The encyclopedia · Finance & Accounting · Strategic decision · 2000–2024
Medicare paid insurers by expected risk, so taking sicker members was worth it
CMS-HCC risk adjustment pays private plans more for sicker enrollees, so covering high-cost seniors is no longer penalised.
Centers for Medicare & Medicaid Services · Medicare Advantage insurers · Medicare
the move
Private Medicare Advantage plans are paid a per-member monthly amount by the government.
That amount is risk-adjusted so plans covering sicker members receive higher payments.
The CMS-HCC model uses diagnoses to predict each member's expected future cost.
This is meant to prevent adverse selection against high-cost enrollees.
why it works
- Risk adjustment compensates plans for genuinely sicker populations.
- It reduces the payoff to cherry-picking healthy enrollees.
- Payments track predicted cost, so coverage of expensive members is viable.
- It aligns the plan's interest with serving high-need patients.
what transfers
If you pay the average, you select away the costly customers. Price the risk, and the market will serve whoever it is paid to serve.
what came after
The model works as designed to offset risk, but it also created an incentive to document more diagnoses to raise payments. Analyses by KFF found chart reviews raised payments for about 1 in 6 enrollees, showing how a risk-adjustment system can be gamed when diagnoses drive revenue.
references
- Chart Reviews Increase Payments to Medicare Advantage Insurers for 1 in 6 Enrollees
- UnitedHealthcare, Humana are gaming Medicare Advantage risk adjustment
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