Implications of Medicare’s V28 Model on MA Plans and Risk-Based Providers

Understanding changes to Medicare risk adjustment is paramount for payers and risk-bearing providers

The Centers for Medicare & Medicaid Services (CMS) originally introduced the CMS-HCC model in 2004 to better tailor Medicare capitation payments to managed care organizations based on expected beneficiary costs. The model assigns risk adjustment factors (RAFs) to hierarchical condition categories (HCCs) in order to predict a health plan’s cost of managing its specific population based on the relative complexity and burden of disease among its members.

Over the last 20 years, CMS has periodically updated the methodology to account for trends in underlying Medicare expenditure, evolving classifications of disease and Medicare budget considerations. Changes to the model are critically important to Medicare Advantage (MA) plans and risk-bearing providers that serve Medicare patients because they directly impact reimbursement.  

This article evaluates the changes put forth in the 2024 CMS-HCC model (V28) and the implications for industry stakeholders.

V28 reduces the payment adjustment upside for sicker and more complex members

CMS finalized V28 of its risk adjustment model in 2023, with a glide path to full implementation taking place between 2024 and 2026. The new model delivers five key changes relative to the previous version:

1. Switched from ICD-9 to ICD-10 codes: Despite the industry’s broader shift to ICD-10 codes, the CMS-HCC model had been using ICD-9 codes; V28 brought the model up to current industry standards by mapping diagnoses to ICD-10 codes, which should help drive standardization for data and reporting practices as well as greater specificity in capturing diagnoses.
2. Updated fee-for-service base years: The new V28 model uses fee-for-service base data from 2018 (diagnoses) and 2019 (expenditures) to inform beneficiary trends and expected spend levels, aiming to further standardize payments between MA (typically higher) and Original Medicare.
3. Increased number of HCCs but decreased relevant diagnoses: Under the CMS-HCC model, each HCC encapsulates multiple related ICD diagnosis codes; the V28 model increased the number of HCCs (from 86 to 115) but decreased the number of relevant ICD-10 codes by approximately 2,100 (from about 9,800 to roughly 7,700), meaning fewer diagnoses will drive RAF uplift in the new model.
4. Reduced like-for-like RAF coefficients: Some HCCs received lower like-for-like RAF coefficients based on the updated base data, resulting in lower relative reimbursement.
5. Introduced constraining coefficients: These “constraining coefficients” are intended to standardize RAFs for related diagnoses (e.g., the RAFs for the three different diabetes codes are equivalent in the new model, removing the additional compensation for diabetes when linked to other diagnoses). 

Taken together, CMS expects the decrease in RAF scores to translate to about 3.12% lower payments and approximately $11 billion in savings in 2024. In the context of base rate cuts and broader headwinds in the MA segment, this new risk adjustment model further challenges profitability for MA plans and risk-based providers.

The V28 dynamic does not change the fundamental activities for MA plans and risk-bearing providers, but it does emphasize the importance of operational effectiveness to preserve margin

Insofar as the V28 model changes effectively bring a rate cut to MA plans and risk-bearing providers, they stress the importance of driving operational efficiency and business hygiene (see Figure 1).  

• Risk coding excellence: To the extent V28 changes make it more difficult to realize economic upside from coding and documentation, plans and risk-based providers will need to focus on efficiently capturing the most high-impact diagnoses, deploying targeted diagnostic screening (rather than broadly testing for all conditions), and educating providers and staff on best practices.
• Care model refinement: Reducing premium revenue potential will require payers and providers to focus on care model refinement (e.g., care management, use of lower-cost providers and payer mix optimization) to manage medical costs and preserve margin.
• Network design and management: Payers will need to leverage network management to drive greater levels of integration with providers to optimize coding practices; payers and at-risk providers will also need to tightly manage specialist networks and referral pathways to optimize for high-quality, low-cost providers.
• Benefit design and contracting: Depending on the extent of the reimbursement impact, payers may need to rationalize benefit design and premium rates to support plan profitability.
• Administrative cost reduction: Payers and providers alike will need to focus acutely on the cost side of the equation to prevent margin erosion from challenging reimbursement headwinds.

L.E.K. Consulting has deep expertise helping clients evaluate and optimize processes along all five value creation levers. To further discuss the implications of V28 for your organization, as well as how we can support you in navigating the changes, please contact us.  

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