How Coders Can Succeed with Risk Adjustment Payments

Risk adjustment is a corrective tool used by actuaries to level the playing field regarding the reporting of patient outcomes, adjusting for the differences in risk among specific patients. This process includes adjusting expected volumes to account for the case mix of a facility or category being compared. As Angela Carmichael, MBA, RHIA, CDIP, CCS, CCS-P, explained in her Sunday presentation, “The Coder’s Playbook for Success with Risk Adjustment Payment Methodologies,” “risk adjustment is a method for determining case mix index (CMI) beyond just the MS-DRGs.”

According to Carmichael, risk adjustment is important for the following reasons:

  1. It’s a necessary tool for managed care programs, which accounts for changes in severity and case mix over time, accurately sets performance targets, and identifies patients for population health initiatives
  2. It’s relevant as an essential element of the value-based purchasing program
  3. It’s fair, because it provides incentives to enroll high-cost individuals into managed care programs by ensuring health plans/ACOs have the resources needed to provide efficient and effective treatment
  4. It’s prominent, and used across a variety of government, private, and commercial insurance programs
  5. It’s here to stay


There are four prominent risk adjustment systems:

  1. Ambulatory Care Groups (ACGs)
  2. Chronic Illness and Disability Payment System (CDPS) for Managed Medicaid programs in approximately 20 states
  3. Diagnostic Cost Groups (DxCGs)
  4. Two types of hierarchical condition categories (HCCs): Centers for Medicare and Medicaid Services (CMS) HCCs for Managed Medicare (Part C) and Department of Health and Human Services HCCs for Managed Commercial in Health Information Exchange


The words “risk adjustment” often are paired with the acronym “HCC,” which stands for hierarchical condition categories. HCCs are diagnostic categories assigned based on diagnosis codes on encounter claims or by Medicare Advantage health plans. These categories filter patients into “buckets” that are clinically similar and are expected to have similar cost patterns to predict future healthcare costs.

Some key characteristics of HCCs include:

  • More than one HCC may be assigned per encounter
  • No sequencing of codes is necessary
  • Not all diagnoses map to an HCC
  • Procedures are not included in HCCs
  • Various provider types and specialist documentation (not just physicians) may be used for coding purposes
  • Hospital inpatient, hospital outpatient, and provider settings are all involved


Each patient is assigned a risk adjustment factor (RAF) score that is determined by multiple variables, including demographics and chronic diseases. The types of diseases that map to a CMS HCC are high-cost medical conditions and current conditions that impact the encounter in terms of requiring monitoring, evaluation, assessment, or treatment.

Diagnoses that are excluded from HCC mapping are those that do not predict future cost, such as appendicitis, and those that have a high degree of discretion or variability in diagnosis, diagnostic coding, or treatment, such as symptoms. Diagnosis codes from lab, radiology, and home health claims are not used because they are not reliable and may indicate rule-out diagnoses.

An important point to remember is that each condition must be mapped at least once in a calendar year. Each January, the facility starts with a “clean slate.” Each chronic non-resolving diagnosis that maps must be reported at least once during the calendar year, on a claim including a face-to-face visit with an acceptable type of provider and in an acceptable setting.

Another very important element of risk adjustment coding to remember is that medical record deficiencies could make an encounter invalid.

Facilities are “incentivized to improve their risk scores,” Carmichael said. It’s very important that facilities involved in HCC programs ensure their coders are well informed in all aspects of the program.

For further review on this topic, CMS provides a participant guide that includes all of the elements required.


  1. Can a link be provided for the CMS Participant Guide, please? Thank you

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  2. I really like your blog. Risk adjustment 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. The Risk Adjustment (RA) model uses a patient’s demographics and diagnoses to determine a risk score, which is a relative measure of how costly that patient is anticipated to be. Healthy patients have a below-average Risk Adjustment Factor (RAF) score so revenue from the insurance premium is transferred from healthy patients to patients with an above-average RAF score.

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