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Risk Adjustment and Burden of Illness in Colorado: APCD Total Cost of Care Compared to Expected Reports

Part II: Understanding health care claims data available on

Last month, in the first installment in this series, I explained risk adjustment and burden of illness concepts in more or less plain English to give readers and my fellow health data policy wonks (there’s that word again!) a better sense of what these concepts mean in practice. In this second installment, I will demonstrate how these concepts apply to the Total Cost of Care Compared to Expected (C2E) reports available on

To summarize where we are after the first installment, risk adjustment is a process that assigns each patient to a unique category or group based on their medical conditions (or diagnoses) and use of health care services during the previous year. These categories or risk groups are then further adjusted to reflect severity of illness or the relative seriousness of any chronic medical conditions such as high blood pressure, high cholesterol or diabetes. Burden of illness calculations take this classification a step further by considering total spending on health care during the previous year and assigning a unique number or risk score to each patient.

As discussed previously, average burden of illness scores can be used in a variety of ways to make apples to apples comparisons of health care use and spending among different groups that are in some sense fair. To put a finer point on it, groups with higher average burden of illness scores tend to be less healthy and would be expected to use more health care services and have higher associated costs.

Burden of illness scores are used in the Colorado APCD to calculate expected values that can be compared to observed values or numbers we actually see based on analysis of the claims data. Expected values are an average based on what we know about the people living in an area (e.g., by county or statewide) or undergoing a specific medical procedure (e.g., knee replacement) at a particular facility and help to explain variation in the cost and use of health care services. It is important to note that reports based on expected values calculated using the Colorado APCD do not currently distinguish between patients with private insurance and those covered by Medicaid. Future updates to the Colorado APCD will include payer specific expected values that take into account differences between patients covered under the Medicaid and Medicare programs and those with private or commercial health insurance.

Results based on expected values appear in both the Total Cost of Care (TCC) and overall Utilization reports available on the Colorado APCD website. Total Cost of Care reports show the total amount of health care spending statewide and by county and three digit Zip Code on a per person per year basis. The actual (or observed) value is generated by dividing total spending on health care by the total number of member months – to obtain a per member per month dollar amount – and multiplying by 12 to reflect a full calendar year. Member months are a fairly standard measure of how long a person had health insurance coverage. For example, if a person was covered by a health insurance plan all of last year, they would show up in the APCD with 12 member months. Although TCC is a high-level cost measure, it is useful for making meaningful comparisons of overall health care spending across regions and relative to the statewide average.

Total Cost of Care Compared to Expected 2012 - All Payers

In last column of the report above, the TCC for all current payers in 2012 was $2,647 per person per year. This means that an average of $2,647 was spent on health care for each Colorado resident covered by private insurance or Medicaid represented in the APCD that year. For people living in the City and County of Denver, the TCC was much lower ($1,750) but was much higher in both Pitkin ($4,453) and Pueblo ($3,947) counties. These observed differences in TCC may be explained by a variety of factors including the number and percentage of people living in those counties covered by Medicaid vs. private insurance, and whether those people actually received health care services in the county where they live. In interpreting reports available on, it is important to remember that all results are based on where an insured person lives and not where they obtain their health care. It is also important to remember that while Colorado APCD reports show the variation in TCC and other metrics across regions, they do not specifically address the reasons for the observed differences.

As discussed earlier, expected values based on risk adjustment and burden of illness scores provide additional insights regarding variation in the TCC numbers. Actual TCC for Denver residents ($1,760 per person per year) has a corresponding value of minus 23 percent in the Compared to Expected column. Recall that burden of illness scores for all Colorado residents in the APCD are set or normalized to a value of one (this can be seen in the second row of the graphic under the State column). Denver County residents have an average illness burden score of 0.87 suggesting that, on average, they are about 13 percent more healthy than residents of the state as a whole based on the amount of health care they receive and the cost of that care. To summarize, the TCC of $1,750 is 23 percent below what we would expect (C2E) after taking into account the relative health status of Denver residents based on the average burden of illness score of 0.87.

Similar insights can be gained for Pitkin and Pueblo Counties. In Pitkin County, the TCC per person per year of $4,453 is much higher than the statewide average and 111 percent above expected (C2E) given an illness burden score of 0.76. In Pueblo County, the TCC of $3,947 is also higher than the statewide average, but only 4 percent above expected when considered in light of an illness burden score of 1.34. The illness burden score for Pueblo County reflects a population that is about 34 percent less healthy than the statewide average and thus we would expect higher than average spending and use of health care services.

An important takeaway is that considering observed variation in TCC from one place to another alone is likely insufficient and may lead to inaccurate conclusions. Spending on health care per person per year varies significantly from place to place and there are many potential reasons for these differences including, but not limited to, the underlying health status of people living in those areas.

The next installment in this series will explore in greater detail how these concepts apply and can be used to interpret the health care Utilization reports available on If you have questions related to risk adjustment, burden of illness or compared to expected measures as applied to the Colorado APCD, feel free to contact me at

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