PREDICTING HEALTH CARE COSTS
Risk adjustment is an actuarial tool to predict health care costs. Hierarchical condition category (HCC) coding is a risk-adjustment model created by the Centers for Medicare & Medicaid Services (CMS) to estimate future health care costs for patients.
The ICD-10 coding system classifies the diagnoses, signs, and symptoms that physicians and other health care professionals use to code and bill for health care services. There are more than 70,000 ICD-10 codes, with more than 9,700 mapped to an HCC.
CMS maps an ICD-10 code to exactly one HCC to assign risk scores to patients.3 Not all ICD-10 codes map to an HCC. Payers assign patients a risk-adjustment factor (RAF) using HCC scores and demographic factors, such as age and gender, which factor into the calculation. Put more simply, a diagnosis gets an HCC score, while a patient receives a RAF made up of HCC scores. Algorithms then allow payers to use a patient’s RAF to predict costs. Typically, higher costs would be predicted for sicker patients and lower costs for healthier patients.
For most payers, a risk score of 1.000 is an average patient. Medicare calculates a beneficiary’s RAF on an annual basis or cost per beneficiary per year. For example, if the RAF for your patient is 1.000, Medicare would expect to spend $10,000 on that patient. If your patient had an RAF of 1.100, Medicare would expect to spend $11,000 ($10,000 x 1.100). This method of cost prediction is used by the Medicare and Medicare Advantage programs.
Commercial payers sometimes use Clinical Risk Groups (CRG) to predict cost.5 In one Midwest area for one payer, a CRG of 1.0 equals $450 per patient per month (PMPM), or $5,400 annually per patient. A CRG of 1.1 for this payer equals $495 PMPM, or $5,940 annually.
RISK ADJUSTMENT IN VALUE-BASED PAYMENT (VBP)
Risk adjustment has taken root in value-based payment (VBP) contracts. HCC coding explains patient complexity and paints a picture of the whole patient. In addition to predicting health care resource utilization, RAFs are used to risk adjust quality and cost metrics.
In a VBP arrangement, if the RAFs for patients attributed to a practice are inaccurate, there are downstream effects.