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Easing into risk adjustment, shared savings

Medicare Advantage has been using a risk adjustment payment formula since 2007, and now a similar approach is coming to insurance exchange markets.

The Department of Health and Human Services estimates that $45 billion in risk adjustment transfers will be needed between 2014 and 2017 for health plans in insurance exchange, to compensate for cost volatility from new members.

Like risk adjustment in Medicare Advantage, that's requiring a new level of collaboration between payers and providers -- and, coming as it is amid a push away from fee-for-service, it's potentially encouraging the adoption of some new reimbursement models.

The Medicare Advantage risk adjustment formula, based on hierarchical condition categories from ICD codes and demographic factors, should transition smoothly to the commercial market, said Dave Corrigan, informatics director at technology and consulting company Lumeris.

"Obviously the conditions that go into the model in the commercial population are going to be different, but the model is the same," Corrigan said.

Which isn't to say it won't be challenging. Medicare Advantage plans are already dealing with declining rates as the Centers for Medicare & Medicaid Services aims to bring the program into funding parity with fee-for-service, making many more of them focus on quality ratings and member satisfaction more than ever before.

And now, with risk adjustment coming to the commercial market, Corrigan said insurers and providers Lumeris is working with are putting collaborating more than ever, with some starting to ink shared savings and value-based payment deals.

"There's a level of engagement that's required with provider networks that a lot of big health plans historically haven't had," Corrigan said.

Providers, too, have a good deal of business riding on effective risk adjustment contracts with health plans. If the current policies and trends keep pace, Corrigan said, "More and more populations are going to be risk adjusted."

And that may or may not eventually translate into global capitated reimbursement models. In Medicaid at least, over the next five years CMS estimates that capitated payments could account for half of all spending.

A lot of the early value-based contracts Corrigan is seeing are starting out with "upside-only" shared savings.

"There would be premium incentives for providers and physicians to care about the comprehensiveness of their coding. Maybe you don't put them at global capitation yet," Corrigan said. "If they managed total cost under that premium, they're rewarded but not necessarily penalized. Usually there's a learning curve. There's kind of an evolutionary path they have to take."

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