1. Risk Adjustment Chapter 6

2. 2 Medicare AAPCC: Adjusted Average Per Capita Costs Average Medicare Part A + Part B expenditures Average Medicare Part A + Part B expenditures By county By county Adjusted for: Adjusted for: Age Age Gender Gender Institutional Status Institutional Status Medicaid Status Medicaid Status Active Worker Status Active Worker Status 95 percent payment 95 percent payment

3. 3 “Adjusting Capitation Rates Using Objective Health Measures and Prior Utilization” Effort to explore the potential of enhancing the AAPCC to reflect health status Effort to explore the potential of enhancing the AAPCC to reflect health status Uses RAND Health Insurance Experiment Data, 1970–1974 Uses RAND Health Insurance Experiment Data, 1970–1974 Source: Newhouse et al. (1989)

4. 4 Measures of Potential Risk Factors Used in the RAND Study Demographic Measures (AAPCC Variables) Age Gender Location (indicator for each of the six sites in the study) Eligible for welfare at baseline Subjective Health Status Measures Physical health (based upon self-reported measures of role and personal limitations) Mental health (based upon self-reported measures of psychological distress, behavioral/emotional control, and positive affect) General health (based upon self-reported measures of general well-being) Disease count (based upon the presence of any of 32 chronic conditions) Physiologic Health Status Measures Dichotomous measures Continuous measures (Based upon 27 measures including such items as elevated cholesterol, hypertension, diabetes, electrocardiogram abnormalities, active ulcer, anemia, dyspepsia, abnormal thyroid function, etc.) Prior Utilization Outpatient expense in prior year Inpatient expense in prior year

5. 5 Table 6-2 Percentage of Explained Variation in Healthcare Expenditures Yielded by Alternative Specifications TotalInpatientOutpatient AAPCC 1.6 % 1.6 % 0.7 % 0.7 % 7.2 % 7.2 % AAPCC + subjective health status 2.81.211.1 AAPCC + dichotomous physiological health status 3.82.013.5 AAPCC + continuous physiological health status 4.22.613.0 AAPCC + prior utilization 6.42.821.2 All9.05.025.1 Source: data from Newhouse et al. (1989)

6. 6 Table 6-3 Profits from Better Prediction of Medical Expenditures by HMOs than from AAPCC Additional Variance Explained by HMO: Profit per Enrollee, 1988$ Profit per Enrollee, 2006$ 0 percentage points $0$0 1 percentage point $630$1,102 5.5 percentage points $1,170$2,046 7.5 percentage points $1,320$2,308 13 percentage points $1,530$2,675 18.5 percentage points $1,650$2,886 Source: adapted from data in Newhouse et al. (1989)

7. 7 Source: Van de Ven and Ellis (2000, 805)

8. 8 Updating AAPCC: Guiding Principles Clinically meaningful measures Clinically meaningful measures Predictive of current and future medical expenditures Predictive of current and future medical expenditures Yield accurate and stable predictions Yield accurate and stable predictions Related conditions treated hierarchically Related conditions treated hierarchically Vague measures grouped with low-paying diagnoses Vague measures grouped with low-paying diagnoses Discourage multiple reporting of similar conditions Discourage multiple reporting of similar conditions No penalty for reporting many conditions No penalty for reporting many conditions Transitivity holds Transitivity holds All diagnoses map to the payment system All diagnoses map to the payment system Discretionary diagnostic codes excluded Discretionary diagnostic codes excluded

9. 9 Updating the AAPCC Comprehensive Model Funded development of several approaches but ultimately choose: Funded development of several approaches but ultimately choose: Principal In-Patient Diagnostic Cost Group (PIP- DCG) Principal In-Patient Diagnostic Cost Group (PIP- DCG) Which, with refinement, became: Which, with refinement, became: Hierarchical Coexisting Conditions Hierarchical Coexisting Conditions And was renamed Hierarchical Condition Categories (HCCs) And was renamed Hierarchical Condition Categories (HCCs)

10. 10 Updating the AAPCC Example of a Simple Model Expected Spending = a1*AGE(<65) + a2*AGE(65-69) + a3*AGE(70-80) + … + a5*MALE + a6*MEDICAID + a7*Condition1 + a8*Condition2 + …+ a21*Condition15 Expected Spending = a1*AGE(<65) + a2*AGE(65-69) + a3*AGE(70-80) + … + a5*MALE + a6*MEDICAID + a7*Condition1 + a8*Condition2 + …+ a21*Condition15 a1-a21 are estimated average incremental costs of being in a class or having a condition. a1-a21 are estimated average incremental costs of being in a class or having a condition. Each class and condition has a value of 1 if it pertains to the person, and 0 if not. Each class and condition has a value of 1 if it pertains to the person, and 0 if not.

11. 11 Updating the AAPCC Example Using Possible HCCs Base payment for female, age 75–79 $2,139 Health status increments: - Diabetes without complications - Diabetes without complications - Moderate cost cancer - Moderate cost cancer$1,481$2,942 Total Payment $6,562

12. 12 Updating the AAPCC The New AAPCC with HCCs 48 age/sex/site categories 48 age/sex/site categories 12 age 12 age 2 sex 2 sex 2 site (community vs. institution) 2 site (community vs. institution) PLUS 6 Medicaid categories PLUS 6 Medicaid categories PLUS 70 HCCs PLUS 70 HCCs PLUS 6 disease interactions PLUS 6 disease interactions

13. 13 Updating the AAPCC Percentage of Expenditure Explained ModelR-Squared Age and Sex 1.0% PIP-DCG6.2% HCC11.2% Source: data from Pope et al. (2004)

14. 14 Table 6-5 Predictive Ratios for Alternative Risk Adjusters Quintiles of Expenditures Age/SexHCC First2.661.23 Second1.931.23 Third1.371.14 Fourth0.951.02 Fifth0.440.86 Top 5% 0.280.77 Top 1% 0.170.69 Source: data from Pope et al. (2004)

15. 15 Table 6-6 Sample Medicare Advantage Payment under HCC, 2006, Lake County, Illinois Basic Lake County, IL, Rate $691.50 Female aged 70–74.384 Medicaid female, aged.183 HCC19 diabetes w/o complications.200 HCC82 unstable angina.348 Total payment [$691.50*(.384+.183+.200+.348)]$771.02 Source: data from CMS (2004)

16. 16 Updating the AAPCC Phase-in of Risk Adjustment Payments Source: data from Wall Street Journal 12/30/2003, B1

17. 17 Medicare Modernization Act of 2004 Provided for prescription drug coverage (Part D) Modified payment for Medicare Advantage plans. Plans proffer a bid per enrollee per month to provide a basic set of benefits consistent with traditional Medicare. If this bid is below the CMS established “benchmark,” the managed care plan keeps 75 percent of the difference to apply to reduced cost sharing or expanded benefits for enrolled beneficiaries. If it is above the benchmark, the plan charges enrollees an additional premium. CMS-HCC is used to adjust the payments for beneficiaries actually enrolled by the plan to reflect their demographics and health status.

18. 18 Uses of Risk Adjustment Florida Medicaid reforms call for risk adjusted vouchers to purchase private insurance Florida Medicaid reforms call for risk adjusted vouchers to purchase private insurance Initially using ambulatory data Initially using ambulatory data Ultimately ambulatory and inpatient data Ultimately ambulatory and inpatient data Tax credit for the purchase of health insurance Tax credit for the purchase of health insurance Some argue for risk adjustment Some argue for risk adjustment Identification of cases for disease management or cost claims management Identification of cases for disease management or cost claims management

19. 19 Discussion Questions How would you describe the CMS-HCC risk adjustment system? Does it use prior utilization, physiological, and demographic information to determine payment rates? How? How would you describe the CMS-HCC risk adjustment system? Does it use prior utilization, physiological, and demographic information to determine payment rates? How?

20. 20 Discussion Questions Suppose a Medicare HMO had been aggressively using some method to attract low utilizers into its plan. In what ways would you expect it to change its behavior, of at all, as a result of the implementation of the new CMS-HCC model? Suppose a Medicare HMO had been aggressively using some method to attract low utilizers into its plan. In what ways would you expect it to change its behavior, of at all, as a result of the implementation of the new CMS-HCC model?

21. 21 Discussion Questions How would a CMS-HCC type model apply to people newly eligible for Medicare? How would a CMS-HCC type model apply to people newly eligible for Medicare?

22. 22 Discussion Questions If Medicare HMOs must now provide Medicare with encounter data on the healthcare utilization of their subscribers, what would you predict about the nature of the underwriting that managed care plans will use when negotiating future contracts with private employers? If Medicare HMOs must now provide Medicare with encounter data on the healthcare utilization of their subscribers, what would you predict about the nature of the underwriting that managed care plans will use when negotiating future contracts with private employers?