Value-Based Care Foundations: Decoding Risk

Understanding Risk Adjustment in Value-Based Care Contracts

The shift from fee-for-service to value-based care (VBC) is reshaping the way healthcare is delivered, measured, and paid for. But for many providers, navigating the world of alternative payment models, quality benchmarks, and performance incentives can feel overwhelming. This is especially true when the rules seem to change with each new contract or program.

This blog series is designed to cut through the noise from the provider’s perspective. Whether you are participating in value-based arrangements for your Medicare (MSSP, MA), Medicaid (state MCOs), or commercial populations (ACOs), we will explain key concepts that directly affect your daily practice and your organization’s bottom line. Our focus will always be on what matters most to providers navigating value-based care arrangements.

We’re starting with a topic at the core of almost every value-based arrangement: risk adjustment. While it’s often thought of as a coding exercise, risk adjustment has profound implications for how patient care is funded.

Before we get too far, let’s define risk adjustment within this context. Risk adjustment is a statistical process used to level the playing field when comparing outcomes and costs across patient populations. It accounts for differences in patient complexity, so providers aren't unfairly penalized (or rewarded) simply because of the kinds of patients they see. There are different models and algorithms, but they all generally aim to describe a population’s risk from a financial perspective. Higher patient risk scores typically indicate a need for more care, resulting in greater assumed costs.

You might be thinking “I am in a value-based care arrangement, but our contracts aren’t subject to risk adjustments...”. The truth is that risk adjustments are often hidden in reimbursement calculations. Let’s look at some common arrangement types to outline some areas where risk adjustment algorithms might be hiding:

There’s a common trend here. Your payments are in some form based on historical benchmarks that get risk-adjusted. It is often said that no two value-based care contracts are the same; however, there are commonalities between them. Risk adjustments, specifically the cost adjustment calculation based on benchmarks, are a common trend. But what does this really mean? To best explain that, let’s look at some real numbers.

The Math

Let’s suppose that you’re an administrator at ABC Healthcare. At ABC, you’re participating in an MSSP. Last year, you had a roster of 5,000 patients, and CMS reported your health care expenditures were $12,000 per member per year.

So, let’s say you’re looking to close out your current year and you’re wondering how you’re going to do when the contract gets reconciled after the performance year. Let’s look at the same four values, but for the current year:

So, how did you do? Your population decreased slightly, your spending increased per capita, and your total overall spending is the same. Additionally, your average population risk dropped very slightly. It looks like you might be breaking even, right? Maybe, you’d predict a slight shift into the red because of risk adjustment, but how can we know for sure? Let’s do some rough math on the given figures above.

Did you predict an almost $4 million drop in the shared savings pool? The above math is roughly how the shared savings pool is calculated for an MSSP contract. Your contract’s calculations might differ slightly; for example, you might use member months instead of total members. Despite these slight differences, the risk adjustment calculation is going to be extremely similar in any other VBC contract. The terminology, input variables, and risk model might differ, but the core fundamentals remain the same.

Now, to complete the story, after the total shared savings pool is calculated, additional calculations are carried out to determine the actual shared savings payment (or loss) based on other factors, such as quality scores. Other arrangements & contracts will have their own specific next steps. We’ll explore those other calculations in future blogs. What we’ve focused on here is the commonalities that most arrangements share with respect to risk adjustments.

For now, here’s an illustrative tool that gives you some hands-on time with the interplay between these variables: