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To Adjust or Not to Adjust: Examining the Role of Risk Adjustment in Population Health

DATE: March 2, 2015

For 30 years, Medicare’s hospital Inpatient Prospective Payment System has used Diagnosis Related Groups (DRGs) to account—or risk adjust—for the differences in the cost of care for clinically complex patients. By creating a direct link between reimbursement and outcomes, pay-for-performance adds a new layer to the issue of risk adjustment.

Myriad quality metrics are currently used in healthcare—for comparing providers to each other, for informing consumers and clinical teams, and for establishing payment bonuses or penalties to incentivize improvement. Depending upon the purpose, quality metrics may also be adjusted for clinical risk factors, such as severity of illness and comorbidities, recognizing that a patient who is sicker, with multiple conditions and comorbidities, has a higher likelihood of a poor outcome. Risk adjustment is particularly important when the metric is used to compare providers or establish payment penalties.

However, risk adjustment for reimbursement and performance metrics does not account for socio-economic status (SES) risks such as poverty level, language barriers, and access to social supports. These factors are critically important to improving outcomes in a population health world where providers are held accountable for managing the health of individuals rather than just treating illness and disease.

Risk Adjustment in Population Health

Population health management focuses on patient-centered care for a specified group (or population). Pay-for-performance and population health payment models are designed to incentivize changes in care delivery, with a focus on wellness, while keeping costs in check. Under a successful population health approach, providers are held accountable for driving better outcomes and are paid appropriately to reflect the resources required to deliver on that accountability—whether that payment is a retrospective fee for services rendered, a risk-based capitation amount, or something in between.

Whereas risk adjustment under a fee-for-service reimbursement system is all about the patients a provider knows and has treated, in a population health approach, providers manage care for the full range of healthcare services—from primary, preventive care to acute and post-acute care. In this environment, risk adjustment should be related to the characteristics of the populations (healthy and sick) being served rather than the clinical complexity and costs of caring for patients who require treatment.

When a provider takes on the risk of caring for a specified population, reimbursement must be appropriately adjusted to reflect the health disparities within the population and the costs associated with adequately addressing them. Concepts such as “hot-spotting” are used to identify groups in need of higher resource investment. There is a growing body of literature in favor of SES payment adjustments to adequately cover the costs of addressing disparities.

Where Should We Adjust for Risk and Why?

In a population health environment, some degree of risk adjustment for clinical severity will continue to be necessary, particularly for illnesses or injuries that cannot be treated proactively. While we believe that reimbursement should be adjusted for SES, we would argue against an SES adjustment for outcomes. Here is why:

The existing encounter-based reimbursement system has three levels of risk adjustment:

  1. premiums paid to insurers are adjusted to reflect the risks of incurring higher costs for certain underlying clinical factors in the insured population;
  2. payments to providers are adjusted by DRGs, which reflect the relative resource requirements for different clinical complexities; and
  3. quality outcomes are adjusted to reflect the lesser or greater likelihood of poor outcomes, such as mortality or readmission, due to clinical factors.

There is no recognition anywhere in the current payment/measurement stream of the resources required to address SES factors or the impact those factors have on outcomes. One could argue that, because there is no payment recognition of SES factors, we must adjust the outcomes measures so that providers are not unduly penalized for disparities that are not addressed at the point of care.

As the delivery system moves toward population health and payment is redesigned, the issue becomes how an SES factor is incorporated—should both payment and outcomes be adjusted for SES?

Existing adjustments within premiums and payments would continue as highlighted in #1 and #2 above. However, if payments to providers also take into account population risk factors, including SES, and are not as directly tied to encounters, then the provider has the resources required for addressing SES as part of the care that is delivered to the population. It becomes the provider’s responsibility to mitigate differences in health outcomes caused by socio-economic disparities. In a truly successful population-based healthcare delivery model, the need for SES adjustments to quality outcomes measures should also be mitigated, if not eliminated. Providers are paid upfront to address SES and performance on outcome measures should reflect the impact of that funding.

How Does This Impact Hospitals and Healthcare Providers?

While there are many challenges ahead as the health system evolves to effective population health management, including the application of SES risk adjustment, hospitals and healthcare providers can prepare by examining data and approaches to care to determine how to achieve better outcomes for existing patients. Providers should look beyond existing patients to the full population and determine the resources needed for effective care management, particularly those that serve disadvantaged populations.

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