Medicare Risk Adjustment

Medicare Risk Adjustment
Steve Calfo, FSA Good Morning – And welcome to Baltimore. My name is Sean Creighton and I work in the Medicare Drug Benefit Group at CMS. I know that you will have lots of questions so please write them down and there will be time to answer them at the end of this presentation. This module can be found behind the Risk Adjustment Methodology Tab in your participant guide and you should have slides to follow along in your slide package. Risk Adjustment Methodology

Risk Adjustment Methodology
Purpose To explain risk adjustment under: Medicare Part C (Medicare Advantage) Medicare Part D (Prescription Drug) The purpose of this presentation is to familiarize you with risk adjustment as it applies to Medicare Advantage and to the new Prescription Drug Benefit. Risk Adjustment Methodology

Objectives Review risk adjustment history Understand the basics of risk adjustment as applied to bidding and payment Review risk adjustment implementation timeline Review characteristics of the Part C and Part D risk adjustment models Discuss Part C frailty adjuster Describe how to calculate risk scores Current Topics Performance 3 & 4 - So, I will briefly go over (1) History of risk adjustment. (2) Changes in the Medicare Program as a result of the enactment of the The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA). (3) How risk adjustment relates to bidding and payment. (4) The CMS-HCC risk adjustment model including frailty adjustment, the ESRD model, and the new Prescription Drug (RxHCC) models. (5) Finally, I will give examples of how risk adjustment is used in Part D bidding and payment. (6) Then if there is time left, I will read from my latest novel “Harry Potter and Prisoner of Risk Adjustment.” Risk Adjustment Methodology

RA Model History Model LAW Payment Years R2 Risk Score AAPCC TEFRA 1.0% Demographic PIP-DCG BBA * 6.7% Inpatient CMS-HCC BIPA 2004-present 10.5% Ambulatory * Blended Risk Adjustment Methodology

Risk Adjustment History
The Balanced Budget Act (BBA) of 1997: Created Medicare + Choice (M+C) Part C Program Mandated CMS to implement risk adjustment payment methodology to M+C (now MA) organizations beginning in 2000 (PIP DCG) Payment based on the health status and demographic characteristics of an enrollee Mandated frailty adjustment for enrollees in the Program for All-Inclusive Care for the Elderly (PACE) Slide 5 – With regard to where risk adjustment originated – The BBA of 1997 required that CMS implement risk adjusted payments for M+C. This payment methodology began in CY 2000 and was based on inpatient diagnostic data. It was implemented using the PIP-DCG model at 10% of the blended payment. BBA also mandated that payments take into account frailty for enrollees of PACE – something that I will discuss in more detail later on. Risk Adjustment Methodology

Risk Adjustment History (continued)
Beneficiary Improvement Act of 2000 (BIPA) Mandated CMS to implement risk adjustment payment methodology to M+C (now MA) organizations based on inpatient and ambulatory data beginning in 2004 (CMS HCC) Established the implementation schedule to achieve 100% risk adjustment payments by 2007 Mandated introduction of risk adjustment to ESRD enrollee payments. Risk Adjustment Methodology

Risk Adjustment History (continued)
Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) Created Medicare Part D - new prescription drug benefit program which was implemented in 2006 Created new program called Medicare Advantage (MA) that replaced M+C program Introduced bidding into the MA program and amended the MA payment methodology. Also retained most M+C provisions. Included risk adjustment as a key component of the bidding and payment processes for both the MA program and the prescription drug benefit. Risk Adjustment Methodology

MMA – Part D Title I - Medicare Prescription Drug Benefit - Part D Two types of sponsors: Stand alone prescription drug plan (PDP) MA plans that offer original Medicare benefits plus the Part D prescription drug benefit (MA-PD) Each MA organization must provide basic drug coverage under one of its plans for each service area it covers Established reinsurance option and risk corridors to limit risk for participating plans 34 Part D regions announced in December 2004 Slide 10 - The voluntary prescription drug benefit (known as Part D) is available for all Medicare beneficiaries through either the Medicare Advantage program or stand alone prescription drug plan (PDPs) beginning in 2006. MA organizations will be required to provide at least 1 MA plan that provides a “required drug coverage” in each of its service areas. MA plans that offer drug coverage are called MA prescription drug plans (MA-PDs). Beneficiaries receiving health care benefits through FFS Medicare can choose to access their prescription drug coverage through prescription drug plans (PDPs). Similar to the MA program, CMS has established 34 regions through which PDP sponsors will offer Part D drug coverage. To encourage plan participation in the provision of the drug benefit, Congress established a reinsurance option and risk corridors to limit different types of financial risk to plans. Risk Adjustment Methodology

Part D Bidding Plans submit bids representing their revenue needs for offering the type of Part D coverage (e.g. standard or enhanced) in selected Part D region(s). The law requires CMS to calculate a national average of the bids and a national base beneficiary premium. The base beneficiary premium is on average 25.5% of the national average bid (adjusted for reinsurance). The basic Part D premium each plan must charge equals the national base beneficiary premium adjusted for the difference between the plan’s bid and the national average bid amount. MA-PD plans may buy down the basic Part D premium with rebate dollars. Risk Adjustment Methodology

MMA – Part C Title II – Medicare Advantage – Part C Medicare Advantage Plan Sponsors could offer 3 types of local plan options Coordinated care plans (HMOs, PPOs, PSO); PFFS plans; and MSA plans. Created MA regional coordinated care plans; 26 MA regions announced in December 2004 Replaced Adjusted Community Rate (ACR) proposal with bidding process for original Medicare benefits Slide 11 - Title II of the MMA that created the Medicare Advantage (MA) program – MA replaces M+C under Part C of Medicare. Many of the M+C provisions were retained such as the eligibility, enrollment, grievance and appeals sections. As you are all no doubt aware, Title II the replaced the ACR proposal process with a bidding process for MA organizations. And in 2006, a broader restructuring of the entire program occurred. While MMA retains all of the M+C plan options in the MA program, it also creates a new option - a regional preferred provider organization (PPO), to be available to beneficiaries beginning in Currently, there are only local PPOs. The MMA also requires CMS to create between PPO regions under which MA organizations can offer Medicare Part A/B basic benefits, supplemental and/or drug benefits in various plans as regional PPOs. Lastly, Medical Savings Accounts (MSAs) plans have been made a permanent part of the program and have been converted from demonstration status. Risk Adjustment Methodology

Part C Bid and Review Process
By law, the Part C basic plan bid is the total revenue needed to offer original Medicare (Part A & Part B) benefits: to enrollees who live in a specific service area (one or more counties) who have a certain level of average risk expected by the MAO & assuming the plan will charge cost sharing equivalent to FFS The law establishes rules for determining plan benchmarks – the upper limit on what the gov’t will pay for each enrollee. The law requires CMS to compare the plan basic bid to the plan benchmark to determine whether the plan must charge an enrollee premium or can offer supplemental benefits at a reduced price. For MA plans with bids below benchmarks, 75% of the difference (“rebate”) must fund coverage of supplemental benefits, e.g. reduction in FFS-level cost sharing and/or coverage of additional non-Medicare covered benefits. Slide 12 - The MMA requires organizations intending to offer MA plans with original Medicare Parts A and B benefits and/or Part D benefits to submit bids in early June of each year for their basic, supplemental and/or Part D benefit packages. Each bid must reflect a plan’s actual revenue requirements, or in other words the cost of providing the benefits offered in its proposed benefit packages. We are in the process of reviewing these bid submissions now. Risk Adjustment Methodology

Part C Bid and Review Process (Continued)
CMS reviews each bid for actuarial soundness Ensures that each bid reflects costs of providing proposed benefit package Risk adjustment used to standardize bids to determine what CMS’ payment rate will be to the plan for each enrollee. Risk Adjustment allows direct comparison of bids based on populations with different health status and other characteristics Risk adjustment is also used to pay more accurately by adjusting the monthly capitated bid-based payments for enrollee health status Slide 13 – Organizations intending to offer MA plans and/or drug benefits will have to submit bids for their basic, and if applicable, supplemental benefit packages. Benchmarks were created for local and/or regional plans for bid-benchmark comparisons. Benchmarks for local plans were based on the county capitation rate while benchmarks for regional plans were based on a combination of a weighted average of all relevant county capitation rates in the region blended with the weighted average of plan bids in the region. Monthly capitated payments were made based on each plan’s bid risk adjusted for health status minus the beneficiary premium amount. ** Supplemental benefits are services that are not covered by Medicare that are paid for by premiums, cost sharing and rebates. ** ** The MMA mandates MA organizations and PDPs to provide basic prescription drug coverage as one of their benefit plans. This is not a payment issue per se here but a statement that MA plans must have a plan in an area that provides drug coverage. If they do, they can have a plan without prescription coverage. ** Risk Adjustment Methodology

What is Risk Adjustment?
A method used to adjust bidding and payment based on the health status and demographic characteristics of an enrollee Prospective - Uses diagnosis as a measure of health status and demographic information Pay appropriate and accurate payments for subpopulations with significant cost differences Purpose: to pay plans accurately for the risk of the beneficiaries they enroll Access, quality, protect beneficiaries, reduce adverse selection, etc. Risk adjustment is a method used to adjust payment based on the health status and demographic characteristics of an enrollee and is currently used to adjust payments to Medicare Advantage Organizations. Risk adjustment is typically built (that is calibrated) on FFS data sets and then applied to other populations. It allows for comparison of a beneficiary to the average Medicare beneficiary. The major function of risk adjustment is to adjust payments for the characteristics of a plan’s enrollees. Risk Adjustment Methodology

CMS Risk Adjustment Models
Currently CMS implements risk adjustment in 3 key payment areas: The Part C CMS-HCC Model for aged and disabled beneficiaries Community, Long Term Institutional Models, New Enrollee The CMS-HCC ESRD Model for beneficiaries with ESRD Dialysis, Transplant, and Post-Transplant The RxHCC Part D drug model for all beneficiaries enrolled in Part D Base Model + Low Income or Long Term Institutional Multipliers Risk scores produced by each model are distinct based on predicted expenditures for that payment method (Part C, ESRD, Part D) Risk scores are based on diagnoses from either MA plans or Medicare FFS Models share a common basic structure As I discuss below,the basic structure underlying all of the CMS risk adjustment models (CMS-HCC, ESRD, and Part D) is the same although each model differs in some ways. I will note significant differences in the models as we proceed. Currently CMS has three risk adjustment models: The CMS-HCC model for Part A/B benefits. This model is calibrated separately for beneficiaries who reside in the community and for those who reside in nursing homes for an extended period (i.e. – the long term institutionalized). The ESRD model is calibrated separately for beneficiaries on dialysis, in transplant status, and for those who have had a transplant. The Part D drug model is calibrated on the Medicare FFS population, and has multipliers for low incomes subsidy eligible individuals and the long term institutionalized to take into account the additional costs of these populations. Later, I will discuss the new Part D model in some detail. Risk Adjustment Methodology

Calibration Refers to the base years of data used in the development of the model Uses diagnosis in a given year to predict Medicare expenditures in the following year Recalibrated every 2 years Appropriate relative weights for each HCC Reflect more recent coding and expenditure patterns Risk Adjustment Methodology

Calibration (continued)
Regression model - weighted - Medicare liability 5% sample – 1.5 million benes – Fee-For-Service Result of the model are estimated coefficients Each coefficient shows the incremental predicted expenditures associated with assigned demographic and disease components Coefficients divided by overall mean to get relative factors Risk scores Assigned to each individual Developed using the relative factors Sum of demographic and disease factors Normalization – corrects for population and coding changes between the data years used in the calibration of the model and the payment year Risk Adjustment Methodology

CMS Risk Adjustment and Frailty Implementation Timeline
Year Implementation Timeline 2004 Part C risk adjustment using new CMS-HCC model Frailty adjuster for enrollees of PACE and certain demonstrations under Part C 2005 End-Stage Renal Disease (ESRD) model for ESRD enrollees 2006 Part D risk adjustment model (RxHCC) for the new Medicare prescription drug benefit (PDP) 2007 Updated CMS-HCC model Normalization of Part C and Post Graft ESRD risk scores 2008 Updates to ESRD payment models New/updated normalization factors for all models (Part C, ESRD, and Part D) Begin frailty payment transition for PACE Begin frailty payment phase-out for certain demonstration organizations Risk Adjustment Methodology

CMS Risk Adjustment and Frailty Implementation Timeline
Year Implementation Timeline 2009 Updated CMS-HCC model Updated normalization factors for all models (Part C, ESRD, and Part D) Updated Frailty adjuster for enrollees of PACE and certain demonstrations under Part C 2010 2011 Updated Part D Risk Adjustment Model Updated CMS-HCC Model Updated ESRD Model Risk Adjustment Methodology

Common Characteristics of the Risk Adjustment Models
Prospective: diagnoses from base year used to predict payments for following year Demographic factors Disease factors Disease groups contain clinically related diagnoses with similar cost implications Hierarchy logic is imposed on certain related disease groups Diagnosis sources are inpatient and outpatient hospitals, and physician settings New enrollee model components Site neutral Additive factors Slide 18 - The next set of slides turn to the characteristics of the CMS-HCC Model - which is used to risk adjust MA organization payments for providing medical services. Most of the characteristics of this model are common to all the CMS risk adjustment models. The model categorizes diagnosis codes into disease groups using ICD-9 codes which are clinically related with similar cost implications - for example, diabetes, cancer or congestive heart failure. These groupings of diagnoses are then used to predict Medicare expenditures for the following year. Certain populations have different cost patterns – which leads to different predictions of future expenditures. Individuals in the community versus individuals in a long term institutional setting with the same health problem are two population groups that have two different cost patterns. As a result, the model was therefore improved upon by creating two models, one for individuals in the community and the other for institutionalized individuals. Risk Adjustment Methodology

Demographic Factors in Risk Adjustment
Age Sex Disabled Status Applied to community residents Factors for disabled <65 years-old Factors for disabled and Medicaid Original Reason for Entitlement Factors based on age and sex > 65 years old and originally entitled to Medicare due to disability Medicaid Status (for Part C) LTI and LIS multipliers (for Part D) Slide 21 – Disabled status is only applied to community residents. Disabled status is defined as under 65 years of age - those over 65 years are considered “aged”. There are separate factors for the “disabled” Medicaid versus “aged” Medicaid beneficiaries in the community model. Both Medicaid status information and disabled status information are accessed from the Medicare Beneficiary Database or MBD. - “Original reason for entitlement” is the last demographic factor addressed here. It applies only to individuals who are 65 years old or over. And it accounts for the fact that enrollees were originally entitled to Medicare due to disability. Risk Adjustment Methodology

Disease Groups/ HCCs 13,000+ ICD-9 codes Grouped together based on diagnosis that are clinically related into 804 Diagnosis Groups –DXGs Each DXG relates to a well specified medical condition ex. Diabetes, congestive heart failure. DXGs are further aggregated into 189 Condition Categories CCs CCs are clinically related and have similar Medicare cost implications Known as disease category or Condition Category (CC) Hierarchy logic is imposed on certain disease groups so model is known as the Hierarchical Condition Category (HCC) Model Risk Adjustment Methodology

Disease Groups/ HCCs(continued)
Most body systems covered by diseases in model Each disease group has an associated coefficient Model heavily influenced by costs associated with chronic diseases Major Medicare costs are captured Slide 22 – I am now going to talk about disease groups in the model - which we also refer to as HCCs. The disease groups cover major diseases and can be broadly organized into body systems. An individual is assigned an HCC based on diagnoses that are assigned in different settings. A select set of diagnoses are associated with the assignment of the 70 distinct HCCs which make up both the community and institutional models. Each HCC has an associated coefficient which represents the relative Medicare cost of treating that particular disease group. And because the model is additive - each HCC assigned to an individual contributes more to the risk adjustment payment for a beneficiary. As a last point, the HCCs represent chronic diseases and as a result major Medicare costs are captured by the model. Risk Adjustment Methodology

Disease Hierarchies Address multiple levels of severity for a disease with varying levels of associated costs Payment based on most severe manifestation of disease when less severe manifestation also present Purposes: Diagnoses are clinically related and ranked by cost Takes into account the costs of lower cost diseases reducing need for coding proliferation Disease within the hierarchy are not additive Hierarchies are applied prior to interactions Slide 23 – Disease hierarchies address the fact that a disease can have different levels of severity with varying levels of associated costs. Hierarchies are made up of multiple HCCs where diagnoses are clinically related and ranked by cost. In the case of a disease hierarchy – payment is based only the most severe and costly manifestation of the disease. So – unlike other HCCs which are not in a hierarchy - in some cases an additional diagnosis will not trigger an additional payment increment because a more severe diagnosis supercedes a less serious one. The model was designed this way because the more severe manifestations of a disease process principally define the impact of that disease on the cost to the Medicare program. Hierarchies also takes into account the costs of lower cost diseases reducing the need for coding proliferation. So you may want to note that within a hierarchy, diagnoses or unique HCCs are NOT additive. Risk Adjustment Methodology

Disease Interactions Model captures the combined effect of multiple unrelated conditions Ex. Combined effect of two chronic disease is greater than the sum of their individual effects Additive 6 high cost chronic conditions There are 6 disease interactions in the Part C model 4 two-way, 2 three-way Risk Adjustment Methodology

Disease Interactions (example)
Two-disease Interaction for Community-Based Enrollee Factor 1: Diabetes Mellitus (DM), HCC15 = 0.608 Factor 2: Congestive Heart Failure (CHF), HCC80 = 0.395 Factor 3: Interaction: DM*CHF = 0.204 Risk Score = (demographic) In this case, the enrollee receives an additional interaction instead of only two factors for HCC15 and HCC80. Risk Adjustment Methodology

New Enrollee Factors Newly eligible disabled or age-in with less than 12 months of Medicare Part B entitlement during data collection period Payments are made retroactively for Medicaid eligibility after enrollment is verified Risk Adjustment Methodology

Part C – CMS-HCC Model Distinctions
Separate community and institutional models for different treatment costs between community and institutional residents Recalibrated: data 70 disease categories for community and long term institutional residents Medicaid Status Defined as one month of Medicaid eligibility during data collection period New enrollees use concurrent Medicaid Slide 19 - Although different these two versions of the CMS-HCC model both have 70 distinct disease groups or categories. The CMS-HCC model is site neutral which means it does not distinguish payments based on site of care – or, in other words, CHF will be given the same weight whether from an inpatient or an ambulatory care setting. Diagnostic data for the model may come from an inpatient or outpatient hospital setting or a physician setting. The model is additive which means that payment is increased for each unique disease group that is recognized. Risk Adjustment Methodology

Part C – Frailty Adjuster
Predicts Medicare expenditures for the functionally impaired (frail) that are not explained by CMS-HCC model Applies only to PACE organizations and certain demonstrations Based on relative frailty of organization in terms of number of functional limitations Functional limitations measured by activities of daily living (ADLs) – from survey results Slide 20 – In addition to disease groups, the CMS-HCC model also uses demographic factors to risk adjust. The five demographic factors are: age, sex, Medicaid status, disability and original reason for Medicare entitlement. There are a couple points to remember about these different factors that should be kept in mind when calculating risk adjusted payments: - Age is based on the enrollee’s age as of February 1st of the payment year. Medicaid as demographic factor: is only applied to the community model, and not to the institutional model. it is assigned when an individual has one or more months of Medicaid eligibility during the data collection period. the exception to this Medicaid assignment is for new enrollees, where their Medicaid status is defined as concurrent. Risk Adjustment Methodology

Part C – Frailty Adjuster (continued)
Contract-level frailty score calculated based on ADLs of non-ESRD community residents age 55 or older Contract-level frailty score added the risk score of community residing non-ESRD beneficiaries > 55 years of age during payment Risk + frailty account for variation in health status for frail elderly Risk Adjustment Methodology

Current and Revised Frailty Factors
ADL Limitations 2008 Frailty Factors 2009 Frailty Factors Non- Medicaid -0.089 -0.183 -0.093 -0.18 1-2 +0.110 +0.024 +0.112 +0.035 3-4 +0.200 +0.132 +0.201 +0.155 5-6 +0.377 +0.188 +0.381 +0.2 Risk Adjustment Methodology

Part C ESRD Models Used for ESRD enrollees in MA organizations and demonstrations Address unique cost considerations of ESRD population Implemented in 2005 at 100% risk adjustment Recalibrated for 2008 using data Slide 30 – ESRD is another area where we are working towards improving the accuracy of risk adjusted payments. Starting in January of MA enrollees with ESRD were risk adjusted using a new version of the CMS-HCC model. Risk Adjustment Methodology

Part C ESRD Models (continued)
Based on treatment costs for ESRD enrollees over time. Three subparts in model: Dialysis Recalibrated CMS-HCC model without kidney disease diagnoses Contains 67 disease groups Transplant Higher payment amount for 3 months Reflects higher costs during and after transplant Functioning Graft Regular CMS-HCC model used Includes factor to account for immunosuppressive drugs and added intensity of care Slide 32 - The three parts of the ESRD model reflect changes in treatment costs for an ESRD enrollee. These three parts or stages can be characterized as dialysis, transplant and functioning graft. Payment for enrollees in dialysis is based on an ESRD state rate book and a recalibrated version of the CMS-HCC model without kidney disease diagnoses. The model is calibrated only on ESRD beneficiaries. The month a transplant for an ESRD enrollee occurs, the plan is paid a very high flat rate for that month and then a different flat rate for 2 more months. There is also a separate special rate for ESRD beneficiaries who receive a simultaneous kidney and pancreas transplant. After the third month, the beneficiary moves into functioning graft status and payment will start after the 3 “transplant” months and continue unless dialysis resumes or the beneficiary receives another transplant. Risk adjusted payment is based on a modified version of the regular CMS-HCC model. There is an additional interaction “graft factor” that applies for months 4-9 to account for the additional costs of immunosuppressive drugs and the added intensity of care and then continues at a lower rate for until the beneficiaries status changes. Risk Adjustment Methodology

Part C ESRD Models (continued)
Dialysis Model – HCCs with different coefficients Multiplied by statewide ESRD ratebook (updated on transition blend beginning 2008) Transplant Model – Costs for transplant month + next 2 months National relative factor created by dividing monthly transplant cost by national average costs for dialysis Highest factor is for month 1 where most transplant costs occur Payment for 3-months multiplied by statewide dialysis ratebook Slide 33 – The dialysis model is the same as the HCC model – with the exception of the exclusion of kidney disease diagnoses - which fall into HCC128 and HCC132. So there are only 68 HCC categories in this model. The model is only calibrated on dialysis patients so the model more accurately captures the average costs of these patients. CMS will make transplant related payments over three months to cover the high costs of the transplant and the payments for immediate services over the next 2 months. The actual amount determined for the this payment amount is based on the average FFS cost experience for these same 3 months. This amount is adjusted geographically by using a relative national factor and the statewide dialysis ratebook. Lastly, under the final functioning graft status a slightly modified HCC model is used – where kidney transplant status, dialysis status and renal failure have been excluded. This means that these dollars go into the base and the enrollee receives an additional bump in payment for any other dollars associated with other HCCs experienced. There is an additional bump up associated with the need to provide immunosuppressive drugs and added intensity of services and there two coefficients in the model to represent these additional costs. Risk Adjustment Methodology

Part C Model Comparison of Coefficients
Metastatic Cancer and Acute Leukemia HCC 7 Diabetes with acute complications HCC 17 Major Depression HCC 55 Age-Sex Factor for 69 year old male Age-Sex Factor for 88 year old female 1.648 0.364 0.370 0.330 0.637 0.568 0.466 0.308 1.140 0.694 0.161 0.106 0.116 0.775 0.919 Community Institutional Dialysis Slide 35 - This slide provides a comparison of the coefficient values under the different Medical models. You’ll note in this chart of comparisons for different model coefficients that the dialysis model coefficients are not significantly higher than the other models’ coefficients even though ESRD enrollees have on average much higher costs. This is because the ESRD dialysis model has a higher base demographic factor (age/sex) which lowers the coefficients associated with diagnoses than does the CMS-HCC model. As we know, Medicare costs for ESRD beneficiaries are much higher than they are for the average Medicare beneficiary, but they are relatively uniform. What this means is that the Medicare costs for ESRD beneficiaries do not vary as much as the Medicare costs for Medicare beneficiaries in general. Therefore, the diseases do not explain as much of the cost variation among ESRD beneficiaries. Ultimately, these costs are retained in the age/sex coefficient in the ESRD dialysis model rather than being seen in the disease coefficients. Risk Adjustment Methodology

Part D Risk Adjustment (RxHCC)
Designed to predict plan liability for prescription drugs under the Medicare drug benefit Different diseases predict drug costs than Part A/B costs Explanatory power of the RxHCC model is R2=0.25 for plan liability, on par with other drug models and is higher than similar Part A/B models because drug costs are more stable Dependent variable included a mix of retail and mail order prescriptions, included costs of drugs not covered by Part D (e.g., benzodiazepines since total cost in Part D would have to include at least some covered drug to compensate for non-covered). The drug risk adjustment model (RxHCC) shares most of the characteristics of the CMS-HCC model (prospective, additive, hierarchical, demographic new enrollee model). The key differences: RxHCC model designed to predict plan liability for prescription drugs under the Medicare drug benefit rather than Medicare Part A/B costs. Different diseases predict drug costs than Part A/B costs. Incremental costs of low income (LI) and long term institutional (LTI) beneficiaries are multipliers to the base RxHCC model score in contrast to the medical model where they are incorporated directly into the base model. Risk Adjustment Methodology

Part D Risk Adjustment (continued)
Average projected plan liability was ≈ $993 in 2006 Model includes 113 coefficients 3 age and disease interactions 2 sex-age-originally disabled status interactions Hierarchies cover 11 conditions The development of the RxHCC model iterative process--disease groups disassembled into smaller subgroups, then reassembled to allow empirical estimation of costs and incorporate clinical judgment. Explanatory power of the RxHCC model is on par with other drug models (R2=.25 for plan liability); is higher than similar Part A/B models because drug costs are more stable. Normalization was done on the entire Medicare FFS population. Average projected plan liability ≈ $993. Risk Adjustment Methodology

Low Income and Long Term Institutional
The Part D model includes incremental factors for beneficiaries who are low- income (LI) subsidy eligible or long term institutional (LTI) The multipliers are applied to the base Part D risk score predicted by the model LI and LTI are hierarchical: If a beneficiary is LTI they can not also receive the LI factor The Part D model includes incremental factors for beneficiaries who are low- income subsidy eligible (LIS) or long term institutional (LTI). The factors are multipliers that are applied to the basic Part D risk adjustment score predicted by the model. For payment, the low income and long term institutional multipliers are mutually exclusive. In reality, both will often apply to the same beneficiary. When the LTI and Low Income multipliers are applicable to the same beneficiary in the same month then only LTI multiplier is used. I present an example of how this works later in the presentation. Risk Adjustment Methodology

Low Income and Long Term Institutional Multipliers
Aged > 65 Disabled < 65 Group 1 – Full subsidy eligible Group 2 – Partial subsidy eligible (15%) 1.08 1.21 1.05 Long Term Institutional status is defined as residing in a nursing home for more than 90 days prior to the payment month. (This same definition is used for the Part A/B and ESRD models.) The low income multiplier has two levels: group 1 – full low-income subsidy eligibles and group 2 - partial low-income subsidy eligibles. Group 1 is defined as having income less than 135% of the Federal Poverty Level (FPL) and resources not exceeding three times the Supplemental Security Income (SSI) resource limit. Group 2 includes all partial low- income subsidy eligible individuals. Risk Adjustment Methodology

Part D Risk Adjuster Example
Liability Model Payment Relative Coded Characteristic Increment Factor Female, age 76 $ Diabetes, w. complications Diabetes, uncomplicated High cholesterol Congestive Heart Failure Osteoporosis Total Annual Pred. Spending $1, For implementation, predicted dollars are divided by national mean (~ $993) to create relative factors that are multiplied by the bid To give an example of how an individual’s risk score is calculated, take a 76 year old female with multiple conditions. As one can see, the factors are additive with the exception of uncomplicated diabetes. Uncomplicated diabetes is not counted because the beneficiary is also coded with diabetes with complications with is a more severe manifestation of diabetes. This is an example of a payment hierarchy. Another interesting feature of this example is that one can see how normalization is done by dividing the dollar coefficient from the model (the column labeled payment increment in dollars) by the mean FFS predicted expenditure ($993) to create the relative factors. Note: there is some rounding in the example. Risk Adjustment Methodology

Risk Adjustment Example (continued)
Step 1 – derive base risk score – 1.22 Step 2 – multiply by either LI or LTI factor if they apply for the payment month Full subsidy eligible (group 1): risk score = base risk score (1.22 * 1.08) = 1.318 Long term institutional (disabled): risk score = base risk score (1.22 * 1.21) = 1.476 Apply normalization factor Continuing this example, I show what happens in the case where the beneficiary is low income subsidy eligible and/or long term institutionalized. The important point here is that a beneficiary cannot receive both the low income and the long term institutional multipliers in the same month and that long term institutional status takes precedence when both are applicable. Risk Adjustment Methodology

Simplified Example Illustrating Use of Risk Adjustment in Bidding
Plan derived costs for benefit package = $1,000 Plan estimated risk score for population = 1.25 Standardized plan bid = $800 ($1,000/1.25) Plan actual risk score based on enrollment = 1.5 Risk adjusted plan payment = standardized plan bid * actual risk score = $1,200 ($800*1.5) I am now going to move on to bidding and a simplified example of the use of risk adjustment in the bidding process. In this example we start with plan derived costs for the benefit package of $1,000 and an estimated risk score for this particular plan’s enrollment of 1.25. In the example, the standardized plan bid will be $800, this represents the costs of this plan’s benefit package for a 1.0 beneficiary. To calculate payment, this standardized bid is then multiplied by an enrollee’s actual risk score. The basic Part D payment formula is the standardized bid * enrollee’s risk score – plan’s enrollee premium. This example provides a conceptual basis for understanding the use of risk adjustment in the capitation formulas for the direct subsidy under Part D and the 1.0 or standardized bid under Part C. Risk Adjustment Methodology

Part D – Direct Subsidy Payments
Monthly direct subsidy made at the individual level Direct subsidy = (Standardized Bid * Individual Risk Score) - Beneficiary Basic Premium Sum for all beneficiaries enrolled equals monthly organizational payment Monthly direct subsidy made at the individual level. Direct subsidy = (Standardized Bid x Individual Risk score) – Beneficiary Basic Premium. Sum for all beneficiaries enrolled equals monthly organizational payment. Risk Adjustment Methodology

2009 Parts C and D Normalization Factors
Model Normalization Factor CMS-HCC Community/Institutional 1.030 ESRD Dialysis/Transplant 1.019 ESRD Functioning Graft 1.058 RxHCC 1.085 Risk Adjustment Methodology

Risk Adjustment Research and Development Part C
Clinical Revision of CMS-HCC model Improve Prediction for High Cost Beneficiaries Consider Incorporating Prescription Drug Data in Part C Risk Adjuster Concurrent Model Risk Adjustment Methodology

Risk Adjustment Research and Development Part C
Coding Intensity Study Collection of Encounter Data Transitioning from ICD 9 to ICD 10 codes Risk Adjustment Methodology

Risk Adjustment Research and Development Part D
New model will be based on actual experience under the Part D program Similar Methodology to current Part C Model Clinically based Prospective – we will use 2007 predictors and 2008 program drug cost data to develop model We will consider using demographic, diagnostic, and drug data to enhance the predictive power of the model Implemented 2011 Risk Adjustment Methodology

Performance of RA Models
Measured by comparing predicted payments to actual costs Predictive Ratio = ( Predicted / Actual ) Predictive Ratios separately for varying risk levels - deciles Part D model is performing very well across all levels of risk for both Regular and Low Income Subsidy beneficiaries Risk Adjustment Methodology

Conclusions Consistency CMS approach uses risk adjustment for all types of plans Flexibility Four pronged approach (HCC, frailty, ESRD, RxHCC) provides flexibility to ensure accurate payments to MA plans and PDPs; provides ability to develop other models as needed Accuracy Improves our ability to pay correctly for both high and low cost persons Slide 46 – So in conclusion – conceptually there are three words that can generally be used to describe our approach to risk adjusting payments. First, consistency – where risk adjustment is applied to all types of plans with different characteristics. Second, flexibility – The approach addresses HCCs, frailty and ESRD and allows for flexibility with regard to ensuring accurate payment to plans and also, provides for the development of other models – which may address for example – drugs. And lastly, accuracy – we continually aim to improve our ability to pay correctly for the entire population which includes both high and low cost individuals. Risk Adjustment Methodology

Information on Risk Adjustment Models and Risk Scores
The updated CMS-HCC model is available at The Part D risk adjustment model is available at Comprehensive list of required ICD-9 Codes for is available at Information on the Part D risk adjustment model and county level Part D risk adjustments score for the FFS population is available on our website. Part C FFS information is available on the CMS website. The 45 Day Advance Notice of Methodological Change for Medicare Advantage Payment Rates and the Final Payment Notices are particularly useful sources of information on the Part C, ESRD, and Part D models and their implementation. The 2004 and 2005 notices have material on the CMS-HCC and ESRD models, while the 2006 notice published the final Part D model. Risk Adjustment Methodology

Contact Sean Creighton Director - Division of Risk Adjustment & Payment Policy Steve Calfo Risk Adjustment Methodology

Medicare Risk Adjustment

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Medicare Risk Adjustment

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