What does 'risk adjustment' involve in health insurance?

'Risk adjustment' refers to the methodology used in health insurance to ensure that health plans are compensated fairly based on the health status of their enrollees. This process accounts for the varying health needs of individuals, allowing for adjustments in payments to health plans based on the risk profile of the covered population.

When health plans enroll individuals with different health conditions and risk factors, some populations may require more resources than others. By implementing risk adjustment, insurers can mitigate financial disparities that may result from enrolling either healthier or sicker individuals. This encourages plans to accept a wide range of enrollees, promoting a more balanced and fair market.

For example, a plan that attracts a higher number of individuals with chronic illnesses may receive higher payments to reflect the additional costs associated with providing care to those members. This mechanism ultimately aims to create a more equitable system where payments are aligned with the actual care needs of enrollees, thereby enhancing the sustainability of health insurance plans.

In contrast, the other choices do not capture the essence of what risk adjustment entails. Approving claims before treatment relates to claims management rather than payment adjustments based on risk. Reporting on claims processed is more about operational metrics, while tracking patient demographics serves marketing purposes and does not address financial adjustments related to health