What is meant by 'risk adjustment' in terms of healthcare?

Risk adjustment in healthcare specifically refers to the methodology used to modify payments to health plans according to the specific risk profiles of their enrolled populations. This concept recognizes that individuals within a health plan can have varying levels of health risk and that not all patients will require the same amount of healthcare resources. Consequently, plans that enroll higher-risk individuals should receive higher payments to adequately cover the expected costs associated with their care.

This process is vital because it ensures that health plans are incentivized to provide care for all patients, regardless of their health condition, without facing financial penalties for enrolling patients who may be more costly to treat. Effective risk adjustment leads to more equitable funding and promotes better patient care, as health plans can allocate appropriate resources to meet their enrollees' needs.

While the other options present valid concepts related to healthcare, they do not specifically define risk adjustment. For instance, auditing providers and standardizing care across demographics are important processes in healthcare management but do not directly explain the function and purpose of risk adjustment in financial terms. Similarly, evaluating patient outcomes is essential for improving healthcare quality, but it is not the primary focus of the risk adjustment mechanism.