Kaiser Foundation Health Plan commissioned Milliman to examine considerations for the use of risk adjustment in commercial large group health insurance, with attention to model choice, data inputs, interpretation, limitations, and governance across different use cases. The commercial large group health insurance market is distinct from Medicare, Medicaid, and the commercial individual and small group markets. It includes employer-sponsored coverage and operates in a more varied business, contractual, and regulatory environment. As a result, risk adjustment in this market is often shaped by employer-specific arrangements, provider contracts, benefit design, and local governance rather than by a single uniform program structure.
In the commercial large group market, risk adjustment is often used as a decision-support tool for underwriting, pricing, budgeting, contracting, internal allocation, and performance interpretation. In some arrangements it also affects payment directly, particularly where large public employee groups or value-based provider contracts use risk-adjusted budgets, targets, or settlements. This paper discusses common uses of risk adjustment in commercial large group health insurance, how model choices such as concurrent versus prospective design, or diagnosis-only versus diagnosis-plus-pharmacy inputs, can affect the results. We also examine why interpretation of results becomes more difficult when benefit design, carve-outs, attribution rules, reimbursement levels, or member persistence differ across populations.
Our central takeaway is that risk adjustment should be treated as an application-specific tool, rather than a universal solution for predicting future healthcare cost and utilization. Key discussion points regarding commercial large groups are as follows.
- Market-specific considerations: How risk adjustment program rules, data requirements, and oversight in the commercial large group market are less standardized across arrangements
- Common uses of risk adjustment: Pricing, budgeting, forecasting, performance evaluation, value-based contracting, and others
- Choosing and applying a risk adjustment model: Several practical questions and key model selection choices
- Common application considerations: When risk-adjusted results are used for business, contractual, payment, or performance decisions
- Contextual limits and broader considerations: Factors such as care delivery model, access to services, benefit design, marketing emphasis, member retention, and contractual structure
- Practical guardrails for use and interpretation: How before selecting or applying a model, program designers may need to define the decision being supported and identify the goal
- Looking ahead: How data and incentives surrounding risk adjustment are changing quickly
This report was commissioned by Kaiser Foundation Health Plan Inc.