By Alex Wayne and Drew Armstrong
Bloomberg, July 11, 2011
Insurers with healthier, lower-cost patients would share revenue with rivals whose customers run up higher bills under U.S. rules to stabilize insurance markets within the 2010 health-care law.
Insurers such as UnitedHealth Group Inc. (UNH) would also qualify for $20 billion in subsidies from 2014 to 2016 when they take on the sickest patients, according to the regulations. The money would come from fees levied on the insurance industry.
Rules issued by the Obama administration today attempt to make good on the law’s goal of discouraging private health plans from cherry-picking patients while easing market disruptions when top changes in the medical system take effect in 2014.
The rules create a “risk-adjustment” program that would take money from insurers in a state with low-cost patients and give it to plans whose customers run up the highest bills. The policy applies both to insurers selling coverage within the exchanges and those operating independently.
And…
Affordable Insurance Exchanges: Standards Related to Reinsurance, Risk Corridors and Risk Adjustment
HealthCare.gov (HHS)
July 11, 2011
Risk Adjustment
The Affordable Care Act provides for a program of risk adjustment for all non-grandfathered plans in the individual and small group market both inside and outside of the Exchange. Under this provision, the Secretary of Health and Human Services, in consultation with the States, will establish criteria and methods to be used by States in determining the actuarial risk of plans within a State. The risk adjustment program serves to level the playing field, both inside and outside of the Exchange. Risk adjustment ends the incentive for issuers to avoid the sick and market only to the healthy by transferring excess payments from plans with lower risk enrollees to plans with higher risk enrollees. For this reason, plans will have to compete on the basis of price, quality and service. This allows consumers the ability to pick the plan that best meets his or her needs. The proposal suggests that a constant set of data for risk adjustment be considered, preventing a health insurer that offers qualified health plan in different States from having different reporting requirements. It proposes that risk adjustment calculations occur at the State, rather than plan or Federal level, given States’ role in the system. And while a Federal risk adjustment methodology would be developed, States could use an approved alternative. We welcome comments on the risk adjustment program design.
http://www.healthcare.gov/news/factsheets/exchanges07112011e.html
And…
Patient Protection and Affordable Care Act; Standards Related to Reinsurance, Risk Corridors and Risk Adjustment
Department of Health and Human Services
Proposed rule
(Excerpt)
§153.320 Federally-certified risk adjustment methodology.
(a) General requirement. Any risk adjustment methodology used by a State, or HHS of behalf of the State, must be established as a Federally-certified risk adjustment methodology. A risk adjustment methodology may become Federally-certified by one of the following processes:
(1) A risk adjustment methodology developed by HHS, with its use authorized and published in a forthcoming annual Federal notice of benefits and payment parameters; or
(2) An alternative risk adjustment methodology submitted by a State in accordance with §153.330, and reviewed and certified by HHS. After HHS approves a State alternative risk adjustment methodology, that methodology is considered a Federally-certified risk adjustment methodology.
(b) Publication of methodology in notices. A State must use one of the Federally-certified risk adjustment methodologies that will be published by HHS in a forthcoming annual Federal notice of benefits and payment parameters or that has been published by the State in the annual State notice described in §153.110(b). Each methodology will include:
(1) A complete description of the risk adjustment model, including –
(i) Factors to be employed in the model, including but not limited to demographic factors, diagnostic factors, and utilization factors if any;
(ii) The qualifying criteria for establishing that an individual is eligible for a specific factor;
(iii) Weights assigned to each factor; and
(iv) The schedule for collection of risk adjustment data and determination of factors; and
(2) Any adjustments made to the risk adjustment model weights to determine average actuarial risk.
(c) Use of methodology for States that do not elect an Exchange. HHS will specify in the forthcoming annual Federal notice of benefits and payment parameters the Federally-certified risk adjustment methodology that will apply in States that do not elect to operate an Exchange.
Proposed rule (103 pages):
http://www.ofr.gov/OFRUpload/OFRData/2011-17609_PI.pdf
Comment:
By Don McCanne, MD
Private insurers have been gaming the system for many decades. They have been selectively marketing their products to the healthy workforce, their young, healthy families, and to healthy individuals who purchase their coverage in the individual market. The costs of higher needs patients have been shifted to the taxpayers through programs such as Medicare end-of-life care, Medicare long-term disability care, Medicaid nursing home and other care, and safety-net institutions for the uninsured. So what has changed that requires us to now look at risk adjustment?
Congress and the President decided to cover a larger percentage of our population by expanding the market of private health plans, plus expanding Medicaid for low-income individuals. It is the expansion of private insurance that has forced the realization that these plans now will have to include individuals with higher health care costs.
Since the model chosen for reform is a market of private plans competing within and outside of the exchanges, insurers have great incentives to market to the healthy while dumping the more costly patients onto their competitors. The higher costs that their competitors would face would have to be reflected in higher premiums, causing a plunge in market share and an eventual exit from the market – a process known as the death spiral. Pro-market enthusiasts certainly understand the consequences of this anti-competitive behavior.
The solution that has been promoted is risk adjustment. Those insurers that have been successful in enrolling a healthier population are required to take some of the savings and pass that on to insurers who have had to cover the higher costs of less healthy beneficiaries. This transfer of funds penalizes insurers who have deliberately avoided covering those with greater needs, while protecting the insurers who have included in their rolls a disproportionate share of these high cost patients. The alleged advantage is that it preserves a competitive market, even if not through a true laissez-faire free market.
There is some controversy over the effectiveness of risk adjustment. Most proposals do not transfer the full difference in spending caused by the variation in risk exposure, still leaving those insurers with higher risks at a disadvantage. Also, the insurers who find that their gaming operations are under attack can be quite innovative in finding new games to play. One of the more common is to upcode to make their patient population appear sicker than they really are. Although auditing can be used in an attempt to discover such chicanery, it is an expensive and not very effective process. Proving that each patient was not as sick as the insurer claimed is arduous and very frequently does not exceed the benefit-of-the-doubt threshold.
Because of these problems, we have been anxiously awaiting HHS’s proposed rule on how they were going to approach risk adjustment that would be fair to all and not cause yet further increases in health care costs. Unfortunately, the proposed rule doesn’t help much. They have not yet presented their model for actuarial risk adjustment, merely stating that “a Federal risk adjustment methodology would be developed.”
Regarding costs, the transfer would be budget neutral (the amount taken from some insurers and given to others would not change total spending on actual health care), but the costs of administering the program, including extensive data collection and the high costs and complexity of the auditing processes, would be assessed against the insurers and passed on to patient/consumers in the form of higher insurance premiums.
Risk adjustment is yet one more expensive, administratively burdensome, and often inequitable consequence of insisting on using private insurers to provide health care coverage. Nefarious risk gaming would not occur in a single payer national health program. But games the private insurers play, and with our money!