December 2011, http://www.gao.gov/products/GAO-12-52. Also, it
is important to note that risk adjustment may not account for all of the differences in health expenditures. As discussed
in Appendix A, the current risk adjustment model explains an estimated 11% of the differences in Medicare
beneficiary health care spending—while this is not a large percentage of the variance, this alone is an inadequate reason
to dismiss the methodology.
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Incorporating Demographic and Other Non-health Factors
into Payments
It is well established that health care expenditures vary by age (increasing with age), gender,
Medicaid eligibility, and disability; incorporating these variables into payments is fairly
straightforward.7 Also taken into account is how a beneficiary originally became eligible for
Medicare—either due to age or permanent disability. CMS has these data from administrative
sources and while there can be error in these administrative data, they tend to be accurate and
somewhat stable over time.8
Incorporating Health Status into Payments
Incorporating health status into payments is somewhat more complicated.9 The process begins
with a diagnosis using the International Classification of Disease, Ninth Revision, Clinical
Modification—an ICD-9-CM code.10 ICD-9-CM codes are used to denote signs, symptoms,
injuries, diseases, and conditions. Physicians have been required by law to submit ICD-9-CM
diagnosis codes for Medicare reimbursement since the passage of the Medicare Catastrophic
Coverage Act of 1988. Currently, there are more than 13,000 ICD-9-CM codes.11 The ICD-9-CM
codes are first mapped into diagnostic groups and then into condition categories (see Figure 1).
Ultimately, as discussed below, the condition categories have a hierarchy imposed on them.
Hierarchies
The codes are hierarchical such that only the most significant manifestation of a disease is coded
for payment purposes. For example:
[All] ICD-9-CM Ischemic Heart Disease codes are organized into the Coronary Artery
Disease hierarchy, consisting of four CCs [condition categories] arranged in descending
order of clinical severity and cost, from CC 81 Acute Myocardial Infarction to CC 84
Coronary Atherosclerosis/Other Chronic Ischemic Heart Disease. A person with an ICD-9-
CM code in CC 81 is excluded from being coded in CCs 82, 83, or 84 even if codes that
group into those categories were also present. Similarly, a person with ICD-9-CM codes that
group into both CC 82 Unstable Angina and Other Acute Ischemic Heart Disease and CC 83
Angina Pectoris/Old Myocardial Infarction is coded for CC 82 and not CC 83.12
7 Klea D. Bertakis, Rahman Azari, and L. Jay Helms, et al., “Gender Differences in the Utilization of Health Care
Services ,” The Journal of Family Practice, vol. 49, no. 2 (July 2000).
8 Again, as a reminder, there are different models for some subpopulations.
9 This section draws extensively from Gregory C. Pope, John Kautter, and Melvin J. Ingber, et al., Evaluation of the
CMS-HCC Risk Adjustment Model, RTI International, Final Report - Prepared for the Centers for Medicare & Medicaid
Services, Research Triangle Park, NC, March 2011, https://www.cms.gov/MedicareAdvtgSpecRateStats/downloads/
Evaluation_Risk_Adj_Model_2011.pdf.
10 ICD-9-CM codes will be replaced with ICD-10 in 2013. CMS has begun preparing for the transition. An analysis of
the effect of the transition on risk adjustment can be found in the impact analysis at https://www.cms.gov/ICD10/
04_CMSImplementationPlanning.asp.
11 Electronic access to a list of ICD-9-CM codes can be found at http://icd9cm.chrisendres.com/.
12 Gregory C. Pope, John Kautter, and Melvin J. Ingber, et al., Evaluation of the CMS-HCC Risk Adjustment Model,
RTI International, Final Report - Prepared for the Centers for Medicare & Medicaid Services, Research Triangle Park,
NC, March 2011, p 11.
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Hierarchical coding ensures that the most costly form of the disease dictates the basis for
reimbursement. While there are 189 hierarchical condition codes (HCCs), only 70 HCCs are
incorporated into the current CMS model. These 70 HCC codes are chronic codes that
empirically have been shown to best predict the following year’s Medicare Part A and Part B
expenditures. Beginning in 2012, 87 HCC codes will be incorporated into the model (see Table
B-1 for these 87 HCC codes and their relative factors).
Figure 1. Aggregation of ICD-9-CM Codes into Hierarchical Condition Categories
Source: Based on Gregory C. Pope, John Kautter, and Randall P. Ellis, et al., “Risk Adjustment of Medicare
Capitation Payments Using the CMS-HCC Model,” Health Care Financing Review, vol. 25, no. 4 (Summer 2004),
pp. 119-141.
Note: ICD-9-CM is International Classification of Diseases, Ninth Revision, Clinical Modification.
Figure 2 depicts an example of how ICD-9-CM codes are converted into HCC codes. More
specifically, Figure 2 depicts the ICD-9-CM codes of a hypothetical 76-year-old female with a
variety of diagnosed conditions, including acute myocardial infarction, angina pectoris, chronic
bronchitis/emphysema, renal failure, chronic renal failure, chest pain, and an ankle sprain.
As can be seen in Figure 2, not all diagnoses result in an HCC. For instance, this woman’s HCC
code for acute myocardial infarction (81), near the top right of the figure, implies that she is not
coded with HCC 83 even though she has also been diagnosed with some form of unspecified
angina pectoris since both codes are in the same disease category and the acute myocardial
infarction (HCC 81) is higher in the hierarchy. Similarly, as can be seen at the bottom of Figure
2, some conditions (chest pain and ankle sprain) map to one of the 189 HCCs but are excluded
from the CMS model since they are not chronic. In addition, short-term illnesses, even if
expensive, are not captured. As noted above, these models are seeking to explain next year’s
expenditures and many of these conditions are either fleeting or not good predictors of future
expenditures.
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Figure 2. Process of Generating HCC Codes from ICD-9-CM Codes
Clinical Vignette of a 76-Year-Old Female with AMI, Angina Pectoris, COPD, Renal Failure, Chest Pain,
and Ankle sprain
Source: Gregory C. Pope, John Kautter, and Randall P. Ellis, et al., “Risk Adjustment of Medicare Capitation
Payments Using the CMS-HCC Model,” Health Care Financing Review, vol. 25, no. 4 (Summer 2004), pp. 119-41.
Notes: ICD-9-CM is International Classification of Disease, Ninth Revision, Clinical Modification. DxGroup is
Diagnostic Group. CC is condition category. HCC is Hierarchical Condition Category. AMI is acute myocardial
infarction. COPD is chronic obstructive pulmonary disease.
Additive Model
While only the highest code in a related disease category is used, codes across unrelated disease
categories are used such that the model is additive. Therefore, using the earlier example of a 76-
year-old female from Figure 2, Table 1 depicts the risk factors estimated for each condition. This
beneficiary’s hypothetical total risk score (1.583) is the sum of the individual risk factors, taking
into account the disease hierarchy. The risk score would be multiplied by the MA plan’s base rate
to determine the risk-adjusted base payment.13 In this example, a monthly base rate of
approximately $621.67 would result in a total estimated annual payment of $11,810, or
13 CMS pays for the risk adjustment of any additional plan premium charged to the beneficiary. See Medicare Payment
Advisory Commission, Medicare Advantage Program Payment System, Payment Basics, Washington, DC, October
2011, http://www.medpac.gov/documents/MedPAC_Payment_Basics_11_MA.pdf.
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[approximately $621.67 x 12 months x 1.583 risk score = $11,810 yearly risk-adjusted base
payment].
Table 1. Hypothetical Example of CMS-HCC Expenditure Predictions and Risk
Score
76-year-old female with AMI, Angina Pectoris, COPD, Renal Failure, Chest Pain, and Ankle Sprain
Risk Marker
Incremental
expenditure
prediction Relative risk factor
Female, age 75-79 $3,409 0.457
Acute myocardial infarction (AMI) (HCC 81) $2,681 0.359
Angina pectoris (HCC 83) $0
Chronic obstructive pulmonary disease (COPD) (HCC
108)
$2,975 0.399
Renal failure (HCC 131) $2,745 0.368
Chest pain (HCC 166) $0
Ankle sprain $0
Total $11,810 1.583
Source: Gregory C. Pope, John Kautter, and Melvin J. Ingber, et al., Evaluation of the CMS-HCC Risk Adjustment
Model, RTI International, Final Report - Prepared for the Centers for Medicare & Medicaid Services, Research
Triangle Park, NC, March 2011, https://www.cms.gov/MedicareAdvtgSpecRateStats/downloads/
Evaluation_Risk_Adj_Model_2011.pdf. p. 15.
Notes: HCC 83 has an incremental prediction but the amount is not added because HCC 81 is within the same
hierarchy and is the more severe manifestation of cardiovascular disease. Chest pain and ankle sprain are
excluded from the payment model. The expenditure prediction is estimated using 2005 data and is presented
here purely for illustration.
Interaction Terms
Empirical study has also shown that the presence of two or more conditions sometimes can result
in greater costs than just their additive effects.14 These are referred to as interaction effects. For
instance, the health care costs for an individual with both diabetes and congestive heart failure are
higher than one would predict from just adding the costs of diabetes and the costs of congestive
heart failure. In addition, empirical investigation has shown that there are interaction effects
between certain diseases and disability such that the health care costs for an individual with a
disability and diabetes are higher than one would predict from just adding the additional costs
associated with being disabled to the costs of having diabetes. CMS has incorporated both types
of interactions into the CMS-HCC model (see Appendix B, Table B-1).
14 Gregory C. Pope, John Kautter, and Melvin J. Ingber, et al., Evaluation of the CMS-HCC Risk Adjustment Model,
RTI International, Final Report - Prepared for the Centers for Medicare & Medicaid Services, Research Triangle Park,
NC, March 2011, https://www.cms.gov/MedicareAdvtgSpecRateStats/downloads/
Evaluation_Risk_Adj_Model_2011.pdf. p. 12.
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How CMS Estimates the Relative Risk Factors
The previous section explained how payments to MA plans are adjusted to account for the
relatively higher or lower cost of enrolling Medicare beneficiaries with certain demographic
characteristics or diagnoses. The size of the adjustments is determined by a mathematical model
briefly described below.
The CMS-HCC model is a linear regression model with expenditures predicted by diagnoses
(CMS-HCCs) and demographic variables. Variables that represent certain interactions are also
included—such as the interactions between certain diseases and between certain diseases and
permanent disability. The expenditure data are based on actual claims data for original Medicare
Parts A and B. The CMS-HCC model has been refined over the years and the relative risk factors
for each health care or demographic variable used as the basis of payment (i.e., coefficients) are
periodically recalculated using more current Parts A and B claims data.15
The results derived from the model can be standardized such that an individual with a risk score
of 1 equates to a Medicare fee-for-service beneficiary with average costs, while individuals with
risk scores of less than 1 equate to Medicare beneficiaries with below average costs and
individuals with risk scores of more than 1 equate to Medicare beneficiaries with above average
costs. Moreover, the risk scores can be further standardized such that a risk score of 1.2 reflects
an individual with 20% higher costs than an average Medicare beneficiary, for example, or that an
individual with a risk score of .8 reflects a beneficiary with 20% lower costs. Therefore, CMS can
use these risk scores to adjust payments to plans such that the payments are individualized to
reflect health status and demographics and reflective of the likely costs that a plan, on average,
should incur in treating a similarly situated Medicare beneficiary (see Table 1). Again, the goal is
not to accurately predict any particular individual’s expenditures for the following year but
predict how expenditures on average vary.
Risk Scores for Medicare Advantage Enrollees
The above discussion describes how CMS estimates adjustments to payments for each Medicare
beneficiary enrolled in a Medicare Advantage plan. This section describes how risk scores are
attributed to MA enrollees for purposes of payment.
New Enrollees
“For new enrollees [who are new to Medicare Advantage and new to the Medicare program in
general],16 who did not have 12 months of Part B eligibility in the preceding calendar year, rates
are based on age, sex, Medicaid status, and original reason for Medicare entitlement (disability or
age), not on diagnoses”, since CMS does not have historical diagnostic data for these enrollees.17
15 Gregory C. Pope, John Kautter, and Randall P. Ellis, et al., “Risk Adjustment of Medicare Capitation Payments
Using the CMS-HCC Model,” Health Care Financing Review, vol. 25, no. 4 (Summer 2004), pp. 119-141.
16 New enrollees who enter the program because of disability or ESRD are risk adjusted for those conditions.
17 James M. Verdier, Medicare Advantage Rate Setting and Risk Adjustment: A Primer for States Considering
Contracting with Medicare Advantage Special Needs Plans to Cover Medicaid Benefits, Center for Health Care
Strategies, Inc., October 2006, http://www.chcs.org/usr_doc/Medicare_Advantage_State_Primer.pdf.
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Non-new Enrollees
Non-new enrollees would include those beneficiaries who are switching MA plans, continuing in
the same MA plan, or otherwise have at least 12 months of Part B eligibility in the preceding
calendar year. CMS collects information from Medicare Advantage plans (previously using the
RAPS (risk adjustment processing system) and now the Encounter Data Processing System
(EDPS)), that allows CMS to periodically update the risk score of each beneficiary enrolled in
MA. Historically, under RAPS, about 80% of the diagnostic information was provided by
physician claims.18 CMS is in the process of moving to encounter level data that include dates of
service and ICD-9-CM codes, thus allowing CMS to retain diagnostic information for updating
risk scores and payments directly from plan data. In addition to physician supplied information,
data from inpatient hospital or outpatient hospital facilities are acceptable.
Risk scores can be adjusted twice each year on January 1 and July 1. Table 2 shows a typical
schedule for data submission and payment updates. The data that form the basis of the riskadjusted
payment are always from a prior 12-month period; no diagnosis data reported in the
service year are used to adjust payments during the service year.
Table 2. Typical Risk Adjustment Implementation Calendar
Payment
Year
Dates of
Service for
Risk
Adjustment
Data
Initial Data
Submission
Deadlinea
First Payment
Date
Final Data Submission Deadline
(Reconciliation)b
2011 July 1,
2009,
through
June 30,
2010
September 3, 2010 January 1, 2011 January 31, 2011, for data from 2009
dates of service; January 31, 2012, for
data from 2010 dates of service
2011 January 1,
2010,
through
December
31, 2010
March 4, 2011 July 1, 2011 January 31, 2012
Source: Based on https://www.cms.gov/PrescriptionDrugCovContra/Downloads/CallLetter.pdf, p.91.
a. March and September dates reflect the first Friday of the respective month.
b. All risk adjustment data for a given payment year (CY) must be submitted by January 31 of the subsequent
year. For instance, for dates of service in 2010, plans had until March 4, 2011, to submit claims information
to support risk scores for payments beginning in July 1, 2011.
Sources of Error
There are only a few sources of error that can enter into the calculation of risk adjusted Medicare
Advantage payments: error with respect to age, gender, disability status, Medicaid eligibility, or
disease. As noted above, the demographic data, disability status, and Medicaid eligibility
generally come from administrative files. The health status information comes from plans
18 http://www.codingnetwork.com/coding-audits-compliance/hcc-audits/.
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submitting diagnoses to CMS. Therefore, error in the health status information provided to CMS
by a plan to justify a risk-adjusted payment are the only data that plans are responsible for and
that are auditable.19
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). While audits have been conducted for
several years, previously CMS only sought to recover the error in payments associated with
sampled enrollees. In February 2011, the President’s FY2011 budget proposed to extrapolate the
RADV error rate to the entire plan contract for the year, resulting in estimated savings of $2.27
billion over the five-year budget window.20 In December 2010, CMS released for comment its
proposed methodology for auditing the data submitted by Medicare Advantage plans and
extrapolating a contract level error in payments.21 In February 2012, CMS released the final
notice of payment error calculation methodology, which states that for payment year 2011 audits,
CMS will extrapolate audit findings to derive the payment error estimate for the entire contract.22
Going forward, as CMS seeks to potentially recover larger dollar amounts from plans, the plans
are likely to push back more aggressively.23 These audits, and the potential recoveries, are likely
to be problematic for some Part C plans.24
Audits are conducted at the contract level, and several plans can be under a single contract.25
Having selected a contract to audit, CMS engages in a three-step process: sampling, medical
19 The health status information must include a legible signature by a physician or practitioner with proper credentials
to submit such information to CMS; as such, the signature and credentialing information are also subject to the audit.
20 The five-year budget window in the FY2011 budget was 2011 to 2015. The Department of Health and Human
Services, 2011 Budget In Brief, available at http://dhhs.gov/asfr/ob/docbudget/2011budgetinbrief.pdf, p. 57.
21 Centers for Medicare & Medicaid Services, Medicare Advantage Risk Adjustment Data Validation (RADV), Notice
of Payment Error Calculation Methodology for Part C Organizations Selected for Contract-Level RADV Audits -
Request for Comments, December 20, 2010, https://www.cms.gov/HealthPlansGenInfo/Downloads/
RADVSamplingPaymentErrorDescription.pdf. Referred to as CMS Request for Comments 2010.
22 Centers for Medicare & Medicaid Services, Notice of Final Payment Error Calculation Methodology for Part C
Medicare Advantage Risk Adjustment Data Validation Contract-Level Audits, February 24, 2012, http://www.cms.gov/
Plan-Payment/02_PaymentValidation.asp. Referred to as CMS Final Notice.
23 For example, one Medicare Advantage provider has stated, “We believe that the proposed methodology is actuarially
unsound and in violation of the Social Security Act. We intend to defend that position vigorously.” See
http://www.secinfo.com/d14D5a.q8djv.q.htm.
24 For instance, several insurers have noted these audits in their quarterly SEC filings as potentially having a “material
adverse effect on revenues derived from the Medicare Advantage program and, therefore, on results of operations,
financial position, and cash flows.” See, for example, http://www.secinfo.com/d14D5a.q8djv.q.htm.
25 For example, Aetna, an organization that participates in the MA program, may have a contract with CMS to serve a
particular market. Under that contract, Aetna could offer more than one plan—a gold, a silver, and a bronze plan. Aetna
may have multiple contracts with CMS to offer plans in different markets throughout the country. However, it is very
common in health care literature to refer to the MA organization as an MA plan. To be clear, with respect to RADV
audits, the sample is drawn from the eligible enrollees in a contract; a single organization may have several of its
contracts audited. If a contract is audited, eligible enrollees from any of its constituent plans could be sampled. For
instance, in the audit of the 2007 plan year, 2 Aetna and 6 Humana contracts were audited. See
ahttp://www.secinfo.com/d14D5a.q8djv.q.htm and http://phx.corporate-ir.net/External.File?item=
UGFyZW50SUQ9MTAxOTU3fENoaWxkSUQ9LTF8VHlwZT0z&t=1.
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record review, and error rate calculation/payment adjustment (see Figure 3). CMS uses samples,
rather than an audit of all eligible enrollees, so as to reduce the burden on plans to provide data.
CMS has determined that 201 enrollees is a sufficient sample size. Each of these steps is
discussed below.
Sampling
The enrollee sample is drawn from the cohort of eligible Medicare beneficiaries who were
enrolled in the contract in January of the payment year. In addition, the enrollees also had to be
1. Enrolled in an MA contract in January of the payment year.
2. Continuously enrolled in the same MA contract for all 12 months of the data
collection year.
3. Non-End Stage Renal Disease (non-ESRD) status in or prior to the payment year.
4. Non-hospice between January of the data collection year and January of the
payment year, with less than 12 months of hospice during the payment year.
5. In Medicare Part B coverage for all 12 months during the data collection period
(i.e., defined as full risk enrollees for risk-adjusted payment).
6. Diagnosed with at least one risk adjustment diagnosis (ICD-9-CM code)
submitted during the data collection period that led to at least one CMS-HCC
assignment. These HCCs were present for risk-adjusted payments, based on plansubmitted
risk adjustment data, and are referred to as the validation HCCs for the
sampled enrollees.26
Eligible enrollees are divided into three equal groups based on the total number of eligible
enrollees. Since the goal is to sample 201 eligible enrollees, the first group consists of 67 eligible
enrollees randomly drawn from the one-third of enrollees with the highest risk scores. The second
group consists of 67 enrollees randomly drawn from the one-third group of eligible enrollees with
the lowest risk scores. The final group consists of 67 enrollees randomly drawn from the onethird
remaining eligible enrollees.
Sampling weights are constructed so each sample of eligible enrollees represents the group from
which they were drawn. For example:
if a contract has 3,000 RADV-eligible enrollees, the enrollees would be ranked by risk score,
then divided into three equal groups of 1,000 enrollees each (to represent high, medium, and
low strata). An equal number of enrollees will be randomly selected from each group. The
weight for each sampled enrollee will equal 14.925 (i.e., 1,000/67). …The enrollee sampling
weights will be used as multipliers to scale-up (or extrapolate) the sample payment error
findings to the population it represents.27
26 Centers for Medicare & Medicaid Services, Notice of Final Payment Error Calculation Methodology for Part C
Medicare Advantage Risk Adjustment Data Validation Contract-Level Audits, February 24, 2012, http://www.cms.gov/
Plan-Payment/02_PaymentValidation.asp. Referred to as CMS Final Notice.
27 Ibid.
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Figure 3. CMS Data Validation Process
Source: Based on figure published at http://www.hccblog.com/files/RADV.pdf.
Notes: IVC = initial validation contractor; SVC = secondary validation contractor; CBC = Center for Beneficiary
Choice.
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Medical Record Review
Having drawn the sample of eligible enrollees to be audited, the MA plan is informed of the
enrollees being audited and their HCC codes. The plan is directed to reproduce and deliver to the
CMS contractor evidence from the medical records that substantiates each HCC code the plan
was paid for.28 Plans have 12 weeks to assemble and deliver the medical records for the sampled
201 enrollees.
The medical records, once received by the CMS contractor, are reviewed to establish whether a
particular diagnosis which gave rise to a risk-adjusted payment can be substantiated. If the record
confirms the underlying diagnosis, the payment was considered justified. If the medical record
does not confirm the underlying diagnosis, the payments based on the diagnosis were considered
in error. If the plan disagrees with the findings of the initial CMS contractor, it may appeal to
have CMS examine the previously submitted one best medical record and attestation.29 This final
decision is binding unless the plan requests a review by the CMS Administrator.
CMS notes that “the payment error for each enrollee will be either positive—representing a
net overpayment, or negative—representing a net underpayment.”30 Since the review is based
on the first medical record that validates the audited CMS-HCC, any evidence of
underpayment would have to be found in that same record, because underpayments, in
general, cannot be supported in the audit by a plan submitting additional medical records to
justify additional CMS-HCC codes.31
Payment Error Calculation
The risk scores for each sampled enrollee are corrected based on the HCCs that are supported by
the RADV medical record review and payments are calculated for each sampled enrollee using
the corrected risk scores. Enrollee-level payment errors are defined as the difference between the
original payment and the corrected payment. The payment error can be either positive—
representing a net overpayment, or negative—representing a net underpayment. A payment error
is calculated for each sampled enrollee based on the number of months the person was enrolled in
the MA selected contract (and was not ESRD or hospice) during the payment year.
28 The CMS Final Notice specifies that “audited MA contracts will be allowed to submit multiple medical records for
each CMS-HCC being validated. All diagnoses will be abstracted from the first medical record that validates the CMSHCC
under review. The one best medical record policy will continue to apply to the RADV audit dispute and appeal
process.” The term “one best” means the plans decide whether a hospital inpatient, hospital outpatient, or physician
medical record is the best record when more than one type of record is available. The record must be from an
acceptable provider type or physician specialty, the dates of service must be from within the data collection period, and
the record must be signed by the provider or attested to.
29 42 CFR Section 422.311(c)(2).
30 Centers for Medicare & Medicaid Services, Medicare Advantage Risk Adjustment Data Validation (RADV), Notice
of Payment Error Calculation Methodology for Part C Organizations Selected for Contract-Level RADV Audits -
Request for Comments, December 20, 2010, https://www.cms.gov/HealthPlansGenInfo/Downloads/
RADVSamplingPaymentErrorDescription.pdf. Referred to as CMS Request for Comments 2010.
31 “The RADV process addresses under-coding through the application of rules for crediting a sampled enrollee with
additional HCCs that are identified incidentally, during medical record review.” Centers for Medicare & Medicaid
Services, “ Policy and Technical Changes to the Medicare Advantage and Medicare Prescription Drug Benefit,” 75
Federal Register p. 19746, April 15, 2010.
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To derive the estimated payment error for each MA contract—as opposed to the error calculated
for the sample—the total payment error for each sampled enrollee will be multiplied by the
enrollee’s sampling weight (computed during the sampling phase and described above). The
weighted enrollee payment errors will be summed across all enrollees in the sample to determine
an estimated payment error for the MA contract. The payment recovery amount for each audited
MA contract will be determined by the lower bound of the 99% confidence interval around the
payment error estimate, modified by a fee-for-service (FFS) adjuster.32 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.33
Figure 4 depicts the payment error calculation. As described above, 201 eligible enrollees per
contract will be selected for review. A total error in payment will be established for each enrollee
based on all of the errors identified during the audit. The impact of each enrollee will then be
extrapolated to the contract by weighting the enrollee relative to the plan and adjusting for the
time that the enrollee was in the plan. The error for each of the 201 sampled enrollees, both
overpayments and underpayments, will then be summed. In the hypothetical example in Figure 4,
the estimated plan level error across all enrollees is $1,187.50. A 99% confidence interval for this
estimate is then calculated for the estimated plan error—that is, there is a 99% certainty that the
actual error in payment will fall within the estimated confidence interval. In the purely
hypothetical example generated in Figure 4, the confidence interval is from $1,037.50 to
$1,337.50. This means that with a certainty of greater than 99%, the error in payment to this
hypothetical plan is at least $1,037.50. If the 99% confidence interval includes $0 or is below $0,
then the recovery amount would be constrained to $0. If the 99% confidence interval does not
include $0, then the lower bound of the confidence interval is modified by a fee-for-service
adjuster to establish the amount the plan would be required to reimburse the government. The
recovery amount is, again, constrained at $0 if application of the FFS adjuster would otherwise
result in a negative recovery. In other words, the results of the RADV audit will not result in an
additional payment to MA plans.
32 The estimated error in payments is derived from the sample of eligible enrollees and is used to estimate the error at
the plan level. Since the estimate is based on a sample, there is a confidence interval around the estimate that varies
with the size of the sample and the degree of precision that one desires. In the case of RADV, CMS has sought to both
reduce the cost and burden of the audits by limiting the sample size to 201 enrollees. In addition, to be conservative, it
has adopted a 99% confidence interval—the higher the confidence one requires, the larger the interval size. Finally, and
again to be conservative, CMS intends to recover funds based on the lower bound of the confidence interval.
33 Centers for Medicare & Medicaid Services, Notice of Final Payment Error Calculation Methodology for Part C
Medicare Advantage Risk Adjustment Data Validation Contract-Level Audits, February 24, 2012, http://www.cms.gov/
Plan-Payment/02_PaymentValidation.asp. CMS has indicated in this letter that the adjuster will be calculated by CMS
based on a RADV-like review of records submitted to support FFS claims.
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Figure 4. Hypothetical Example of Payment Error Calculation
Source: Congressional Research Service.
Notes: The “Error” is the difference between the original payment to the plan and the corrected payment based
on audit findings. The “Weight” is constructed so each sample of eligible enrollees represents the audited
contract. The “Weighted Error” is equal to the error multiplied by the weight. The weighted errors are again
weighted by the number of months the person was enrolled in the MA selected contract (and was not ESRD or
hospice) during the payment year (rather than the data collection year during which the person had to be
enrolled for 12 months). The estimated plan error is the sum of the “Weighted Error” amounts weighted by
months (or $1,187.50 in this example).
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Concerns with Risk Adjustment and the
Audit Process
Concerns with Medicare Risk Adjustment Generally
Recent academic study of risk adjustment and some preliminary research by the Medicare
Payment Advisory Commission (MedPAC) have raised some concern with risk adjustment under
Medicare Advantage.34 As seen in Figure 5, there is a distribution of actual costs associated with
any set of beneficiaries with the same HCC code or set of codes. Medicare reimburses a plan
based on the average associated cost of treating such beneficiaries (Point A). Brown et al. (p. 33)
suggest that plans may “decrease their efforts to screen enrollees along dimensions included in
the model, while increasing their efforts along dimensions excluded from the model.” To the
extent that plans can do this, they can disproportionately enroll beneficiaries who on average are
below average cost (across HCCs) into their plan and experience below average expenses while
being reimbursed at rates established for average beneficiaries; beneficiaries with below average
costs are represented by Point B in Figure 5. MedPAC is similarly concerned that some Medicare
Advantage plans, specifically special needs plans and PACE plans,35 may disproportionately
enroll high cost individuals but be reimbursed for average cost enrollees (Point C). While
MedPAC suggests exploring improvements to the CMS risk adjustment model, Brown et al. are
more skeptical of the prospects of improving the risk adjustment model.
34 See Jason Brown, Mark Duggan, and Ilyana Kuziemko, et al., How Does Risk Selection Respond to Risk Adjustment:
Evidence from the Medicare Advantage Program, National Bureau of Economic Research, Working Paper 16977,
http://www.nber.org/papers/w16977 and MedPAC, “Risk Adjustment in Medicare Advantage,” Presentation by Dan
Zabinski, Washington, DC, September 16, 2011. http://www.medpac.gov/transcripts/RiskAdj_Sept_2011.pdf
35 A Specialized Plan for Special Needs Individuals (SNPs) is any MA coordinated care plan that exclusively enrolls or
enrolls a disproportionate percentage of special needs individuals. Special needs individuals are any MA eligible
individuals who are either institutionalized as defined by the Secretary, eligible for both Medicare and Medicaid, or
have a severe or disabling chronic condition and would benefit from enrollment in a specialized MA plan. Programs of
All-Inclusive Care for the Elderly (PACE) are fully capitated managed care programs that provide a comprehensive
array of acute and long-term care services to frail elderly persons living in the community.
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Figure 5. Hypothetical Distribution of Costs for All Beneficiaries with the Same
HCC
Source: Congressional Research Service.
Concerns with CMS Audit Process
A number of stakeholders have also expressed concerns regarding the audit process. The
American Academy of Actuaries (AAA) responded to a CMS Request for Comments on CMS’s
proposed RADV sampling and error calculation methodology. While the crux of the AAA’s
position is presented below in full,36 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. An underlying principle of risk adjustment systems is that there needs to be
consistency in the way the model was developed and how it is used. The CMS-HCC risk
adjustment factors were developed with FFS data that, to the best of our knowledge, were
not validated or audited for accuracy. The proposed audit process, however, effectively
would apply those factors only to MA data that are validated. In other words, the data used in
36 Letter from Thomas F. Wildsmith, Vice President, Health Practice Council, American Academy of Actuaries, to Ms.
Cheri Rice, Acting Director, Medicare Plan Payment Group, January 21, 2011, http://www.actuary.org/pdf/health/
RADV_comment_letter_012111_final.pdf.
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the RADV audit to determine a plan’s payment error are fundamentally and materially
different from the data used to develop the risk adjustment model.
If, as a result of the RADV audit, for example, certain lower-cost enrollees no longer are
considered diabetic but would have been considered diabetic in the FFS data used to develop
the risk scores, then the payment for diabetic members in the payment year could be
inadequate. In this example, the risk score factor associated with diabetes would be
understated relative to the factor that would have resulted from using only substantiated
diagnoses, because the lower-cost patients would have lowered the average spending
amounts among those identified as diabetics in the FFS data. When that factor is applied to
similarly non-validated data, the total payments for those with diabetes would be adequate.
When that same factor is applied only to those with substantiated data, however, the total
payments could be too low.
This type of data inconsistency not only creates uncertainty, it also may create systematic
underpayment, undermining the purpose of the risk adjustment system and potentially
resulting in payment inequities. In addition, the uncertainty related to a plan’s ultimate postaudit
risk score could make it difficult for actuaries to estimate the plan’s risk score and
certify the plan bid.
Extrapolating RADV payment-error calculations to adjust premium payments to MA plans
represents a significant change in the risk adjustment methodology. The Health Practice
Council is concerned that the resulting modified payment methodology may not
appropriately reflect the relative risk profile of enrollees in the affected MA plans.
The notice of final calculation methodology added a fee-for-service adjustment to the final
recovery amount, which may address these concerns. More information about the fee-for-service
adjuster is forthcoming.
Conclusion
Risk adjustment is intended to compensate MA plans for the higher (or lower) cost of enrolling
sicker (or healthier) Medicare beneficiaries, yet, as described in this report, plans that
disproportionately enroll sicker (or to the extent possible, healthier) beneficiaries may be
systematically under (or over) compensated. 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. It remains to be seen how the
Secretary will account for methodological concerns as she implements risk adjustment.
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Appendix A. History of Part C Risk Adjustment
Payments to private plans under Medicare are risk adjusted to account for the variation in the cost
of providing health care among Medicare beneficiaries. Several different models have been used
to calculate risk adjustment, each successive model gaining in complexity and explanatory power.
This appendix briefly describes the risk adjustment models that are not otherwise discussed in the
text of this report.37
Below, Table A-1 shows the risk adjustment models that have been used to adjust Medicare
private plan payments, the year each model was in use, and the percentage of variation in
individual expenditures predicted by each model (R2). The R2 is one measure of how well a model
explains why a specified outcome varies—in this case beneficiary expenditures. The range of
spending by individual Medicare beneficiaries can be from $0 per year for a very healthy
beneficiary who did not use any medical care, items, or medications, to hundreds of thousands of
dollars, or more, for a very ill beneficiary. The models attempt to predict beneficiary spending
based on beneficiary characteristics. Sicker beneficiaries may have higher expenditures—but how
much more? The R2 quantifies that measure for the model as a whole—from 0 (which means the
model does not explain any of the variation) to 1, which means the model perfectly predicts
expenditures. Looking at the first model listed in Table A-1, the Average Adjusted Per Capita
Cost (AAPCC) model has an R2 of 0.0077, which means that the model explains 0.77% of the
variation in beneficiary expenditures. Each subsequent model used by CMS has increased the
percent of variation in beneficiary expenditures explained. The most recent (proposed) model is
able to explain approximately 12.5% of the variation in expenditures.
Table A-1.Medicare Managed Care (Part C) Historic Risk Adjustment Models
Risk Adjustment Model
Payment
Years
Percentage of Variation in Individual
Expenditures Predicted (R2)
Adjusted Average Per Capita Cost (AAPCC) Pre-2000 0.0077
PIP-DCG 2000-2003 0.0550
CMS-HCC 2004-2008 0.0997
Version 12 CMS-HCC (2005 recalibration) 2009-current 0.1091
Version 21 CMS-HCC (2007 recalibration; 2009
clinical revision)
Proposed 0.1246
Source: Gregory C. Pope, John Kautter, and Melvin J. Ingber, et al., Evaluation of the CMS-HCC Risk Adjustment
Model, RTI International , RTI Project Number 0209853.006, Research Triangle Park, NC, March 2011, p. 6,
https://www.cms.gov/MedicareAdvtgSpecRateStats/downloads/Evaluation_Risk_Adj_Model_2011.pdf.
Notes: The first three models were estimated using both community and institutional beneficiaries in the same
model and used data from 1999-2000 for calibration. The later two models were estimated using only
community beneficiaries, with a separate model for the institutionalized; they used more recent data for
calibration, as shown in the table. The AAPCC risk adjusted on demographic information only. The Principal In-
Patient Diagnostic Cost Group (PIP-DCG) added data on inpatient diagnoses to slightly different demographic
information. The CMS-HCC model added data from ambulatory settings into the model.
37 This section draws extensively from Gregory C. Pope, John Kautter, and Randall P. Ellis, et al., “Risk Adjustment of
Medicare Capitation Payments Using the CMS-HCC Model,” Health Care Financing Review, vol. 25, no. 4 (Summer
2004), pp. 119-141. See also Gail Pardue McGrath and Solomon Mussey, Advanced notice of Methodological Changes
for Calendar Year (CY) 2004 Medicare+Choice (M+C) Payment Rates, Centers for Medicare and Medicaid Services,
March 28, 2003, https://www.cms.gov/MedicareAdvtgSpecRateStats/Downloads/Advance2004.pdf.
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Adjusted Average Per Capita Cost (AAPCC)
Prior to payment year 2000, private plan payments under the Medicare+Choice (M+C) and
TEFRA risk programs—both predecessors to the Medicare Advantage program—were risk
adjusted to account for the effect of certain demographic characteristics. The demographic
variables in the AAPCC model were age, sex, Medicaid enrollment, institutionalized status for
nursing home residents, and working aged status representing those Medicare beneficiaries 65
years of age and over with employer sponsored insurance as their primary source of coverage.
Taken together, these demographic data explain less than 1% of the variation in Medicare
beneficiary expenditures (see Table A-1). This model did not account for the costs associated
with beneficiary health. Payments to individual plans were not adjusted for enrolling very ill
beneficiaries. However, in the aggregate, private plan enrollees were healthier than enrollees in
original Medicare, leading to higher payments than if beneficiary health had been taken into
account.38
Principal In-Patient Diagnostic Cost Group (PIP-DCG)
The Balanced Budget Act of 1997 required CMS to implement a risk adjustment methodology
that took into account beneficiary health status by no later than January 1, 2000.39 From payment
year 2000 through 2003, CMS used the Principal Inpatient Diagnostic Cost Group (PIP-DCG)
model. In addition to demographic variables, this model took into account, “the worst principal
inpatient diagnosis (principal reason for inpatient stay) associated with any hospital admission.”40
Though, as shown in Table A-1, the PIP-DCG model explained more of the variation in Medicare
expenditures than the AAPCC (demographic only) model, it had several limitations. First,
illnesses that resulted in higher expenditures but did not result in a hospital admission were not
counted in the model. Second, any attempt to reduce hospital admissions through, for example,
better management of chronic disease, could potentially result in lower risk-adjusted payments.
Though the PIP-DCG model was to be phased-in, subsequent legislation held the phase-in
schedule at 90% demographic-only method/10% PIP-DCG method through 2003, in part to
“soften the financial impact of risk adjustment on M+C organizations.”41
CMS–Hierarchical Condition Category (CMS-HCC)
Starting in 2004, Medicare plan payments were adjusted by the CMS-HCC model—a model that
includes information from hospital inpatient and outpatient settings, physicians visits, and visits
with clinically trained non-physicians such as psychologists and podiatrists.42 The CMS-HCC
takes into account the severity of a beneficiary’s illness (and only compensating for the most
38 Gregory C. Pope, John Kautter, and Randall P. Ellis, et al., “Risk Adjustment of Medicare Capitation Payments
Using the CMS-HCC Model,” Health Care Financing Review, vol. 25, no. 4 (Summer 2004), pp. 119-141. p. 119.
39 Social Security Act Section 1853(a)(3)(C)(i).
40 Ibid. p. 120.
41 Gail Pardue McGrath and Solomon Mussey, Advanced notice of Methodological Changes for Calendar Year (CY)
2004 Medicare+Choice (M+C) Payment Rates, Centers for Medicare and Medicaid Services, March 28, 2003,
https://www.cms.gov/MedicareAdvtgSpecRateStats/Downloads/Advance2004.pdf. p. 4.
42 Gregory C. Pope, John Kautter, and Randall P. Ellis, et al., “Risk Adjustment of Medicare Capitation Payments
Using the CMS-HCC Model,” Health Care Financing Review, vol. 25, no. 4 (Summer 2004), pp. 124.
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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. The
CMS-HCC model explains nearly 10% of the variation in beneficiary expenditures and is
described in detail in the “Risk Adjustment Under Medicare Advantage” section of this report.
Updates to the CMS-HCC retain the basic structure of the model.
Version 12 CMS-HCC
Each year the model is updated to account for changes in the ICD-9-CM diagnosis codes. In
addition, Version 12 was recalibrated with more recent diagnosis and expenditure data. The
update increased the percentage of the variation in Medicare expenditures which were explained
by the model from just under 10% to nearly 11%.43
Version 21 CMS-HCC
Version 21 includes updates to the ICD-9CM diagnosis codes, and recalibration with more recent
diagnosis and expenditure data. In addition, version 21 “underwent a major clinical revision in
2009 to adjust for changes in disease patterns, treatment methods, and coding practices, as well as
compositional changes within the Medicare population.”44 These updates again increased the
predictive power of the model to approximately 12.5%. Version 21 is slated to be implemented in
2012 for PACE plans.45
43 Gregory C. Pope, John Kautter, and Melvin J. Ingber, et al., Evaluation of the CMS-HCC Risk Adjustment Model,
RTI International, Final Report - Prepared for the Centers for Medicare & Medicaid Services, Research Triangle Park,
NC, March 2011, https://www.cms.gov/MedicareAdvtgSpecRateStats/downloads/
Evaluation_Risk_Adj_Model_2011.pdf. p. 7.
44 Ibid. p. 7.
45 Ibid. p. 8.
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Appendix B. CMS-HCC Risk Adjustment Model
Table B-1. Preliminary Community and Institutional Relative Factors for the CMSHCC
Risk Adjustment Model
Variable Disease Group
Community
Factor
Institutional
Factor
Female
0-34 Years 0.198 0.783
35-44 Years 0.212 0.723
45-54 Years 0.274 0.700
55-59 Years 0.359 0.805
60-64 Years 0.416 0.773
65-69 Years 0.283 1.004
70-74 Years 0.346 0.947
75-79 Years 0.428 0.874
80-84 Years 0.517 0.792
85-89 Years 0.632 0.699
90-94 Years 0.755 0.594
95 Years or Over 0.775 0.465
Male
0-34 Years 0.079 0.994
35-44 Years 0.119 0.658
45-54 Years 0.165 0.687
55-59 Years 0.292 0.814
60-64 Years 0.332 0.877
65-69 Years 0.309 1.148
70-74 Years 0.378 1.195
75-79 Years 0.464 1.168
80-84 Years 0.565 1.104
85-89 Years 0.647 1.046
90-94 Years 0.776 0.928
95 Years or Over 0.963 0.842
Medicaid and Originally Disabled Interactions with Age and Sex
Medicaid-Female-Aged 0.213
Medicaid-Female-
Disabled
0.104
Medicaid-Male-Aged 0.210
Medicaid-Male-Disabled 0.113
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Variable Disease Group
Community
Factor
Institutional
Factor
Originally Disabled-
Female
0.244
Originally Disabled-Male 0.171
Medicaid and Originally Disabled
Medicaid 0.126
Originally Disabled 0.026
Disease Coefficients Description Label Community
Factor
Institutional
Factor
HCC1 HIV/AIDS 0.492 1.374
HCC2 Septicemia, Sepsis, Systemic Inflammatory
Response Syndrome/Shock
0.520 0.471
HCC6 Opportunistic Infections 0.557 0.541
HCC8 Metastatic Cancer and Acute Leukemia 2.425 0.928
HCC9 Lung and Other Severe Cancers 1.006 0.610
HCC10 Lymphoma and Other Cancers 0.695 0.363
HCC11 Colorectal, Bladder, and Other Cancers 0.330 0.255
HCC12 Breast, Prostate, and Other Cancers and
Tumors
0.180 0.165
HCC17 Diabetes with Acute Complications 0.344 0.434
HCC18 Diabetes with Chronic Complications 0.344 0.434
HCC19 Diabetes without Complication 0.124 0.187
HCC21 Protein-Calorie Malnutrition 0.653 0.343
HCC22 Morbid Obesity 0.342 0.353
HCC23 Other Significant Endocrine and Metabolic
Disorders
0.240 0.248
HCC27 End-Stage Liver Disease 1.003 0.637
HCC28 Cirrhosis of Liver 0.425 0.343
HCC29 Chronic Hepatitis 0.313 0.343
HCC33 Intestinal Obstruction/Perforation 0.337 0.302
HCC34 Chronic Pancreatitis 0.257 0.175
HCC35 Inflammatory Bowel Disease 0.279 0.250
HCC39 Bone/Joint/Muscle Infections/Necrosis 0.423 0.386
HCC40 Rheumatoid Arthritis and Inflammatory
Connective Tissue Disease
0.376 0.222
HCC46 Severe Hematological Disorders 1.078 0.638
HCC47 Disorders of Immunity 0.306 0.436
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Variable Disease Group
Community
Factor
Institutional
Factor
HCC48 Coagulation Defects and Other Specified
Hematological Disorders
0.258 0.197
HCC51 Dementia With Complications 0.616 —
HCC52 Dementia Without Complication 0.343 —
HCC54 Drug/Alcohol Psychosis 0.358 0.051
HCC55 Drug/Alcohol Dependence 0.358 0.051
HCC57 Schizophrenia 0.471 0.274
HCC58 Major Depressive, Bipolar, and Paranoid
Disorders
0.318 0.274
HCC70 Quadriplegia 1.075 0.497
HCC71 Paraplegia 0.868 0.497
HCC72 Spinal Cord Disorders/Injuries 0.441 0.191
HCC73 Amyotrophic Lateral Sclerosis and Other Motor
Neuron Disease
1.016 0.294
HCC74 Cerebral Palsy 0.036 —
HCC75 Polyneuropathy 0.281 0.256
HCC76 Muscular Dystrophy 0.460 0.247
HCC77 Multiple Sclerosis 0.482 —
HCC78 Parkinson’s and Huntington's Diseases 0.555 0.110
HCC79 Seizure Disorders and Convulsions 0.252 0.173
HCC80 Coma, Brain Compression/Anoxic Damage 0.533 0.103
HCC82 Respirator Dependence/Tracheostomy Status 1.732 1.567
HCC83 Respiratory Arrest 0.769 0.611
HCC84 Cardio-Respiratory Failure and Shock 0.326 0.346
HCC85 Congestive Heart Failure 0.361 0.226
HCC86 Acute Myocardial Infarction 0.283 0.394
HCC87 Unstable Angina and Other Acute Ischemic
Heart Disease
0.283 0.394
HCC88 Angina Pectoris 0.210 0.366
HCC96 Specified Heart Arrhythmias 0.276 0.227
HCC99 Cerebral Hemorrhage 0.371 0.175
HCC100 Ischemic or Unspecified Stroke 0.333 0.175
HCC103 Hemiplegia/Hemiparesis 0.481 0.063
HCC104 Monoplegia, Other Paralytic Syndromes 0.212 0.063
HCC106 Atherosclerosis of the Extremities with
Ulceration or Gangrene
1.313 0.773
HCC107 Vascular Disease with Complications 0.417 0.257
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Variable Disease Group
Community
Factor
Institutional
Factor
HCC108 Vascular Disease 0.288 0.146
HCC110 Cystic Fibrosis 0.388 0.323
HCC111 Chronic Obstructive Pulmonary Disease 0.388 0.323
HCC112 Fibrosis of Lung and Other Chronic Lung
Disorders
0.294 0.252
HCC114 Aspiration and Specified Bacterial Pneumonias 0.691 0.239
HCC115 Pneumococcal Pneumonia, Empyema, Lung
Abscess
0.212 0.194
HCC122 Proliferative Diabetic Retinopathy and Vitreous
Hemorrhage
0.223 0.366
HCC124 Exudative Macular Degeneration 0.248 0.178
HCC134 Dialysis Status 0.617 0.538
HCC135 Acute Renal Failure 0.617 0.538
HCC136 Chronic Kidney Disease, Stage 5 0.227 0.304
HCC137 Chronic Kidney Disease, Severe (Stage 4) 0.227 0.304
HCC138 Chronic Kidney Disease, Moderate (Stage 3) 0.227 0.304
HCC139 Chronic Kidney Disease, Mild or Unspecified
(Stages 1-2 or Unspecified)
0.227 0.304
HCC140 Unspecified Renal Failure 0.227 0.304
HCC141 Nephritis 0.075 0.235
HCC157 Pressure Ulcer of Skin with Necrosis Through
to Muscle, Tendon, or Bone
1.071 0.284
HCC158 Pressure Ulcer of Skin with Full Thickness Skin
Loss
1.071 0.284
HCC159 Pressure Ulcer of Skin with Partial Thickness
Skin Loss
1.071 0.284
HCC160 Pressure Pre-Ulcer Skin Changes or Unspecified
Stage
1.071 0.284
HCC161 Chronic Ulcer of Skin, Except Pressure 0.473 0.226
HCC162 Severe Skin Burn or Condition 0.458 —
HCC166 Severe Head Injury 0.533 0.103
HCC167 Major Head Injury 0.141 —
HCC169 Vertebral Fractures without Spinal Cord Injury 0.441 0.179
HCC170 Hip Fracture/Dislocation 0.363 —
HCC173 Traumatic Amputations and Complications 0.379 0.067
HCC176 Complications of Specified Implanted Device or
Graft
0.555 0.369
HCC186 Major Organ Transplant or Replacement Status 1.032 1.120
HCC188 Artificial Openings for Feeding or Elimination 0.609 0.658
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Variable Disease Group
Community
Factor
Institutional
Factor
HCC189 Amputation Status, Lower Limb/Amputation
Complications
0.804 0.384
Disease Interactions
SEPSIS_CARD_RESP_FA
IL
Sepsis and Cardiorespiratory Failure 0.634
CANCER_IMMUNE Cancer and Immune Disorders 1.101
DIABETES_CHF Diabetes and Congestive Heart Failure 0.237 0.143
CHF_COPD Congestive Heart Failure and Chronic
Obstructive Pulmonary Disease
0.255 0.159
CHF_RENAL Congestive Heart Failure and Renal Disease 0.201
COPD_CARD_RESP_FA
IL
Chronic Obstructive Pulmonary Disease and
Cardiorespiratory Failure
0.420
CRFAIL_COPD Cardiorespiratory Failure and Chronic
Obstructive Pulmonary Disease
0.524
SEPSIS_PRESSURE_ULC
ER
Sepsis and Pressure Ulcer 0.538
SEPSIS_ARTIF_OPENIN
GS
Sepsis and Artificial Openings for Feeding or
Elimination
0.453
ARTIF_OPENINGS_
PRESSURE_ULCER
Artificial Openings for Feeding or Elimination
and Pressure Ulcer
0.361
COPD_ASP_SPEC_
BACT_PNEUM
Chronic Obstructive Pulmonary Disease and
Aspiration and Specified Bacterial Pneumonias
0.249
ASP_SPEC_BACT_PNE
UM_ PRES_ULCER
Aspiration and Specified Bacterial Pneumonias
and Pressure Ulcer
0.325
SEPSIS_ASP_SPEC_
BACT_PNEUM
Sepsis and Aspiration and Specified Bacterial
Pneumonias
0.387
SCHIZOPHRENIA_COP
D
Schizophrenia and Chronic Obstructive
Pulmonary Disease
0.187
SCHIZOPHRENIA_CHF Schizophrenia and Congestive Heart Failure 0.220
SCHIZOPHRENIA_SEIZ
URES
Schizophrenia and Seizure Disorders and
Convulsions
0.303
Disabled/Disease Interactions
DISABLED_HCC6 Disabled, Opportunistic Infections 0.564
DISABLED_HCC34 Disabled, Chronic Pancreatitis 0.757
DISABLED_HCC46 Disabled, Severe Hematological Disorders 0.818
DISABLED_HCC54 Disabled, Drug/Alcohol Psychosis 0.432
DISABLED_HCC55 Disabled, Drug/Alcohol Dependence 0.147
DISABLED_HCC110 Disabled, Cystic Fibrosis 2.397
DISABLED_HCC176 Disabled, Complications of Specified Implanted
Device or Graft
0.495
DISABLED_HCC85 Disabled, Congestive Heart Failure 0.320
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Variable Disease Group
Community
Factor
Institutional
Factor
DISABLED_PRESSURE_
ULCER
Disabled, Pressure Ulcer 0.421
DISABLED_HCC161 Disabled, Chronic Ulcer of the Skin, Except
Pressure Ulcer
0.337
DISABLED_HCC39 Disabled, Bone/Joint Muscle Infections/Necrosis 0.624
DISABLED_HCC77 Disabled, Multiple Sclerosis 0.344
DISABLED_HCC6 Disabled, Opportunistic Infections 0.914
Source: Advance Notice of Methodological Changes for Calendar Year (CY) 2011 for Medicare Advantage
(MA) Capitation Rates, Part C and Part D Payment Policies and 2011 Call Letter. https://www.cms.gov/
PrescriptionDrugCovContra/Downloads/2011CombinedCallLetter.pdf
Notes: 1. The relative risk scores in this table were calculated by dividing the parameter estimates by the Part C
national average predicted expenditures (CMS Part C Denominator). The Part C Denominator value used is
$8,034.71.
2. The relative factor for HCC 160 is based on pressure ulcer, any stage, for all anatomical sites codes. The
relative factor for HCC 160 is also assigned to HCCs 157, 158, and 159 in the constrained regression because
the ICD9 codes for the stages of pressure ulcers are not implemented until FY09.
3. In the “disease interactions,” the variables are defined as follows: Artificial Openings for Feeding or Elimination
= HCC 188; Aspiration and Specified Bacterial Pneumonias = HCC 114; Bone/Joint/Muscle Infections/Necrosis =
HCC 39; Cancer = HCCs 8-12; Cardiorespiratory Failure = HCCs 82-84; Chronic Obstructive Pulmonary
Disease = HCCs 110-111; Chronic Ulcer of Skin, except Pressure = HCC 161; Congestive Heart Failure = HCC
85; Diabetes = HCCs 17, 18, 19; Immune Disorders = HCC 47; Multiple Sclerosis = HCC 77; Opportunistic
Infections = HCC 6; Pressure Ulcer = HCCs 157-160; Renal Disease = HCCs 134-141; Schizophrenia = HCC
57; Seizure Disorders and Convulsions = HCC 79; Sepsis = HCC 2.

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