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Risk Adjustment

If you are thinking about entering into any risk arrangement—whether it involves the use of capitation, shared savings, pay-for-performance, payment bundling, bonuses, withholds, etc.—you must understand risk adjustment.

"Risk adjustment" describes methods for determining whether patient characteristics will necessitate higher utilization of medical services. Variation in patient characteristics can substantially affect whether or not payments made to you under a given risk arrangement will be adequate. A risk arrangement lacking an adequate risk adjustment tool could actually penalize you for practicing high-quality medicine. If you attract very sick patients because of your reputation for quality in the community, you will likely have to provide more services to your patients than your peers who do not treat a similar patient population. If your payments are not accurately risk adjusted, and you receive payment amounts similar to your peers, it is likely that your payments will be inadequate.

Chapter eight: Risk adjustment

Risk adjustment is not just about cost, however. It is highly likely that, regardless of the payment model used, the amount of your payments will, in part, be a function of how the payer measures the quality of your services. Attracting sicker or poorer patients than your peers may lower your quality scores to the extent these scores are based on outcomes or patient compliance, for example, and are not properly risk-adjusted. With lower scores than your peers, you are also likely to receive lower payments.

If you are offered a risk contract, you must make every effort to understand completely any associated risk adjustment methodology. You should insist that the payer disclose to you all of the applicable risk adjustment factors. Specifically, ask the payer to describe the extent to which the risk adjustment methodology will take into account the following patient characteristics: 

  • age
  • gender
  • diagnosis
  • socioeconomic status
  • insurance status prior to enrollment
  • localized geographic area
  • family size
  • experience rating
  • benefit plan design

Also ask the payer to provide you with the publisher, product name, edition and model version of the software that will be performing the risk adjustment, and insist that you be given information fully describing the software’s predictive accuracy, including any R-Squared and predictive ratios.

Ideally, the risk adjustment methodology should be as accurate as the most sophisticated risk adjustment system that is commercially available. And even if the payer’s risk adjustment methodology is among the best available, you must be sure that the payer is contractually obligated to promptly augment that methodology with any enhancements improvements that may become available during the term of the risk arrangement.

If you are new to a particular risk arrangement, you will probably need help understanding the effect that any associated risk adjustment methodology will have on your payments. Anticipating this need, the AMA has developed a resource entitled "Evaluating & Negotiating Emerging Payment Options." This resource discusses how risk arrangements work, and contains a practical, easy-to-understand guide to understanding and negotiating different types of risk arrangements—including capitation, shared savings, and more. Other topics covered will include emerging bundled payment arrangements, risk adjustment and selecting an actuary.

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