CMS calculates the reconciliation target price as follows:

(a) CMS risk adjusts the preliminary episode target prices computed under § 512.540 at the beneficiary level using a TEAM Hierarchical Condition Category (HCC) count risk adjustment factor, an age bracket risk adjustment factor, a social need risk adjustment factor, and at the hospital level using a hospital bed size risk adjustment factor and a safety net hospital risk adjustment factor, and at the episode category-specific beneficiary level using factors specified in paragraph (a)(6)(i) through (v) of this section.

(1) The TEAM HCC count risk adjustment factor uses five variables, representing beneficiaries with zero, one, two, three, or four or more CMS-HCC conditions based on a lookback period that ends on the day prior to the anchor hospitalization or anchor procedure.

(2) The age bracket risk adjustment factor uses four variables, representing beneficiaries in the following age groups as of the first day of the episode:

(i) Less than 65 years.

(ii) 65 to less than 75 years.

(iii) 75 years to less than 85 years.

(iv) 85 years or more.

(3) The social need risk adjustment factor uses two variables, representing beneficiaries that, as of the first day of the episode—

(i) Meet one or more of the following measures of social need:

(A) State ADI above the 8th decile.

(B) National ADI above the 80th percentile.

(C) Eligibility for the low-income subsidy.

(D) Eligibility for full Medicaid benefits.

(ii) Do not meet any of the three measures of social need in § 512.545(a)(1)(iii)(A).

(4) The hospital bed size risk adjustment factor uses four variables based on the TEAM participant's characteristics:

(i) 250 beds or fewer.

(ii) 251-500 beds.

(iii) 501-850 beds.

(iv) 850 beds or more.

(5) The safety net hospital risk adjustment factor is based on the TEAM participant meeting the definition of safety net hospital, as defined in § 512.505.

(6) Episode category-specific beneficiary level risk adjustment factors represent the presence or absence in beneficiaries, as of the first day of the episode, of each of the following conditions:

(i) CABG episode category.

(A) Prior post-acute care use.

(B) HCC 18: Diabetes with Chronic Complications.

(C) HCC 46: Severe Hematological Disorders.

(D) HCC 58: Major Depressive, Bipolar, and Paranoid Disorders.

(E) HCC 84: Cardio-Respiratory Failure and Shock.

(F) HCC 85: Congestive Heart Failure.

(G) HCC 86: Acute Myocardial Infarction.

(H) HCC 96: Specified Heart Arrhythmias.

(I) HCC 103: Hemiplegia/Hemiparesis.

(J) HCC 111: Chronic Obstructive Pulmonary Disease.

(K) HCC 112: Fibrosis of Lung and Other Chronic Lung Disorders.

(L) HCC 134: Dialysis Status.

(ii) LEJR episode category.

(A) Ankle procedure or reattachment, partial hip procedure, partial knee arthroplasty, total hip arthroplasty or hip resurfacing procedure, and total knee arthroplasty.

(B) Disability as the original reason for Medicare enrollment.

(C) Dementia without complications.

(D) Prior post-acute care use.

(E) HCC 8: Metastatic Cancer and Acute Leukemia.

(F) HCC 18: Diabetes with Chronic Complications.

(G) HCC 22: Morbid Obesity.

(H) HCC 58: Major Depressive, Bipolar, and Paranoid Disorders.

(I) HCC 78: Parkinson's and Huntington's Diseases.

(J) HCC 85: Congestive Heart Failure.

(K) HCC 86: Acute Myocardial Infarction.

(L) HCC 103: Hemiplegia/Hemiparesis.

(M) HCC 111: Chronic Obstructive Pulmonary Disease.

(N) HCC 112: Fibrosis of Lung and Other Chronic Lung Disorders.

(O) HCC 134: Dialysis Status.

(P) HCC 170: Hip Fracture/Dislocation.

(iii) Major Bowel Procedure episode category.

(A) Long-term institutional care use.

(B) HCC 11: Colorectal, Bladder, and Other Cancers.

(C) HCC 18: Diabetes with Chronic Complications.

(D) HCC 21: Protein-Calorie Malnutrition.

(E) HCC 33: Intestinal Obstruction/Perforation.

(F) HCC 82: Respirator Dependence/Tracheostomy Status.

(G) HCC 85: Congestive Heart Failure.

(H) HCC 86: Acute Myocardial Infarction.

(I) HCC 103: Hemiplegia/Hemiparesis.

(J) HCC 111: Chronic Obstructive Pulmonary Disease.

(K) HCC 112: Fibrosis of Lung and Other Chronic Lung Disorders.

(L) HCC 134: Dialysis Status.

(M) HCC 188: Artificial Openings for Feeding or Elimination.

(iv) SHFFT episode category.

(A) HCC 18: Diabetes with Chronic Complications.

(B) HCC 22: Morbid Obesity.

(C) HCC 82: Respirator Dependence/Tracheostomy Status.

(D) HCC 83: Respiratory Arrest.

(E) HCC 84: Cardio-Respiratory Failure and Shock.

(F) HCC 85: Congestive Heart Failure.

(G) HCC 86: Acute Myocardial Infarction.

(H) HCC 96: Specified Heart Arrhythmias.

(I) HCC 103: Hemiplegia/Hemiparesis.

(J) HCC 111: Chronic Obstructive Pulmonary Disease.

(K) HCC 112: Fibrosis of Lung and Other Chronic Lung Disorders.

(L) HCC 134: Dialysis Status.

(M) HCC 157: Pressure Ulcer of Skin with Necrosis Through to Muscle, Tendon, or Bone.

(N) HCC 158: Pressure Ulcer of Skin with Full Thickness Skin Loss.

(O) HCC 161: Chronic Ulcer of Skin, Except Pressure.

(P) HCC 170: Hip Fracture/Dislocation.

(v) Spinal Fusion episode category.

(A) Prior post-acute care use.

(B) HCC 8: Metastatic Cancer and Acute Leukemia.

(C) HCC 18: Diabetes with Chronic Complications.

(D) HCC 22: Morbid Obesity.

(E) HCC 40: Rheumatoid Arthritis and Inflammatory Connective Tissue Disease.

(F) HCC 58: Major Depressive, Bipolar, and Paranoid Disorders.

(G) HCC 85: Congestive Heart Failure.

(H) HCC 86: Acute Myocardial Infarction.

(I) HCC 96: Specified Heart Arrhythmias.

(J) HCC 103: Hemiplegia/Hemiparesis.

(K) HCC 111: Chronic Obstructive Pulmonary Disease.

(L) HCC 112: Fibrosis of Lung and Other Chronic Lung Disorders.

(M) HCC 134: Dialysis Status.

(b) All risk adjustment factors are computed prior to the start of the performance year via a linear regression analysis. The regression analysis is computed using 3 years of claims data as follows:

(1) For performance year 1, CMS uses claims data with dates of service dated January 1, 2022 to December 31, 2024.

(2) For performance year 2, CMS uses claims data with dates of service dated January 1, 2023 to December 31, 2025.

(3) For performance year 3, CMS uses claims data with dates of service dated January 1, 2024 to December 31, 2026.

(4) For performance year 4, CMS uses claims data with dates of service dated January 1, 2025 to December 31, 2027.

(5) For performance year 5, CMS uses claims data with dates of service dated January 1, 2026 to December 30, 2028.

(c) The annual linear regression analysis produces exponentiated coefficients to determine the anticipated marginal effect of each risk adjustment factor on episode costs. CMS transforms, or exponentiates, these coefficients, and the resulting coefficients are the beneficiary and hospital-level risk adjustment factors, specified in paragraphs (a)(1) through (6) of this section, that would be used during reconciliation for the subsequent performance year.

(d) At the time of reconciliation, the preliminary target prices computed under § 512.540 are risk adjusted by applying the applicable beneficiary level and hospital-level risk adjustment factors specific to the beneficiary in the episode, as set forth in paragraphs (a)(1) through (6) of this section.

(e) The risk-adjusted preliminary target prices are normalized at reconciliation to ensure that the average of the total risk-adjusted preliminary target price does not exceed the average of the total non-risk adjusted preliminary target price.

(1) The final normalization factor at reconciliation—

(i) Is the national mean of the benchmark price for each MS-DRG/HCPCS episode type divided by the national mean of the risk-adjusted benchmark price for the same MS-DRG/HCPCS episode type.

(ii) As applied, cannot exceed ±5 percent of the prospective normalization factor (as specified in § 512.540(b)(6)).

(2) CMS applies the final normalization factor to the previously calculated, beneficiary and provider level, risk-adjusted target prices specific to each region and MS-DRG/HCPCS episode type.

(f) Retrospective trend factor. CMS calculates the average regional capped performance year episode spending for each MS-DRG/HCPCS episode type divided by the average regional capped baseline period episode spending for each MS-DRG/HCPCS episode type.

(1) The retrospective trend factor is capped so that the maximum difference cannot exceed ±3 percent of the prospective trend factor (as specified in § 512.540(b)(7)).

(2) CMS applies the capped retrospective trend factor to the previously calculated normalized, risk adjusted target prices specific to each region and MS-DRG/HCPCS episode type, as specified in paragraph (e)(2) of this section, to calculate the reconciliation target prices, which are compared to performance year spending at reconciliation, as specified in § 512.550(c).