The practice of risk adjustment has long carried significance for Medicare Advantage, Medicaid managed care, and commercial health insurance plans. In light of national healthcare reform, many more stakeholders are now hoping to better understand implications of risk adjustment, especially related to health insurance exchanges and provider payment reforms. Risk adjustment is no longer the realm of specialists, it now concerns most practicing healthcare actuaries who will be interested in a refinement in the art and science of risk adjustment.

This report provides a methodology to quantify uncertainty in risk assessment. Of the many functions that actuaries perform, risk adjustment is expected to be highly scrutinized. As the practice matures, the questions from stakeholders are going to increase in number and in complexity. At this point, it is important to emphasize that quantifying uncertainty does not undermine the value in a sound application of risk adjustment. In fact, it should strengthen the foundations of the concept, providing new tools for greater rigor in its application, and therefore enabling more success in meeting the policy goals of risk adjustment.

This research report was originally published on SOA.org.