Healthcare Technology Insights

The Next Generation of Risk Adjustment Capabilities

July 31, 2017

The concept of risk adjusted reimbursement and other value-based payments have been core areas of focus for TripleTree for many years.  In addition to continued market interest in the sector, risk adjustment has recently been a topic of discussion in healthcare circles.  Whether it’s the impact of recent whistleblower lawsuits or disruptive technologies looking to “shake up” the system, risk adjustment activities continue to have a high profile in the marketplace.  The recent conversations got us thinking – what does the next generation of risk adjustment look like?

Before thinking about the future of risk adjustment, it’s important to understand the fundamentals of today’s approach:

  • What is risk adjustment?  According to the American Academy of Actuaries, risk adjustment is “an actuarial tool used to calibrate payments to health plans or other stakeholders based on the relative health of the at-risk populations.”
  • The Centers for Medicare and Medicaid Services (CMS) started using risk adjustment strategies as early as 2000 and then augmented their activities in 2004 with the addition of professional encounter data for chronically ill people
  • With the implementation of the Affordable Care Act (ACA), risk adjustment became a bigger part of Medicare Advantage (MA) and the individual and small-employer markets
  • CMS administers the risk adjustment model to predict healthcare costs based on the actuarial risk of enrollees in risk adjustment covered health plans.  The Hierarchical Condition Category (HCC) classification system is the basis for the CMS risk adjustment model.
  • Today, there are several best-in-class risk adjustment vendors, primarily enabling MA plans and some Medicaid and Exchange plans to appropriately ‘Risk Adjust’ their member populations. These vendors provide these services primarily through technology-enabled solutions that identify at-risk members and retrieve the appropriate information required to support the HCC classification system.

With such significant traction in government sponsored programs to date, it would appear the current risk adjustment methodology is correctly calibrating healthcare reimbursement rates based on various risk conditions.  The good news is that today’s risk adjustment methodology impacts many health plan members.  The bad news is that today’s risk adjustment methodology doesn’t reach as many health plan members as it could, and there is an opportunity to augment the methodology to identify additional gaps in care, reduce more healthcare costs and result in even more effective deployment of care management solutions.  To achieve these lofty goals, the next generation of risk adjustment companies will need to focus on larger groups of health plan members and utilize even more sophisticated patient segmentation to tailor outreach and engagement to identify even more accurate HCC coding.  In our mind, the motivations to think more “smartly” about larger member cohorts lay in the numbers and the realities of the healthcare industry:

  • The aging population continues to grow, with many Medicare Advantage and Medicaid members ignored under current outreach protocols, impacting risk adjustment, care management and quality programs for these members.
  • The ongoing quest to lower healthcare costs and manage state and federal budgets will push the industry to focus on formerly underserved populations.
  • The relentless push towards quality (STARS, HEDIS, MIPS and other CMS quality programs) will continue to push the industry to close gaps in care.

To be successful in this new era of risk adjustment, we believe companies will need to leverage existing HCC capabilities and couple them with advanced quality and care management programs, strong analytic and data competencies and community-based outreach and engagement programs.  When combined, these next-age vendors will possess the right tools to improve member engagement, impact health outcomes, drive down costs, and improve quality scores.

As a healthcare merchant bank, we’ve been excited to watch industry players start to integrate many of these next-generation capabilities, and we’ve been privileged to advise a number of companies as they move forward with their long-term growth strategies.  Both TripleTree and TT Capital Partners believe the next generation of risk adjustment capabilities is on the horizon, fueled by a combination of forces that will drive value to members, health plans, providers, government and other healthcare system stakeholders. 

We welcome your thoughts – let us know what you think.