The Truth Behind the Risk Adjustment Overhaul and How It Affects Your Insurance Needs


Medicare Advantage plans are starting to see their risk adjustment payments cut in the wake of the CMS overhauls.  The plans that treat the sickest beneficiaries – those with high-cost claims – have recently seen their risk adjustment payments reduced, creating a financial incentive for them to offer fewer generous benefits to attract healthier enrolees.  In order to attract more people who are healthy and less expensive than those they’re currently serving, insurers may have an incentive to drop coverage altogether from some beneficiaries so they can reduce costs by avoiding paying for expensive care.

How Risk Adjustment Overhaul Affects Your Insurance Needs

CMS is considering two options it says will boost payments and reduce the need for plans to “cherry-pick” healthier enrolees.

Medicare Advantage plans are being forced to cut back on the benefits they offer or risk losing money.

Medicare Advantage plans are increasingly realizing that their clients want lower premiums, higher deductibles, and fewer generous benefits than in the past.  CMS is proposing two options that would boost payments and reduce the need for plans to “cherry-pick” healthier enrolees.

  • The first option would increase payments based on how much a plan costs relative to Medicaid’s average (or median) patient cost per day of care.
  • The second option would require all Medicare Advantage HMOs with at least one high-risk member to see an annual increase in their risk adjustment payment rate equal to 1% of their total premiums earned during the previous year – a 50% increase from current levels!

While insurers say the changes will cause premiums of riskier members to increase and premiums of healthier people to decrease, CMS compares its overhauls with the status quo.

The first, which CMS calls a “risk adjustment overhaul,” involves using a new method of computing payments based on health status, risk scores, and other factors.  In this scenario, insurers who enrol higher-risk patients would see their costs go down while plans with healthier members would be paid more by CMS — thus reducing their incentive to cherry-pick healthy enrolees.

The second option uses what’s called an “aggregate risk index(ARI).  This would calculate how much money each plan needs based on its total membership population using information like age and gender demographics, as well as individual diagnoses or procedures performed over time rather than just one snapshot in time like under current law does now.

Insurers are upset with CMS rebalancing how risk-adjustment payments are made.

In a nutshell, CMS is overhauling the risk adjustment program in Medicare Advantage plans.

This is an update of a previous report on the risk adjustment program published in June 2014. The original report, titled: “Medicare Advantage Risk Adjustment Program: Addressing Inequities and Improving Transparency“, was prepared by the Kaiser Family Foundation’s Health Care Innovation Project (HCIP).  It examined how much money insurers are receiving from taxpayers under this multi-billion-dollar program and made recommendations for improving its effectiveness as well as increasing transparency about how it works.

The risk adjustment plan is an important part of the Affordable Care Act.  The goal of this plan is to make sure that insurers are not penalized for taking on high-risk patients.  This system has been criticized for not being fair because it doesn’t take into account the different needs and costs in each state.  This can lead to some states paying more than others, which could cause some insurers to leave the market.


The Medicare Advantage program has long been in the crosshairs of insurers, and it seems that the risk adjustment overhauls are just another reason for those companies to be worried about what’s coming next.  The lawmakers behind these changes have made it clear that they are not interested in hearing any arguments from insurers who might want to preserve certain aspects of their business model.  And with an increasingly fragile budget outlook, it’s hard to see how this kind of behaviour might not create a great deal of uncertainty for the entire industry as a whole – especially if there are further rounds of cuts coming down the road.

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Danielle Ezra

Executive – Social Media Marketing

V-Etico Services LLC

Phone: 1 (307) 368-8003