1. Refinements to the CMS-HCC Model For Risk Adjustment of Medicare Capitation Payments
Presented by:
John Kautter, Ph.D.
Gregory Pope, M.S.
Eric Olmsted, Ph.D.
RTI International
Contact: John Kautter, PhD,
RTI International is a trade name of Research Triangle Institute.

2. History of Medicare Risk Adjustment
Demographics (AAPCC)
Doesn’t explain cost variation
Favorable selection => higher program costs
Principal inpatient diagnoses (PIP-DCG model, 2000)
Incentive to admit
Penalizes plans that avoid admissions
Inpatient and ambulatory diagnoses (2004)

3. CMS-HCC Model
Centers for Medicare & Medicaid Services (CMS) Hierarchical Condition Categories (HCC) model
Prospective
Inpatient and outpatient diagnoses w/o distinction
70 diagnostic categories (HCCs)
Hierarchical within diseases

4. CMS-HCC Model (continued)
Cumulative (additive) across diseases
6 disease interactions
Discretionary diagnoses are excluded
Demographic factors included
Calibrated on 1999/2000 Medicare 5% Sample

5. CMS-HCC Model Performance
Percentage of cost variation explained
Age/Sex: 0.8%
PIP-DCG: 5.5%
CMS-HCC: %

6. CMS-HCC Models for Medicare Subpopulations
Disabled
End-stage renal disease
Institutionalized
New enrollees
Secondary payer status
Frail elderly

7. Disabled Over 10% of Medicare population Under age 65
Model estimated separately for aged and disabled
Overall cost patterns similar
For 5 diagnostic categories, incremental expense of the disabled is higher
5 disease interactions for disabled in final CMS-HCC model

8. End-Stage Renal Disease
About 1% of Medicare population
Very expensive: approximately $50,000/year
3-segment model
Dialysis patients
CMS-HCC model calibrated on dialysis patients
Transplant period (3 months)
Lump-sum payment
Post-transplant period
Aged/disabled CMS-HCC model w/add-on for drugs

9. Institutionalized Beneficiaries
About 5% of Medicare population
Costly, but less expensive than community residents for same diagnostic profile
Combined CMS-HCC model
Overpredicts costs for institutionalized
Underpredicts costs for community frail elderly

10. Institutionalized Beneficiaries (continued)
Different cost patterns by age and diagnosis for community and institutionalized
CMS-HCC model calibrated separately on community and institutionalized
Current year institutional status reported by nursing homes

11. New Enrollees Lack 12 months of base year enrollment
Two-thirds are 65 year olds
New enrollees versus continuing enrollees
Much less costly at age 65
Similar costs at other ages
Merged new/continuing enrollee sample
Separate cost weights for 65 year olds
Demographic model

12. Medicare as Secondary Payer
Beneficiaries with active employee employer-sponsored insurance
Costs are lower
Multiplier scales cost predictions down
Multiplier is ratio of mean actual to mean predicted expenditures

13. Frail Elderly
Diagnosis-based models underpredict expenditures for the functionally impaired
Medicare specialty plans (e.g., PACE) serve functionally-impaired populations
Frailty adjuster to better predict their costs
Predicts costs unexplained by CMS-HCC
Based on difficulties in ADLs
ADLs collected from surveys or assessments

14. CMS-HCC Model Refinements
Additional HCCs added to model
100% institutional sample used for institutional model calibration
Changes in diagnostic classification
2002/2003 Medicare FFS data used for calibration of all models

15. Availability of Additional HCCs
For Part D risk adjuster, plans required to submit diagnoses for 127 HCCs
Additional 57 HCCs available for CMS-HCC models (127 – 70 = 57)

16. Adding HCCs Benefits Greater accuracy in predicting illness burden
Rewards plans who enroll and treat beneficiaries with these diagnoses
E.g., Special Needs Plans (SNPs)
Drawbacks
Creates greater opportunities for diagnostic “upcoding”

17. HCCs Added to CMS-HCC Model
Available additional HCCs reviewed by project team to determine which were appropriate for payment model
Number of HCCs increased from 70 to 101

18. Examples of HCCs Added to CMS-HCC Model
“Refined” CMS-HCC Model
HCC Community Institutional
Type I
Diabetes
Mellitus $1,557 $1,435
Dementia/
Cerebral
Degeneration $1, − −
Hypertension $388 $919

19. 100% Institutional Sample
CMS-HCC institutional model calibrated on 5% institutional sample (n = 65,593)
To increase statistical accuracy and stability, “refined” CMS-HCC institutional model calibrated on 100% institutional sample (n = 1,238,842)

20. Distribution of Annualized Medicare Expenditures, 2003
5% Community 100% Institutional
Sample Size ,380, ,238,842
Expenditures
Mean $6, $11,252
95th Percentile $31, $47,390
90th Percentile $17, $31,553
Median $1, $3,028
10th Percentile $ $538
5th Percentile $ $349

21. Changes in Diagnostic Classification
Diabetes complications moved to diabetes hierarchy
E.g., diabetic neuropathy moved from HCC 71 Polyneuropathy to HCC 16 Diabetes with Neurologic or Other Specified Manifestation
HCC 119 Proliferative Diabetic Retinopathy and Vitreous Hemorrhage deleted and most moved to HCC 18 Diabetes with Ophthalmologic or Unspecified Manifestation
Cerebral Palsy consolidated in HCC 70 Cerebral Palsy and Muscular Distrophy

22. Refined CMS-HCC Community and Institutional Models
% of Cost
Variation
Explained # HCCs
CMS-HCC
Community 9.8% 70
Institutional 6.0% 69
“Refined” CMS-HCC
Community 11.0% 101
Institutional 8.9% 90

23. Refined CMS-HCC Model Performance – I
Predictive ratios, prior year expenditure quintiles
Age/Sex CMS-HCC
First
Second
Third
Fourth
Fifth

24. Refined CMS-HCC Model Performance – II
Predicted ratios by CMS-HCC predicted expenditure deciles
Age/Sex CMS-HCC
First
Second
Third
Fourth
Fifth
Sixth
Seventh
Eighth
Ninth
Tenth

25. Conclusions Medicare risk adjustment has been evolving
Demographic  Inpatient  All-Encounter
(AAPCC) (PIP-DCG) (CMS-HCC)
The “refined” CMS-HCC model represents a more comprehensive all-encounter risk adjustment model
Increases payment accuracy for plans
Viability of plans
Beneficiaries’ access to plans