Risk adjustment is used for a variety of purposes in the health care industry. One of the principal uses of risk adjustment is to set payments for health plans to reflect expected treatment costs of their members. Because of differences in health status and treatment needs, the cost of health care will vary from person to person. Without risk adjustment, plans have an incentive to enroll healthier patients and avoid sick patients, especially in cases where plans cannot use health status to set premiums. With risk-adjustment plans receive a higher payment for members with multiple chronic illnesses than for members with no or limited health problems. If risk adjustment is done well, it should reduce the incentives for plans to avoid patients they expect to be costly.
The methodology used to risk adjust varies, depending in part on health care market regulations, the populations served and the source of payments. Risk adjustment is used in all major public programs offering health coverage in the United States—including Medicare Advantage (MA), Medicare Part D, and state Medicaid managed care programs.
Risk adjustment is a particularly important topic at this point in history because of its role in the major health reforms envisioned under the Affordable Care Act (ACA). The ACA prohibits plans in the individual and small group market from denying coverage based on pre-existing conditions, eliminates medical underwriting, and limits premium variation based on age and other risk factors. As a result, risk adjustment is needed to ensure that a plan will not benefit from enrolling a disproportionate share of healthy patients. The ACA requires risk adjustment for all plans in the individual and small group market, both inside and outside health insurance exchanges.
This synthesis looks at the role of risk adjustment in health care markets and its effectiveness. It addresses the following questions: