Fact sheet

CMS Issues Final Rule to Amend the U.S. Department of Health and Human Services’ Risk Adjustment Data Validation Program

Today, the Centers for Medicare & Medicaid Services (CMS) issued a final rule to amend the methodology and other program parameters for the U.S. Department of Health and Human Services’ risk adjustment data validation (HHS-RADV) program. HHS-RADV was created to strengthen the integrity of the HHS-operated risk adjustment program by validating the accuracy of data submitted by issuers that is used to calculate the amount of funds transferred among insurers based on the actuarial risks of the individuals they enroll. The final rule addresses stakeholder feedback and will provide states and issuers with more stability and predictability, promote program integrity, and foster increased competition.  

Background on Risk Adjustment and HHS-RADV Program

The final rule announced today builds upon the agency’s ongoing efforts to update parameters for the HHS-operated risk adjustment program, which is critical to maintaining a strong and stable insurance market and encouraging broader issuer participation resulting in more choice for consumers.  Since the 2017 benefit year, HHS has operated the risk adjustment program under section 1343 of the Patient Protection and Affordable Care Act on behalf of all states and the District of Columbia.

The risk adjustment program seeks to reduce the incentives for issuers to avoid high-cost, high-risk individuals. It provides payments to health insurance issuers that have higher-than-average risk enrollees, such as those with chronic conditions, which are funded through the collection of charges from issuers that have lower-than-average risk enrollees.   Risk adjustment state transfers are calculated separately for the individual non-catastrophic, catastrophic and small group or merged market risk pools within a state. 

To ensure the integrity of the risk adjustment program, HHS-RADV helps verify that issuers are providing accurate and complete data for the purposes of risk adjustment state transfer calculations. The findings from HHS-RADV are used to adjust issuers’ plan liability risk scores which can result in changes to risk adjustment transfers. This process ensures that risk adjustment transfers reflect verifiable risk differences among issuers, rather than risk score calculations that are based on poor data quality.

Final Rule Changes

In response to stakeholder feedback about HHS-RADV, the rule finalizes changes to two technical aspects of the HHS-RADV program, the error rate calculation and the application of HHS-RADV results. 

Updates to the HHS-RADV error rate calculation: The first change is to refine the HHS-RADV error rate calculation, the methodology CMS uses to determine the adjustments to issuers’ previously calculated risk adjustment risk scores and state transfers based on HHS-RADV results. This error rate calculation is, in part, based on the issuer’s failure rate, a measure of the issuer’s failure to validate diagnoses and conditions associated with enrollees selected for audit.  To avoid making adjustments to risk adjustment transfers for expected variations, HHS-RADV only makes adjustments to an issuer’s risk score when an issuer’s failure rate goes beyond a certain threshold making them an outlier. For 2019 benefit year HHS-RADV and beyond, CMS is finalizing the following three modifications to the error rate calculation:

  • CMS will modify the way that it groups medical conditions in HHS-RADV within the same hierarchical condition category (HCC) coefficient estimation groups in risk adjustment to determine failure rates for those HCCs.  This modification seeks to better account for the difficulty in categorizing certain conditions and to, therefore, refine how the error rate calculation measures risk differences within and between condition groupings.   
  • CMS will make changes that would reduce the magnitude of risk score adjustments for issuers close to the threshold used to determine whether an issuer is an outlier.  Currently, issuers whose failure rates are not significantly different from issuers just inside the threshold may see significant changes to their risk scores and transfers, creating a “payment cliff” for issuers just outside the threshold.  Adjusting the magnitude of risk score adjustments intends to mitigate this effect.
  • CMS will modify the error rate calculation in cases where certain outlier issuers have a negative failure rate.  A low failure rate is not always due to more accurate data submission.  A low failure rate can also be due to not identifying conditions that should have been reported in risk adjustment.  The final rule refines the error rate calculation to mitigate the impact of adjustments that result from error rates driven by these newly found conditions.

These changes are intended to strengthen program integrity by reducing possible incentives for issuers to underreport diagnoses during initial risk adjustment data submission.  These changes will also promote fairness by ensuring that issuers are not penalized in HHS-RADV when a difference in diagnosis for an enrollee has no effect on risk, as well as by ensuring that issuers that receive adjustments are receiving adjustments in proportion to the errors identified through HHS-RADV.  The changes are based on lessons learned and stakeholder feedback from the initial years of HHS-RADV.

Application of HHS-RADV Results: The second change transitions to the application of HHS-RADV results to adjust the risk scores and transfer amounts for the benefit year being audited.  Currently, HHS-RADV generally applies a prospective approach for making adjustments to risk adjustment transfers, meaning HHS-RADV results are used to adjust the subsequent benefit year risk score and transfers.   For example, 2017 benefit year HHS-RADV results are generally used to adjust 2018 benefit year transfer amounts.  The one exception is for exiting issuers whose HHS-RADV results are currently used to adjust the risk scores and transfer amounts for the benefit year being audited. This final change addresses stakeholder concerns about making adjustments to risk scores based on HHS-RADV error rates calculated using prior benefit year data, when an issuer’s risk profile, enrollment, or market participation could change substantially from benefit year to benefit year. It also promotes fairness by avoiding situations where an issuer who newly enters a state market risk pool is subject to HHS-RADV adjustments from a benefit year in which they did not offer plans. 


CMS is committed to continuing to monitor and refine the HHS-RADV methodology and program requirements. CMS designed the final rule to help improve the predictability of HHS-RADV results, while mitigating the burden to issuers. CMS consulted with stakeholders on policies related to risk adjustment and HHS-RADV and held a series of stakeholder engagement sessions to gather input on potential areas of improvement for the HHS-RADV program.  Additionally, based on results from CMS’ first payment year of HHS-RADV, CMS issued a white paper for comment on December 6, 2019, regarding potential changes to the HHS-RADV methodology and program requirements.  CMS considered public input it received through the public comment process on the HHS-RADV white paper, the proposed HHS-RADV amendments rule, other regulations, and formal discussion and correspondence with stakeholders as the agency developed these policies. 

To view the Final Rule, click here: