Risk adjustment is a form of predictive modeling introduced by the Medicare Modernization Act of 2003. It gauges the risk that a member will incur medical expenses above or below an overall average over a defined period of time. Risk adjustment assists in the financial forecasting of future medical need. The more severe or complex a diagnosis, the higher the risk value that is assigned. The concept was introduced to minimize the incentive to choose enrollees based on their health status.  

A risk-adjustment value is assigned to each diagnosis code that falls into the payment model. The ICD-10 codes are then grouped into an HCC, or hierarchical condition category. HCC categories are related both clinically and financially. Unlike hospital DRGs, HCCs are cumulative: each additional HCC in an unrelated disease category is factored into the risk profile.