Guiding Principles in Medicare’s Risk Adjustment Approach

The new risk adjustment system was designed to meet ten guiding principles. These principles relate to insurance underwriting issues, understanding and acceptance by users, and minimization of opportunities to “game the system.” Briefly, the ten principles are:

1. The health-status–related measures should be clinically meaningful. This means that they should have face validity and be sufficiently clinically specific to make it difficult for plans to assign a beneficiary with a vaguely defined condition into a higher payment group.
2. The measures should predict both current and future medical expenditures. Thus, a transitory condition such as an ankle sprain would not be a useful measure.
3. The measures should be based on large enough sample sizes that they yield accurate and stable predictions. Medicare as with any insurer may have to sacrifice some risk categories to gain reduction in variance.
4. Related clinical conditions should be treated hierarchically, while unrelated conditions should increase the level of payment. Thus, someone identified as having had a recent acute myocardial infarction (i.e., a heart attack) and having unstable angina would only be counted as having the more-severe condition rather than both. However, someone with unstable angina and lung cancer would be counted as having both.
5. Vague measures should be grouped with low-paying diagnoses to encourage specific coding of health conditions.
6. The measures should not encourage multiple reporting of the same or closely related diagnoses. Thus, the hierarchy of related conditions should be used and only the most severe condition coded.
7. Providers should not be penalized for reporting many conditions. Thus, no condition should have a negative payment associated with it, and a more-severe condition must pay at least as much as a less- severe manifestation.
8. Transitivity must hold. If condition A results in a greater payment than condition B and if B is paid more than C, then A should be paid more than C.
9. All of the diagnoses that clinicians use have to map into the payment system.
10. Discretionary diagnostic codes should be excluded to prevent intentional or unintentional gaming of the system.