Risk adjustment is one tool that helps determine insurance eligibility and premiums, as well as reimbursements for providers. It allows insurance providers to compare members and determine which ones have higher risks of developing certain conditions or require more care than others. This information can then be used by regulators for setting appropriate reimbursement rates for different providers.

So, beyond that what exactly is risk adjustment? Why does it matter? And why will it continue impacting the way we approach health costs over the next several years?

What is the purpose of risk adjustment?

The official definition of risk adjustment, according to HealthCare.gov, is “a statistical process that takes into account the underlying health status and health spending of the enrollees in an insurance plan when looking at their health care outcomes or health care costs.”

To understand risk adjustment, you first need to know how it is calculated. The calculation of an enrollee’s risk score begins with their demographics and HCCs; a.k.a. the medical codes for their conditions.

To make sure that insurance providers are reimbursed fairly and accurately for services rendered, every member ends up with a unique risk score based on various demographic factors (such as age) combined together from predefined categories called Hierarchical Condition Categories or “HCC”.

The demographic factors used to calculate risk scores include:

  • Age
  • Sex
  • Socioeconomic data
  • Disability status or eligibility
  • Medicaid eligibility
  • Institutional status (nursing homes, inpatient care, etc.)

The demographics are paired with an enrollee’s list of diagnoses. These codes have all been assigned a specific value for risk adjustment. They’re part of the standard ICD-10 coding system used in healthcare — which assigns codes to every diagnosis based on many factors like severity, location, and condition.

HCCs with lower numbers are higher in severity on the scale and thus would raise someone’s risk score. For example, diabetes that is well-managed with no complications would have an HCC of 19, while diabetes in full ketoacidosis would be an HCC 17, which is more severe than the 19. These numbers, paired with the demographic information, would determine how much risk adjustment is necessary for this enrollee.

HCCs and demographics are the two factors that might most affect someone’s premium and eligibility in some medicare plans. In addition, people without chronic conditions might have more fluctuation in their risk scores due to diagnosis changing year over year. Still, those who require consistent treatment will likely remain in a high-risk adjustment program.

What are risk adjustment factor scores (RAF)?

Risk Adjustment Factors — known as RAFs — are the average risk scores for specific HCCs. They’re used in combination with demographics to determine an individual’s final risk score. The higher a person’s RAF, the more likely it is that they’ll end up in high-risk adjustment programs or see increased premiums due to their diagnosis and demographic information.

Health plans use special algorithms paired with patient RAF scores to predict costs. Patients with multiple chronic conditions would have a higher RAF score, thus likely having more healthcare needs with higher costs.

Why does this matter? Since risk adjustment is a calculation that takes into account both demographics and the severity of an enrollee’s diagnosis, HCCs will have more of an impact on premiums than ever before.

There’s no doubt that risk adjustment will continue to be a complex topic for healthcare professionals and insurance providers alike as we enter 2022. There are still many questions as to how this will play out in the future of healthcare, but there’s one thing that seems clear: risk adjustment is going to have a very real impact on every aspect of care and coverage moving forward.

Patients with high RAF scores can always apply for a Medigap or Medicare Supplemental Insurance plan to offset added costs not covered by their Medicare plan. In 2021, there are ten different types of Medicare supplemental plans (Medigap) available in most states. Each is indicated with a different letter: A, B, C, D, F, G, K, L, M, or N. A Medigap policy would help people pay remaining healthcare costs like deductibles, coinsurance, or copayments—in other words, fill the gaps that aren’t covered by Medicare plans.

What are the three risk adjustment models?

Depending on the situation, there are three different ways to adjust for risk. Each model has a different purpose and goal in mind.

CDPS — Chronic Illness and Disability Payment Systems

The first model is called CDPS and is used by state Medicaid programs for making capitated (fixed) payments to Medicaid HMOs for disabled enrollees. It may also be used for TANF (Temporary Assistance to Needy Families) for short-term assistance.

There are some precise characteristics of the CDPS model that make it stand out from the others. These are:

  • There are 20 hierarchical categories of diagnoses that group them by body system or diagnosis type.
  • A focus on those who need the most care.
  • Each category has subcategories that showcase their degree of expenditure, affected by the severity of the diagnosis.
  • Hierarchies are applied to every major category and count only the highest cost diagnosis. For example, if someone had two conditions under the cardiovascular category, the higher cost condition would be counted.
  • Patients can have multiple diagnoses across different categories.
  • This model has been adjusted multiple times to account for changes in medical coding.

understanding healthcare risk adjustments HCC — Hierarchical Condition Category

There are actually two forms of HCC: CMS and HHS. The CMS-HCC was developed after a mandate via the Balanced Budget Act of 1997 to adjust capitation payments based on its enrollees’ health status and demographics. Meanwhile, HHS-HCC came as a result of the Affordable Care Act. It intended to stabilize premiums for health plans offered on and off the Health and Humans Services health plan exchange. In addition, this model allowed for states who didn’t want to operate their own risk adjustment program to use the HHS risk adjustment program.


  • Hierarchies are applied so that only the most severe or highest cost diagnosis is counted in each category—similar to the CDPS model.
  • All diagnosis codes are organized into 805 diagnostics groups, which are then organized into 189 conditional categories for a broad picture view.
  • The variables that most impact one’s risk adjustment are: disability status, low-income status, Medicaid, the reason for entitlement, age, and sex.
  • They utilize prospective modeling, meaning they use previous year data to predict cost in the current year vs. concurrent modeling, which uses current year data.
  • They use an additive model where multiple categories can be added together to determine risk.
  • This model uses separate calculations for long-term care vs. new enrollees.
  • There is an entirely separate risk model for enrolled with ESRD (end-stage renal disease).


  • HHS-HCC is the newest model, implemented in 2014.
  • They work on a risk pool model, meaning its budget-neutral by transferring funds from low-risk plans to high-risk enrollee plans.
  • Again, only the most severe or highest-cost diagnoses are counted.
  • Age and sex are the demographics that most affect risk scores.
  • This model uses a concurrent model, using current year data to predict this year’s costs, unlike the CMS-HCC that uses prospective modeling.
  • This model includes 127 out of the 189 conditional categories that best predict expenses, focusing more on chronic diseases.
  • Depending on the plan level (platinum, gold, silver, bronze, catastrophic), there may be separate calculations due to plans’ varying actuarial value. Actuarial value is the total average of costs for covered benefits. For example, if a plan has an actuarial value of 80%, it means the enrollee is responsible for the remaining 20% of costs on all covered benefits.

ACG — Ambulatory Care Groups

Lastly, the ACG model was developed with a completely different approach than the other two. This model assigns diagnosis codes using 32 ambulatory diagnostics groups based on how the condition might affect an enrollee’s health and resource needs. For example, the likelihood of disability, reduced life expectancy, or needs for specialists, therapy, or hospice care is all highly considered under this model. This model is often referred to as the Case Mix model because it is used for both risk adjustment and research.

case mix healthcare risk adjustment Risk Adjustment and Healthcare

Risk adjustment allows for proper cost adjustments as well as setting a standard of premiums for high-risk enrollees. This is because people who are sick or have chronic conditions will be more expensive to treat than someone with few or no health issues. Overall this risk adjustment aims to provide the appropriate funding based on the severity of an enrollee’s health condition.

It’s a complex system that plans and providers need to have a plan for in order to create budgets properly, adjust plan coverage, and give enrollees the best possible care options. The Ōmcare Home Health Hub allows plans and providers to manage their risk by capturing RAFs (risk adjustment factors) over telehealth visits and ensures medication assistance, leading to healthier outcomes.

We are trying to make chronic care easier and more effective by allowing flexible, at-home care. If you have any questions regarding risk adjustment or bettering care for high-risk patients, reach out to us today!