Risk Adjustment Fundamentals and Payment Methodology
Why risk adjustment exists
Risk adjustment is a prospective payment method: diagnoses from a prior period predict next-year cost for each enrollee, producing a relative risk score where the average is 1.0. In Medicare Advantage, CMS-HCC models combine demographic factors (age/sex, institutional or new-enrollee status) with disease factors (HCCs), then divide by a normalization factor. The plan is paid a benchmark times the risk score, subject to coding-intensity and other adjustments. A risk score is a relative cost index, not a dollar amount and not a quality measure.
Know the data flow: encounter and claims data (RAPS and EDPS) plus medical record review feed the model. Payment-year diagnoses generally come from the prior year, so a code dated outside the collection period does not count. Distinguish prospective from concurrent models, and remember that HHS-HCC (ACA) and RxHCC (Part D) are separate models with their own coefficients.
Common traps: confusing payment year with data year; assuming every diagnosis raises payment; forgetting normalization; and mixing risk adjustment with Star Ratings.
Rule of thumb: risk score = (demographic factor + sum of HCC factors) ÷ normalization factor. Worked example: an aged community enrollee has a demographic factor of 0.30 and one HCC factor of 0.40; with a normalization factor of 1.05, the score is (0.30 + 0.40) ÷ 1.05 = 0.667 - below average, and not a dollar figure.