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

2. 2 History of Medicare Risk Adjustment n Demographics (AAPCC) l Doesnt explain cost variation l Favorable selection => higher program costs n Principal inpatient diagnoses (PIP-DCG model, 2000) l Incentive to admit l Penalizes plans that avoid admissions n Inpatient and ambulatory diagnoses (2004)

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

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

5. 5 CMS-HCC Model Performance n Percentage of cost variation explained l Age/Sex:0.8% l PIP-DCG:5.5% l CMS-HCC:10.0%

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

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

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

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

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

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

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

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

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

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

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

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

18. 18 Examples of HCCs Added to CMS-HCC Model Refined CMS-HCC Model HCCCommunityInstitutional Type I Diabetes Mellitus$1,557$1,435 Dementia/ Cerebral Degeneration$1,576 Hypertension$388$919

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

20. 20 Distribution of Annualized Medicare Expenditures, 2003 5% Community 100% Institutional Sample Size 1,380,978 1,238,842 Expenditures Mean $6,541 $11,252 95th Percentile $31,285 $47,390 90 th Percentile $17,682 $31,553 Median $1,445 $3,028 10 th Percentile $56 $538 5 th Percentile $0 $349

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

22. 22 Refined CMS-HCC Community and Institutional Models % of Cost Variation Explained# HCCs CMS-HCC Community9.8%70 Institutional6.0%69 Refined CMS-HCC Community11.0%101 Institutional8.9%90

23. 23 Refined CMS-HCC Model Performance – I n Predictive ratios, prior year expenditure quintiles Age/Sex CMS-HCC First2.651.20 Second1.821.19 Third1.311.09 Fourth0.910.99 Fifth0.460.90

24. 24 Refined CMS-HCC Model Performance – II n Predicted ratios by CMS-HCC predicted expenditure deciles Age/SexCMS-HCC First2.840.88 Second2.430.92 Third2.100.94 Fourth1.700.97 Fifth1.490.97 Sixth1.271.00 Seventh1.061.01 Eighth0.861.04 Ninth0.641.04 Tenth0.351.00

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