A Risk Adjustment Model for Workers’ Compensation Claims
Part 1: Background and Motivation
Although Risk Adjustment models have been used in various states within Medicaid and Medicare[1] since the 1990s, they regained national spotlight after 2014, with the introduction of the Affordable Care Act (ACA). Section 1343 of the ACA mandates commercial Risk Adjustment as a permanent program for all non-grandfathered plans in the individual and small group market[2]. Several countries, including the Netherlands, Switzerland, Germany, Ireland, Australia, and South Africa, have introduced similar adjustment mechanisms as part of their regulated private health insurance markets.
In this first installment in a series of posts about the development of a Risk Adjustment model for Workers’ Compensation claims, we will broadly present some background information about Risk Adjustment and its growing importance in the transition to Value-Based Care, as well as our slightly different objective in developing this new Risk Adjustment model.
Background
Individuals purchase health insurance against the risk of incurring medical expenses; insurance in general is expected to pay for unexpected, random adverse events, such as accidents, injuries, and the ensuing medical bills. Those adverse events are the “risk” that insurers manage. However, for chronic conditions like diabetes or cystic fibrosis, actuaries know that there might be a lifetime of extra expenses. This is where Risk Adjustment comes into play. According to Healthcare.gov, Risk Adjustment is “a statistical process that takes into account the underlying health status and health spending of the enrollees in an insurance plan when looking at their health care outcomes and costs.”[3]
Essentially, Risk Adjustment provides financial protection for insurers with higher-risk patients, by making payments to health insurance issuers that disproportionately attract these higher-risk populations. Funds are transferred from plans with relatively lower risk enrollees to plans with relatively higher risk enrollees, so as to protect against adverse selection, and thereby ensure that no plan is carrying an unreasonable financial burden.
Thus, Risk Adjustment is a stabilization program designed to spread the financial risk that insurers assume for their enrolled populations. It is designed to encourage insurers to offer a variety of plans with stable premiums[4]. According to the U.S. Centers for Medicare and Medicaid Services, successful risk adjustment allows a plan that enrolls a higher proportion of high-risk enrollees to charge the same average premium, ceteris paribus, as a plan that enrolls a higher proportion of lower-risk enrollees, shifting the focus of plan competition to plan benefits, quality, efficiency, and value[5], [6].
As we mentioned earlier, Risk Adjustment is an inherently statistical process. The U.S. Department of Health and Human Services (HHS) Risk Adjustment model predicts expenditures using only enrollees’ age, gender, and diagnoses. A diagnosis is a key clinical factor that drives medical treatment decisions and costs, Conceptually, it is distinct from, and neutral to, treatment or utilization. The heart of the Risk Adjustment is the clinical classification system that organizes the thousands of International Classification of Diseases (ICD) diagnosis codes into a coherent system of diagnostic categories, or HCCs (Hierarchical Condition Categories), such as “Diabetes”, “Cardiovascular Conditions”, “Kidney Disease”, “Cancer”, etc.[7]
When a plan enrollee visits the doctor, any clinical diagnoses the doctor makes will be recorded as ICD codes in the enrollee’s medical record and insurance claims. These codes, which represent the enrollee’s health conditions, are aggregated and mapped to HCCs. The HCCs, in turn, are aggregated among all of the insurer’s enrollees and used to determine the insurer’s overall risk. This risk is measured against all other competitors in a given marketplace.
It is important to note that there are several model methodologies in use, depending on the focus market (Medicaid, Medicare, etc.). The fundamental differences lie in the method of aggregating diagnostic codes into categories, but all perform similarly in terms of predictive accuracy.
Workers’ Compensation: Motivation for the Development of a Risk Adjustment Model
We now bring our focus on Risk Adjustment to the area of Workers’ Compensation. By definition, Workers’ Compensation is a publicly-sponsored form of insurance that provides wage replacement and medical benefits to employees injured in the course of employment. By agreeing to receive Workers’ Compensation, workers are also agreeing to give up their right to sue their employer for negligence. In the United States, Workers’ Compensation policy is usually handled by individual states, and the lack of federal standards has resulted in deeply variant policies for the same kinds of injuries in different parts of the country.[8]
A Workers’ Compensation claim is unique when compared to healthcare services not related to the workplace, since it encompasses the entire history of a workplace injury case: all encounters and procedures related to the injury are included within a single claim. These can include, but are not limited to, physical therapy, surgery, and various specialist visits.
In general, a primary care provider is assigned as the “treating provider” to each Workers’ Compensation claim. This provider manages the overall treatment plan, makes referrals to specialists as necessary, and works with the employer on a return-to-work plan as soon as it is safe to do so.[9]
Similarly to the broad distribution of high-risk and low-risk healthcare plans we described before, such a distinction can be made among Workers’ Compensation claims treating providers: some providers regularly get assigned as treating providers for complex, high-utilization, and high-cost Workers’ Compensation claims that include several encounters with specialists, as well as physical therapy, and possibly one or more surgeries; others are treating providers for simpler, shorter, and lower-utilization, lower-risk claims. Therefore, we can develop a Risk Adjustment model for Workers’ Compensation claims, in order to account for the varying risk that is found among the injured worker population. This will allow for a more fair and accurate evaluation of a provider’s performance as a treating provider for Workers’ Compensation claims, normalizing across all claims for high-cost events such as surgeries, MRIs, and multiple specialist referrals.
Of course, such a Risk Adjustment model will be different than the ones developed by the CMS for the Medicare/Medicaid, and the Affordable Care Act regulated private health insurance markets. However, there will also be some striking similarities. Description of the methodology will be part of the next installment in this series. Stay tuned!
For more information, please contact info@accordionhealth.com
REFERENCES
[1] CMS, Medicare Managed Care Manual, Chapter 7: Risk Adjustment
[2] Federal Register, Patient Protection and Affordable Care Act; Standards Related to Reinsurance, Risk Corridors and Risk Adjustment
[3] Healthcare.gov Glossary, Risk Adjustment
[4] Cigna, “Informed on Reform”: Risk Adjustment
[6] Cunningham R, Merrell K, Weiner JP, et al., “Risk adjustment in health insurance.” Health Policy Brief 2012
[7] CMS, “Evaluation of the CMS-HCC Risk Adjustment Model — Final Report”, March 2011
[8] Legal Information Institute, Cornell University Law School, Workers Compensation
[9] Political Subdivision Workers’ Compensation Alliance, FAQs for Employees
