Medicare risk adjustment is a system that calculates how much the federal government pays health plans and providers based on how sick or healthy each patient actually is. Instead of paying a flat rate per person, Medicare uses each enrollee’s diagnoses, age, sex, and other factors to generate a “risk score” that raises or lowers payment. Sicker patients generate higher payments; healthier patients generate lower ones. The goal is to make sure plans and providers are compensated fairly for treating people with serious health needs, rather than being financially rewarded for enrolling only healthy people.
Why Risk Adjustment Exists
Without risk adjustment, a Medicare Advantage plan that enrolled a large share of people with diabetes, heart failure, or cancer would receive the same per-person payment as a plan whose members were mostly healthy. That creates a powerful incentive to avoid sick patients or skimp on care for expensive conditions. Risk adjustment removes that incentive by tying payment to each person’s expected healthcare costs. As CMS puts it, the system “evens the playing field” so that plans can treat patients with different health needs and not just healthier, less costly ones.
This matters most in Medicare Advantage, the privately run alternative to traditional Medicare that now covers more than half of all Medicare beneficiaries. The federal government pays Medicare Advantage plans a monthly amount for each enrollee, and risk adjustment determines how large or small that amount is.
How Risk Scores Are Calculated
Every Medicare Advantage enrollee receives a risk score, which is a single number that represents how costly that person is expected to be relative to the average Medicare beneficiary. A score of 1.0 means the person is expected to cost exactly the average. A score of 1.5 means they’re expected to cost 50% more than average. A score of 0.8 means 20% less.
The score is built by adding together weighted factors. Each factor represents a demographic characteristic or a medical condition, and each carries a value based on how much it historically contributes to total healthcare spending. A simplified example from CMS: if the average cost is $1,000, a 57-year-old woman might carry a demographic factor of 0.5, and a specific condition might add 0.7. Her total risk score would be 1.2, meaning her plan would receive 20% more than the base payment.
The demographic side of the calculation includes age, sex, whether the person qualifies for both Medicare and Medicaid (dual eligibility), whether they originally enrolled in Medicare due to a disability, and in some contexts their geographic location. The clinical side comes from diagnoses submitted by doctors and other providers during the prior year.
The Hierarchical Condition Category System
The clinical diagnoses that feed into risk scores aren’t used one by one. They’re organized into groups called Hierarchical Condition Categories, or HCCs. Conditions that involve similar medical problems and similar spending patterns get bundled into the same HCC. For example, various types of diabetes complications might fall into one category, while different severities of heart failure fall into another.
The “hierarchical” part is important. When related conditions exist at different levels of severity, the system uses only the most severe one for payment purposes. If someone has both a mild and a severe form of a related condition, only the severe version counts toward their risk score. This prevents double-counting and keeps the model from inflating payments for overlapping diagnoses.
Not every diagnosis qualifies as an HCC. The model focuses on conditions that are chronic, serious, or predictive of high future costs. A common cold or a minor sprain won’t affect someone’s risk score, but congestive heart failure, HIV, major depression, or chronic kidney disease will.
Where the Diagnosis Data Comes From
Risk scores depend entirely on the diagnoses that providers submit to CMS. Every time a Medicare Advantage enrollee sees a doctor, goes to the hospital, or receives outpatient care, the diagnoses from that visit are reported. Those diagnoses are then mapped to HCCs and factored into the following year’s risk score.
This creates a strong financial incentive for plans to make sure every legitimate diagnosis is captured and reported. Many Medicare Advantage plans conduct annual wellness visits, in-home health assessments, and chart reviews specifically to identify conditions that may not have been documented during routine care. The practice is legal and, when done correctly, improves the accuracy of risk scores. But it has also drawn scrutiny.
A 2024 report from the HHS Office of Inspector General found that diagnoses reported only through health risk assessments and related chart reviews, with no supporting claims from other medical services, resulted in an estimated $7.5 billion in risk-adjusted payments for 2023. In-home assessments generated almost two-thirds of that total. Just 20 Medicare Advantage companies drove 80% of those payments. The concern is that some of these assessments may document conditions that don’t reflect genuine clinical care, inflating risk scores and overpaying plans.
How CMS Audits for Accuracy
CMS runs a program called Risk Adjustment Data Validation, or RADV, which is its primary tool for catching overpayments to Medicare Advantage plans. During a RADV audit, CMS pulls a sample of enrollees from a plan and checks whether the diagnoses submitted for risk adjustment are actually supported by the medical records. If a plan reported that someone had a qualifying condition but the medical chart doesn’t back it up, CMS can recoup the overpayment.
These audits happen after the final risk adjustment data submission deadline for a given contract year. Under rules finalized for 2025, CMS has also streamlined the appeals process for plans that dispute audit findings. Plans must now resolve medical record review appeals before they can challenge the payment error calculation itself, preventing them from running both appeals simultaneously.
The V28 Model Update
The risk adjustment model isn’t static. CMS periodically updates it to reflect changes in medical coding, treatment patterns, and cost data. In 2024, CMS began transitioning Medicare Advantage payments from the previous model (known as V24) to a new version called V28.
V28 reclassifies certain conditions, drops some HCCs, adds others, and recalibrates the cost weights. The update is being phased in gradually rather than switched on all at once, which gives plans time to adjust. The HHS Office of Inspector General is actively studying trends and differences between the two models, particularly how the changes affect payment patterns across different types of plans and patient populations.
Why It Matters for Enrollees
If you’re enrolled in Medicare Advantage, risk adjustment works mostly behind the scenes. You won’t see your risk score on a statement, and it doesn’t directly change your premiums or copays. But it shapes the financial environment around your care in ways that matter. A plan that receives higher risk-adjusted payments for sicker enrollees has more resources to cover expensive treatments, specialist visits, and hospital stays for those members. A plan that receives lower payments for healthier enrollees can offer lower premiums or extra benefits to attract them.
Risk adjustment also explains why your Medicare Advantage plan may be eager for you to complete an annual wellness visit or an in-home health assessment. These visits give the plan a chance to document your conditions accurately, which directly affects how much the plan gets paid. For you, the visit can also flag health issues you weren’t aware of, though it’s worth knowing that the plan has a financial stake in the outcome.