Implementation of risk adjustment for Medicare

The Health Care Financing Administration (HCFA) implemented risk adjustment for Medicare capitated organizations January 2000. The risk adjustment system used, the Principal Inpatient Diagnostic Cost Group (PIPDCG) method, had to be incorporated into the Payment structure mandated by the Balanced Budget Act of 1997 (BBA). This article describes how risk adjustment was integrated into the payment system within the rules of the BBA, and how fee-for-service (FFS) and health maintenance organization (HMO) data are collected and used in the determination of Payment.