Medicare Advantage Risk Adjustment and Risk Adjustment Data Validation Audits

Paulette C. Morgan
Specialist in Health Care Financing

According to the American Academy of Actuaries, “[h]ealth risk adjustment is the process of adjusting payments to organizations (usually health insurance plans) based on differences in the risk characteristics of people enrolled in each plan.” By adjusting payments to compensate organizations for the relatively higher medical costs associated with an ill individual, plans should, all other things being equal, be indifferent between enrolling the sicker person or the relatively healthier one.

Medicare Advantage (MA) is an alternative way for Medicare beneficiaries to receive covered benefits. Under MA, private health plans are paid a per-person amount to provide all Medicarecovered benefits (except hospice) to beneficiaries who enroll in their plan. The Centers for Medicare & Medicaid Services (CMS) risk adjusts the payments to MA plans. The size of the adjustment depends on the demographic and health history of each plan enrollee. The payment adjustment takes into account the severity of a beneficiary’s illness, the accumulated effect of multiple diseases, as well as interactive effects—instances where having two or more specified diseases or characteristics results in expected health care expenditures that are larger than the simple sum of the effects. The payments are not adjusted for short-term illnesses because they are assumed to be poor predictors of future health spending.

MA plans provide information to CMS to justify the risk-adjusted payments; CMS therefore audits the plans to ensure that the risk-adjusted payments that the plans are claiming are in fact supported by the medical record. Based on the audit findings, plans may have to pay back money when the medical record does not provide evidence for the risk-adjusted payment they had received. Alternatively, the audit may reveal additional illnesses that had not previously been taken into account. Previously, MA plans were only required to pay back money (or receive money) based on the findings from the audited enrollee records. CMS has proposed extrapolating the audit findings to apply to all enrollees in the audited plan.

Some concerns have been raised about risk adjustment under Medicare Advantage and the MA plan audits. First, risk adjustment compensates plans for the average predicted cost of any particular diagnosis. To the extent that MA plans could enroll beneficiaries with below-average expenditures relative to the average for their disease, those plans would be over-compensated by risk adjustment. Second, according to the American Academy of Actuaries, the Medicare fee-forservice data used in the MA risk adjustment model were not audited for accuracy and may contain errors. The audits under MA, however, would apply the risk adjustment factors to data that were validated. The inconsistency of using audited data in one circumstance and non-audited data in another could create uncertainty; however, a for-for-service adjustment factor added by CMS in the final notice of payment methodology may remedy this concern. Third, some plans have expressed concern that recoveries from the audits may place them at substantial financial risk.

This report describes how CMS pays providers under Medicare Advantage and how these payments are risk adjusted. In addition, it describes how risk scores for individual Medicare Advantage enrollees are initially generated and change over time, and it discusses how CMS audits risk-adjusted MA payments. It concludes with a short discussion of several concerns raised with risk adjustment and the audit process.


Date of Report: March 5, 2012
Number of Pages: 30
Order Number: R42134
Price: $29.95

Follow us on TWITTER at http://www.twitter.com/alertsPHP or #CRSreports

Document available via e-mail as a pdf file or in paper form.
To order, e-mail Penny Hill Press or call us at 301-253-0881. Provide a Visa, MasterCard, American Express, or Discover card number, expiration date, and name on the card. Indicate whether you want e-mail or postal delivery. Phone orders are preferred and receive priority processing.