Risk Adjustment

Key facts

Medicare Advantage model

CMS-HCC, based on diagnoses and demographics

ACA market program

HHS risk adjustment under Section 1343 of the Affordable Care Act

MA coding intensity adjustment

Statutory minimum of 5.9 percent, applied since 2019

Audit mechanism

Risk Adjustment Data Validation (RADV) audits

What is risk adjustment?

Without risk adjustment, a plan or provider that attracts healthier people looks more efficient and earns more under fixed payments, while one that serves sicker people is penalized. Risk adjustment corrects for that by estimating how much each person is expected to cost, based on factors such as age, sex, diagnoses and program eligibility.

The method appears across U.S. health care. It sets capitated payments to Medicare Advantage and Part D plans, moves funds among insurers in the Affordable Care Act individual and small group markets, shapes many Medicaid managed care rates, and adjusts benchmarks and quality comparisons for accountable care organizations and hospitals.

How risk adjustment is used

Major U.S. programs use different models:

• Medicare Advantage: the CMS-HCC model turns diagnoses and demographics into a risk score that scales monthly capitated payments to plans.
• Medicare Part D: the RxHCC model adjusts direct subsidy payments to prescription drug plans.
• ACA individual and small group markets: the HHS-HCC model drives budget-neutral transfers from issuers with lower-risk enrollees to issuers with higher-risk enrollees within each state market.
• Medicaid managed care: states choose their own models when setting plan rates.
• Provider performance: ACO benchmarks, readmission measures and cost measures are risk adjusted so organizations are compared fairly.

Why risk adjustment matters

Risk adjustment moves money. Because more complete diagnosis coding raises risk scores, Medicare Advantage risk scores have historically grown faster than those of comparable Original Medicare beneficiaries, and the statute requires CMS to reduce them by at least 5.9 percent for coding intensity. Chart review, in-home assessments and coding programs are an industry built around this incentive.

Any comparison of cost, utilization or outcomes across plans, providers or regions needs a risk adjustment step, or the result mostly reflects patient mix. Risk scores are also a signal of how sick a population is and how thoroughly an organization documents conditions.

Contested areas in risk adjustment

Oversight is unsettled. CMS uses Risk Adjustment Data Validation (RADV) audits to recover payments for diagnoses not supported by medical records. In September 2025, a federal district court in Texas vacated the 2023 RADV final rule, which had allowed CMS to extrapolate audit error rates across contracts, and the government appealed. Model recalibrations such as the move to CMS-HCC V28 have also drawn opposition from plans.