Risk adjustment is a statistical method by which payers can reasonably predict how much a patient's care needs are expected to cost in any given year. In so called Fee-For-Service Medicare this matter is essentially moot since since providers are simply paid for the reimbursable services they provide their patients. However, health care payment is rapidly moving towards fixed or pre-arranged reimbursement models. For example, Medicare Advantage plans are paid a pre-determined or fixed per member per month fee and ACOs are incented to spend less annually than a pre-determined benchmark that amounts to an ACO's patients' historical costs risk adjusted. Therefore, risk adjustment, or getting risk adjustment right, becomes critically important.
During this 23 minute discussion Dr. Book explains the theory behind risk adjustment, how it's calculated for Medicare Advantage plans using hierarchical condition categories (HCC) codes and demographic data, the phenomenon known as "up coding," what CMS has done to address the issue and whether predicted costs tend to be lower than actual costs for high cost beneficiaries is a problem.
Dr. Robert Book is a Health Economist and Senior Research Director at the Health Systems
Innovation Network. (His paper discussed during this interview was authored via his work with the American Action Forum.) Dr. Book's work primarily focuses on modeling of the effects of the ACA. He has also expertise in a wide variety of related issues including Medicare and Medicare Advantage pricing, provider incentives, employer-sponsored insurance, drug regulation and the economics of medical research. Dr. Book earned his Ph.D. in economics and his MBA at the University of Chicago, an MA in computational and applied mathematics at Rice and his undergraduate in mathematics at Duke.
Dr. Book's primer on Medicare Advantage risk adjustment is at: http://americanactionforum.org/research/primer-medicare-risk-adjustment.
For a discussion on Medicare Advantage pricing more generally see the May 6, 2013 interview with Dr. Brian Biles.