Risk Adjustment Model
To account for beneficiary health status, CMS risk adjusts payments to MA plans by first calculating a risk score for every Medicare beneficiary, including those in MA plans and the FFS program. A beneficiary’s risk score is the ratio of estimated health care spending for that beneficiary under Medicare FFS relative to the spending of the average FFS beneficiary. CMS uses its risk adjustment model to estimate health care spending based on beneficiary risk factors such as age, sex, Medicaid enrollment status, and clinical diagnoses. The model does not account for a beneficiary’s functional status. The risk scores generated from the risk adjustment model are then used to adjust payments to MA plans. For example, payments to MA plans are twice as much for beneficiaries whose Medicare spending is estimated to be twice as high as average FFS spending. CMS implemented the most recent version of its risk adjustment model in 2017. In 2019 and 2020, CMS plans to revise the risk adjustment model to:
(1) account for additional diagnoses, such as those related to chronic kidney disease and mental health; and
(2) account for the number of a beneficiary’s diagnosed conditions.
While CMS does not account for functional status directly in the risk adjustment model, it does make an additional payment adjustment, known as the frailty adjustment, for plans that disproportionately enroll beneficiaries with functional limitations—specifically, Program for All-Inclusive Care for the Elderly (PACE) organizations and certain types of special needs plans (SNP).
To implement this adjustment, CMS adds a fixed amount to the risk score of each community-residing beneficiary 55 and older in a given plan to reflect the higher average costs of caring for beneficiaries with functional limitations. To calculate this adjustment, CMS first estimates frailty adjustment factors based on functional status information for Medicare FFS beneficiaries from the CAHPS survey and then applies these factors to a given plan based on functional status information from Medicare Health Outcomes Survey (HOS) or HOS-M.
The GAO Finds MA Risk Adjustment Model Underestimates Spending for Functional Limitations
GAO found that for the sample of beneficiaries analyzed, the MA risk adjustment model underestimated spending for those with functional limitations and overestimated spending for those without such limitations. These findings suggest that risk adjustment accuracy could be improved by accounting for functional status, which could in turn reduce any financial disadvantages plans may experience by enrolling beneficiaries with functional limitations.
Average Actual and Estimated Medicare Spending for a Sample of Beneficiaries under CMS's Current Risk Adjustment Model, by Functional Status, 2015 Medicare Spending per beneficiary (dollars)
Average Actual and Estimated Medicare Spending for a Sample of Beneficiaries under CMS's Current Risk Adjustment Model, by Functional Status, 2015
GAO also found that CMS and other stakeholders could face substantial challenges if the risk adjustment model were revised to account for beneficiary functional status, in part because this information is not readily available. For example, about three-fourths of beneficiaries do not receive health care in settings where functional status information is routinely collected. Stakeholders told GAO that expanding the collection of such information could be resource intensive for CMS, plans and health care providers, and an imposition for some beneficiaries. In addition, the potential for higher payments may give MA plans a financial incentive to identify beneficiaries with functional limitations. If this incentive causes MA plans to identify functional limitations more completely than providers in fee-for-service (FFS) Medicare, the risk adjustment process would need to account for this to avoid inappropriately high payments to plans because the risk adjustment model is estimated based on FFS data.
More on The 21st Century Cures Act and Risk Adjustment
The 21st Century Cures Act required the Secretary of the Department of Health and Human Services (HHS) to evaluate the impact of including the severity of chronic kidney disease and additional diagnoses related to mental health and substance use disorders into the risk adjustment model. The Act also required the Secretary to incorporate the total number of disease or conditions of an individual enrolled in an MA plan into the risk adjustment model starting in 2019 with a 3-year phase in period. Pub. L. No. 114-225, § 17006(f)(1), 133 Stat. 1033, 1336 (2016) (codified at 42 U.S.C. § 1395w-23(a)(1)(I)(i)).