Understanding risk adjustment across Medicare Advantage, Medicaid, and Marketplace plans

Risk adjustment (RA) is defined by the Center for Medicare and Medicaid Innovation as a way to calculate what to pay a health provider based on a patient’s health, their likely use of healthcare services, and the costs of those services.¹ It is most commonly applied in public sector health benefit programs, including Medicare Advantage (MA), Medicaid, and Affordable Care Act (ACA) Marketplace plans, where the majority of payments are capitated and must reflect differences in population health risk. Although each program has unique rules and methodologies, the core objective of RA remains consistent: “Risk adjustment is a method for modifying capitated provider payments based on their patients’ characteristics and health conditions…” Furthermore, “insurers and other health care payers use statistical models to determine what providers should be paid based on their patient’s expected future health care costs.”²

Health plans use RA to identify members with higher expected healthcare needs and to capture diagnosis data that informs payment decisions. This discussion focuses on RA as a financial mechanism, as RA uses clinical risk markers from medical charts to shift plan revenue to align better with predicted costs. Accurate documentation, coding, and data submission ensure that a plan optimizes the legitimate revenue received under the RA schema.

Across the industry, plans have opportunities to fine tune operations to ensure revenue and risk are in balance. The following points illustrate why RA should remain a strategic priority for plans subject to RA mechanisms:

Medicare Advantage

• Risk scores directly influence capitation payments.
• The Centers for Medicare and Medicaid (CMS) conducts regular audits (e.g., Risk Adjustment Data Validation [RADV]), increasing compliance exposure. Because MA RA involves public money and is not zero-sum, carrier documentation and coding practices are placed under increased scrutiny through these audits.
• Effective RA operations support revenue optimization and audit defensibility.

Affordable Care Act marketplaces

• RA is designed to be revenue neutral across plans within a state. This means health plans do not generate new dollars through higher risk scores but instead redistribute funds among one another.
• Both underperforming coding and documentation practices, or having a healthier-than-average population, can lead to net financial transfers out of the plan to competing plans with higher relative risk. The U.S. Department of Health and Human Services (HHS), entirely through the CMS, requires timely submissions. For certain high-cost services or populations, even a single rejected or unaccepted claim can represent a significant loss in expected revenue until corrected and resubmitted.
• The absolute value of RA transfers has accounted for approximately 9%–10% of total nationwide premiums over the past two-plus years³, significant enough to impact overall profitability. Figure 1 further shows how transfer impacts vary significantly by health plan. Plans with paid claim amounts in the bottom quartile (lower risk populations) pay net transfers of up to 13% of collected premiums, whereas plans in the highest quartile of paid claims (higher risk populations) receive transfers exceeding 17% of their total premium.

Medicaid

• Medicaid RA is not nationally standardized, as each state designs its own model, parameters, and payment rules. As a result, methodologies vary widely across states, creating operational complexity for health plans. Plans with strong RA programs can outperform industry peers by ensuring accurate capitation payments.

Common risk adjustment challenges facing U.S. health plans

Despite the importance of RA, many organizations face persistent operational and structural challenges that hinder program effectiveness. The following regularly observed pain points illustrate common barriers to building and maintaining high-performing RA programs.

Lack of ownership, coordination, and accountability

A key challenge in RA performance is not technical capability, but a lack of clear ownership and coordination. In many organizations, lines of business operate in silos. Functional teams such as finance, IT, coding, and provider engagement are not aligned, and no single leader is accountable for end-to-end outcomes. This results in fragmented oversight, duplicated work, and missed opportunities to scale successful strategies across markets and products.

Insufficient coordination across functions

A siloed approach across functions such as clinical operations, coding, compliance, IT, actuarial teams, and provider relations often results in disconnected strategies and redundant efforts. When Care Management (CM), provider contracting, and RA activities are not coordinated, or when lines of business maintain separate processes, data are not effectively shared, clinical programs do not support accurate documentation, and opportunities to close risk capture gaps are missed. An integrated operating model is essential to align clinical, financial, and operational teams around a common RA strategy.

Inadequate technology infrastructure

Without integrated systems or tailored analytics, organizations frequently struggle to monitor performance or drive improvements. Having timely and accurate analytics is key. Lagging organizations often rely on manually pulling data from systems and using manual analytic resources to develop actionable reports. These processes can be error-prone, inefficient, and not timely.

Limited provider engagement and education

Providers play a vital role in accurate diagnosis documentation, yet many organizations lack structured strategies to engage and align providers in RA efforts. Without mechanisms such as value-based contracts, documentation expectations, feedback reporting, or incentive models, clinicians may have little visibility into how documentation affects patient risk profiles and plan revenue. This often results in inconsistent coding practices and limited alignment between clinical care and accurate risk capture.

Absence of member-focused wellness initiatives

Accurate RA is fundamentally tied to members being seen by providers. If members do not engage in regular clinical encounters, such as annual wellness visits, preventive care appointments, or chronic condition follow-ups, their diagnoses are not documented and therefore cannot be submitted to CMS or state agencies for risk scoring. Many organizations lack structured, proactive outreach strategies to bring members into care or tailor engagement to member preferences. Without this, chronic conditions may go undiagnosed clinically and unreported administratively, resulting in lower risk scores and reduced reimbursement. Therefore, member wellness efforts are not only important for improving health outcomes but are a necessary operational input to accurate risk capture and the financial sustainability of risk-adjusted programs.

Lack of vendor oversight

External partners often support functions such as chart retrieval, coding, and analytics; however, without clear governance and accountability, these arrangements may not deliver optimal results. In many organizations, vendor performance is not consistently aligned with internal goals, leading to misaligned priorities and limited return on investment.

Who to involve in risk adjustment programs: Aligning clinical, financial, and operations teams

Successful RA programs are built on cross-functional collaboration, drawing on the expertise of actuarial teams, provider relations, member engagement, CM, and executive leadership to promote accuracy, compliance, and operational alignment. Although not exhaustive, these stakeholder groups are commonly engaged across markets and lines of business, and their coordinated efforts are vital to program success.

Actuarial health economics team

This team is typically central to the financial integrity of an RA program. Actuaries and health economics teams analyze historical claims and enrollment data to forecast risk scores and project revenue tied to member health status. They collaborate closely with RA leaders to evaluate the fiscal impact of coding initiatives, monitor risk score trends, and inform bid or rate setting strategy. Their analytical insights are foundational to understanding both current performance and future opportunities in a compliant environment.

Provider relations and contracting

Provider relations teams engage directly with providers and care teams to promote high-quality clinical documentation and coding. By facilitating education, performance reporting, and workflow enhancements, they help integrate RA goals into everyday provider practices. Their ability to build strong relationships and communicate regulatory requirements effectively can determine the success of provider-facing initiatives. In collaboration with provider contracting teams, they can also help align financial incentives and contractual language with RA objectives, reinforcing accountability across the provider network.

Member engagement

Member engagement plays a significant role in RA by ensuring patients access care regularly enough for conditions to be accurately diagnosed and documented. Outreach efforts, such as reminders for annual wellness visits, chronic condition follow-ups, or preventive screenings, help bring members into clinical settings where risk-adjustable conditions can be identified. When paired with insights into member preferences, barriers to care, and culturally appropriate communication, engagement strategies improve health outcomes and the completeness of risk capture. Without sustained member engagement, even the strongest coding or provider strategies may fall short due to a lack of clinical encounters.

Care management

CM staff contribute valuable clinical insight into RA efforts. Through their work in patient outreach, care coordination, and chronic condition management, they often identify undocumented or emerging health conditions. This clinical engagement complements provider documentation and helps make sure the full burden of illness is captured. When aligned with coding workflows, CM programs can support quality improvement and accurate risk scoring.

Leadership

Executive leadership often sets a strategic vision and leads enterprise alignment around RA goals. Their role includes allocating necessary resources, establishing cross-departmental accountability, and reinforcing the importance of compliance and data integrity. Effective leadership fosters a culture that prioritizes sustainable, accurate, and ethical practices, and their engagement is often the difference between a fragmented effort and a fully integrated, organization-wide program.

Cross-collaboration

Cross-functional collaboration enhances the effectiveness of RA programs by leveraging expertise across clinical teams, operations, compliance, finance, and data analytics. Each function contributes to accurate coding, documentation, and regulatory alignment. Coordinated efforts often improve data quality, streamline processes, and support compliance with applicable guidelines.

Establishing shared governance, such as a cross-functional RA committee, can facilitate information sharing, clarify roles, and align priorities. These structures help reduce fragmentation, support decision-making, and identify performance gaps.

Integrated workflows further strengthen program accuracy and timeliness. For example, analytics can inform provider outreach, whereas compliance teams interpret regulatory updates. Shared tools and reports enable teams to address inefficiencies and respond to emerging trends.

Finally, regular collaboration supports adaptability. As RA requirements evolve, coordinated planning and awareness of interdependencies help organizations maintain alignment with clinical, operational, and financial goals.

Conclusion

As the regulatory and financial landscape continues to evolve, a comprehensive, data-driven, and forward-looking approach to RA is foundational to organizational stability and success. The accuracy of risk capture directly affects revenue, compliance exposure, and care delivery decisions across MA, Medicaid, and ACA Marketplace lines of business. Yet, as this paper has outlined, many organizations still face structural, operational, and collaborative challenges that hinder their ability to execute RA effectively.

Addressing these challenges requires more than isolated process improvement. It calls for alignment between clinical operations, provider engagement, finance, analytics, IT systems, and executive leadership. Organizations that invest in coordination, governance, and infrastructure, not just coding or analytics in isolation, are generally better positioned to ensure that payment accurately reflects population acuity, that compliance risks are mitigated, and that members receive timely, appropriate care.

This paper focused on defining RA, outlining variation across programs, exploring common operational challenges, and identifying key stakeholders essential to effective execution. The follow-up publication will focus on the practical side of RA, how leading organizations can move from fragmented, reactive workflows to coordinated, data-driven programs. It will offer:

• Operational and governance insight that creates clear accountability and cross-functional alignment
• Provider engagement strategies that support documentation accuracy and sustained behavior change
• Member outreach and wellness practices that strengthen clinical visibility and risk capture
• Data, analytics, and technology capabilities that enable early detection of gaps, real-time insights, and audit readiness
• Revenue integrity and compliance frameworks that safeguard payments while upholding program integrity

Health plans that successfully integrate strategy, operations, clinical teams, and analytics will be better positioned to manage financial risk, meet regulatory expectations, and ultimately reinvest in better member care.

Limitations and data reliance

We primarily relied on information and data provided by CMS, including publicly released membership data and projections for model impacts. We also relied on other information provided by additional sources, primarily relating to policy analysis. Throughout this analysis, Milliman relied on data and other information provided by publicly available data sources. The estimates presented in this paper are not predictions of the future; they are estimates based on the assumptions and data analyzed at a point in time. If the underlying data or other listings are inaccurate or incomplete, the results may also be inaccurate or incomplete. Milliman has not audited or verified these data and other information but has reviewed them for reasonableness.

This publication is intended for informational purposes only. Milliman makes no representation or warranties regarding the contents of this report. Likewise, readers of this publication are instructed that they are to place no reliance upon this report that would result in the creation of any duty or liability under any theory of law by Milliman or its employees to third parties. The views expressed in this research paper are those of the authors and do not represent the opinions of Milliman, Inc. Other Milliman consultants may hold alternative views and reach different conclusions from those represented in this report.

Guidelines issued by the American Academy of Actuaries require that actuaries include their professional qualifications in all actuarial communications. Alex Geanous is a member of the American Academy of Actuaries and meets the qualification standards for performing the analysis presented herein.

¹ CMS. (n.d.). Risk Adjustment. https://www.cms.gov/priorities/innovation/key-concepts/risk-adjustment.

² Horstman, C., & Lewis, C. (2024, April 11). The basics of risk adjustment. The Commonwealth Fund. https://www.commonwealthfund.org/publications/explainer/2024/apr/basics-risk-adjustment.

³ CMS. (2025, June 30). Summary report on individual and small group market risk adjustment transfers for the 2024 benefit year. https://www.cms.gov/files/document/ra-report-by2024.pdf.