reports

Center for Health Program Development and Management, University of Maryland, Baltimore County, and Actuarial Research Corporation

A guide to implementing a health-based risk-adjusted payment system for Medicaid managed care programs. Annandale, VA, USA: Center for Health Program Development and Management, University of Maryland, Baltimore County, and Actuarial Research Corporation.

Center for Health Program Development and Management, University of Maryland, Baltimore County, and Actuarial Research Corporation, Annandale, VA, USA

Health-based risk adjustment uses diagnostic information on beneficiaries’ medical conditions to measure their health status when compared to traditional age and demographic adjustments. These measures can be used to better predict future health care costs in order to adjust payment.
Applying risk adjustment to the Medicaid population involves categorizing Medicaid managed care beneficiaries according to their expected health care costs and adjusting payments to reflect the cost differences.
The two main benefits of implementing health-based risk adjustment are to remove the financial incentive gained by enrolling higher numbers of healthy beneficiaries and to provide adequate funding for chronically ill managed care enrollees.
Implementing a health-based risk adjustment system is complex and can be challenging. Understanding several basic elements of health-based risk adjustment will greatly enhance your state’s development and implementation efforts. Several of the factors that need to be considered are listed below.

• Evaluate and select a risk adjustment classification system. You should determine objective criteria based on what is important to your state. Use these criteria to evaluate each of the risk adjustment classification systems. When you have chosen a system, be prepared to explain your decision to the managed care organizations and other interested parties.
• Decide which Medicaid eligibility groups will be risk-adjusted. In addition, your state may decide to carve-out beneficiaries with certain conditions from the risk-adjusted group (e.g., AIDS and HIV).
• Evaluate the completeness of your encounter data. Complete, validated encounter data are essential for establishing a good risk adjustment system. You need to develop strategies to evaluate the completeness and accuracy of your encounter data. These strategies need to include validation at both a micro and a macro level.
• Define your payment system. Payments can be made on an individual level basis or an MCO level basis. They can also be made prospectively or concurrently. There are several considerations involved.
• Calculate your managed care capitation rates. Key to developing health based capitation rates is to identify a base period of complete, valid data to and trend the expenses in the base period to the payment period.
• Prepare your MMIS to make risk-adjusted payments. Determine any additional roles your MMIS will play. Will you use the MMIS strictly to make payments or will you store an individual’s risk group/score on the MMIS?
• Decide if you want to include risk-adjusted utilization standards in your managed care contracts.
• Evaluate the impact of risk adjustment on your Medicaid budget. Risk adjustment may require modifications to the way your state makes budget projections. When developing risk-adjusted budget projections, it is important to evaluate the case mix of each MCO.

These items are discussed in detail in this manual, along with the many benefits and challenges you may encounter when implementing a risk-adjusted payment system. Finally, this manual presents state experiences as documented by the states that have already implemented health-based risk adjustment for their Medicaid managed care programs.