The new risk adjustment system was designed to meet ten guiding principles [Pope et al. 2004]. These principles relate to health insurance underwriting issues, understanding and acceptance by users, and minimization of opportunities to "game the system." Briefly, the ten principles are:
1. The health-status- related measures should be clinically meaningful. This means that they should have face validity and be sufficiently clinically specific to make it difficult for plans to assign a beneficiary with a vaguely defined condition into a higher payment group.
2. The measures should predict both current and future medical expenditures. Thus, a transitory condition such as an ankle sprain would not be a useful measure.
3. The measures should be based on large enough sample sizes that they yield accurate and stable predictions.
4. Related clinical conditions should be treated hierarchically, while unrelated conditions should increase the level of payment. Thus, someone identified as having had a recent acute myocardial infarction [i.e., a heart attack] and having unstable angina would only be counted as having the more-severe condition rather than both. However, someone with unstable angina and lung cancer would be counted as having both.
5. Vague measures should be grouped with low-paying diagnoses to encourage specific coding of health conditions.
6. The measures should not encourage multiple reporting of the same or closely related diagnoses. Thus, the hierarchy of related conditions should be used and only the most severe condition coded.
7. Providers should not be penalized for reporting many conditions. Thus, no condition should have a negative payment associated with it, and a more-severe condition must pay at least as much as a lesssevere manifestation.
8. Transitivity must hold. If condition A results in a greater payment than condition B and if B is paid more than C, then A should be paid more than C.
9. All of the diagnoses that clinicians use have to map into the payment system.
10. Discretionary diagnostic codes should be excluded to prevent intentional or unintentional gaming of the system.
Medicare''s Current AAPCC Approach to Risk Adjustment The Balanced Budget Act of 1997 [BBA] required Medicare to phase in a new AAPCC methodology, beginning in 2000 [Ingber 2000]. The new methodology was to better incorporate health status into the capitation rates. Medicare implemented a transitional risk adjustment system based only on inpatient data in 2000 and a full model based on both inpatient and ambulatory data in 2004.
It is also worth noting that because a risk-adjusted payment system is based on patient health status measures, then the BBA requires Medicare HMOs and other providers to provide encounter data to the Centers for Medicare and Medicaid Services [CMS]. For a detailed discussion of what is now called the CMS Hierarchical Condition Categories [CMS-HCC] model, see Pope et al. .
The managed care plans proffer a bid per enrollee per month to Medicare to provide a basic set of benefits consistent with traditional Medicare. If this bid is below the CMS established "benchmark" for the county [or region, if applicable], the managed care plan keeps 75% of the difference to apply to reduced cost sharing or expanded benefits for enrolled beneficiaries. If it is above the benchmark, the plan charges enrollees an additional premium. However, the CMS-HCC model is used in all cases to adjust the payments for beneficiaries actually enrolled by the plan to reflect their demographics and health status.
The extended example discussed in this article focuses exclusively on the Medicare AAPCC and its replacement the risk-adjusted CMS-HCC model. When private insurers use manual rating with medical underwriting or prospective experience rating for smaller employer groups, they increasingly make use of risk adjustment methods, albeit the methods seldom are as sophisticated as those discussed here.
Similarly, when insurers seek to identify highcost enrollees who may benefit from case management or disease management, they employ versions of risk adjustment methods to accomplish this. Florida enacted reforms to its Medicaid program for the poor in 2005. That program calls for providing Medicaid-eligible people with the equivalent of a voucher to purchase private health insurance. The size of the voucher is to be risk-adjusted based initially on ambulatory data but eventually on both ambulatory and inpatient data.
Finally, there have been several proposals to replace or supplement the current employer-sponsored health insurance system with one that provides a tax credit for the purchase of private health insurance. Some tax credit proponents argue for risk adjustments to scale the size of the tax credit to the health status of the recipient.
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