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What your CFO needs to know about risk adjustment

April 27, 2017

    If you've joined any one of our recent Health Care Advisory Board National meetings, you've heard exactly why figuring out your Medicare risk strategy is critical to value-based reimbursement. In addition to forming an effective Medicare risk strategy, CFOs of health care organizations with risk-based contracts need to be paying close attention to risk adjustment.

    In my experience leading our Clinovations consulting work that helps organizations more accurately document risk, I find most CFOs don't clearly understand the impact accurate risk adjustment has on their financial performance under risk-based payment models. But once the CFO truly understands the potentially far-reaching benefits of accurate risk documentation and capture, risk adjustment often becomes a top organizational priority.

    So, here's a primer for the CFO on risk adjustment.

    First, how does risk adjustment work?

    If your health system has Medicare risk-based contracts by participating in programs like the Medicare Shared Savings Program (MSSP), Medicare Advantage, NextGen ACO, Comprehensive Primary Care Plus, or more, CMS assigns a risk adjustment factor (RAF) score as a measure of your patient population's  clinical complexity.

    Upcoming webconference: How to pick the right Medicare ACO program

    The RAF score is determined by the volume of billed diagnoses that are associated with Hierarchical Condition Categories (HCCs). In other words, for populations where there are more HCCs indicated in the diagnosis history, CMS considers it to be more complex and assigns a higher RAF score. And with a higher RAF score comes higher reimbursement to account for the higher costs associated with a more complex population.

    For a more in-depth look at how risk adjustment works, my colleague John Kontor, MD, just penned a blog post that details the methodology applied to MSSP participants.

    Is there a financial impact when organizations improve the accuracy of their documentation?

    On average, an organization leaves 30% of the reimbursement value of at-risk populations on the table due to inaccurate HCC capture and documentation. I've worked with dozens of health systems across the country to help improve the accuracy of their HCC capture and documentation, and in most cases, financial leadership is unaware of the potential worth of these unclosed gaps. Even for provider organizations taking on minimal risk, there may be a significant financial impact.

    The best way I can stress the importance of being able to quantify what accurately capturing and documenting HCCs could mean financially for your organization is through our work with one of our large clients in the Midwest.

    In addition to MSSP participation through its ACO, this large health system participates in five Medicare Advantage plans, one of which is owned by the health system. With its medical group spread across three states serving thousands of patients each year, the leadership team was well aware of their problems with respect to accurate HCC documentation and capture. They had been working on their own solution in-house for three years before partnering with Clinovations.

    In just four months across the latter part of 2015, we managed to effectuate changes that resulted in far more accurate documentation which closed approximately 55% of their 2015 gap, accounting for $10 million in revenue received the following year in per member per month (PMPM) payments. Because patients with undocumented HCCs must be re-evaluated and re-documented each year, organizations start at zero in January. By March of 2016, these improved HCC accuracy efforts closed 37% of their 2016 gap for the entire calendar year.

    When we asked the leadership team what they would do differently if they could start over, here's what the medical director said:

    “Looking back on our efforts, I regret the money we left on the table for four years while we were navigating this process on our own through trial and error.”

    Understand how to improve risk agreement terms

    In addition to quantifying the opportunity of improving HCC capture and documentation, a CFO managing the financial health of an organization also needs to understand the critical role that accurate risk adjustment plays in negotiating the terms of risk agreements.

    Much of risk-adjusted reimbursement success comes from being able to take on more delegated risk, so knowing the monetary split between the provider and insurer is important. Arming the CFO with accurate risk capture and potential reimbursement data empowers the finance team to negotiate with the payer to take on more delegated risk at the right time.

    We saw this process work firsthand at a large regional provider we worked with in the Midwest. Having a large number of risk contracts with new risk contracts coming online in the next year, the finance team led contract discussions and negotiations to identify plans with the largest HCC capture gap and, therefore, the greatest opportunity for improvement. This approach led to a greater focus on the plans with the best revenue opportunity for the health system.

    Unfortunately, we've also seen this process not go well. A hospital in the Southeast went into risk contracts without an accurate understanding of performance or potential. As a result, they agreed to much longer contract terms than they should have. Leadership did not have a clear understanding of how they were doing on quality metrics, such as HEDIS measures and STAR ratings. Now, the organization is locked into an agreement that is demanding unrealistic and unattainable quality performance.

    Agreeing to terms of risk contracting arrangements without a clear understanding of how risk adjustment factors into the contracts is akin to playing poker without looking at the cards. But understanding risk adjustment is like looking at the cards and having the odds tables memorized to know exactly what's at risk for all parties involved.

    Today, most payers have better insight than most health system finance executives into what's really at stake in risk contracts. But as health systems sponsor more and more plans, financial leadership needs to be even more involved to ensure these plans' financial viability.

    CFOs and their teams cannot afford to be flying blindly on how HCCs and accurate risk capture impact success under risk.

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