The American Academy of Actuaries defines health risk adjustment as the process of adjusting payments to organizations, such as health insurance plans, based on the risk characteristics of the people enrolled in the plan. Risk adjustment compensates organizations for the higher medical costs associated with ill individuals in a bid to make them indifferent between enrolling a sicker individual or a relatively healthy one.
The Necessity of Risk Adjustment
Many providers have been reluctant to accept global payments and episode-of-care payments because of concerns about the underlying financial risk. If a payment system demands that providers become accountable for costs they cannot directly control, then the providers will most likely be reluctant to accept the system or if they do, they could end up risking financial problems such as the ones that hit many providers under the infamous capitation contracts of the 1990s.
Risk adjustment is a common method used to protect providers from excessive insurance risk; the goal is to make higher payments for patients with serious health conditions. This way providers are only exposed to performance risk, and not insurance risk. One of the main advantages of using health risk adjustment is that the provider has a higher incentive to perform a complete coding of patient diagnoses not only to ensure accurate payment, but also to ensure that all of a patient’s conditions are managed comprehensively. In contrast, the fee-for-service payment tends to record the diagnosis codes used in risk adjustment only when a related treatment claim is filed, leading to an incomplete record of patients’ health conditions in the claims data systems.
The current risk adjustment system, however, is not without flaws. A patient’s risk score is based on his or her present health problems and not how the problems have changed over time as a result of the impact of a health services provider. For instance, if a physician helps a patient stop smoking or lose weight, the patient’s risk score would fall. This would cause the physician to receive a lower payment under the risk adjustment system, which consequently penalizes the physician for improving the patient’s health outcome. This can act as a disincentive for health services providers. A better strategy would be to engage in a risk adjustment contract that tracks changes in a patient’s health condition over time. This is more appropriate, particularly if health care providers sign multi-year contracts to manage the quality and cost of health care.