By Edwin Park
Center on Budget and Policy Priorities, December 12, 2011
Risk adjustment is one of the critical elements of health reform (i.e., the Affordable Care Act, or ACA) that’s designed to encourage insurers to compete based on price and quality – not on attracting the healthiest enrollees and deterring those in poorer health, as they typically do today in the individual and small-group insurance markets.
Under the ACA’s risk adjustment provision, insurers in the individual and small-group markets with sicker-than-average overall enrollment will receive payments to compensate them for their resulting higher costs. The payments will come from plans that enroll healthier-than-average people who do not cost as much to cover. By compensating insurers that enroll people in poorer health, risk adjustment reduces the incentive for insurers to “cherry pick” the healthy and avoid enrolling people with chronic illnesses and other serious health conditions.
To implement this “risk adjustment” provision, the federal government proposes that the entities administering risk adjustment – states or the U.S. Department of Health and Human Services (HHS) – determine the health status of plan enrollees based on data that insurers submit to them, which is similar to how risk adjustment in Medicare works today. But some insurance companies, as well as some House Republicans, are urging the federal government to allow insurers to measure the health status of their enrollees themselves without submitting any data.
Some insurance companies are mounting strong opposition to the HHS proposal on risk adjustment data submission. Instead, they are pushing HHS to adopt a “distributed” approach to the collection of risk adjustment data.
Under a distributed approach, insurers would standardize their data (according to federal and state specifications), themselves apply the risk adjustment methodology and calculate their own risk scores and then simply submit those scores to the entity administering risk adjustment. Insurance companies would not provide the risk adjustment entity with any of the underlying claims and encounter data needed to determine whether the data are reliable and valid and whether the risk scores have been accurately calculated. (Insurers would be expected to make a sample of that data available after the fact for retrospective audits.)
Risk adjustment is an essential element of the Affordable Care Act. Letting insurers calculate their own risk scores without having to submit the underlying data needed to make sure those calculations are accurate would place the health reform law’s risk adjustment system at substantial risk of error, upcoding, and fraud, threatening the long-term success of the exchanges and the major health insurance market reforms scheduled to take effect in 2014.
http://www.cbpp.org/cms/index.cfm?fa=view&id=3640&emailView=1
And…
Letter to Centers for Medicare & Medicaid Services
Re: Proposed Rule for Standards Related to Reinsurance, Risk Corridors and Risk Adjustment (CMS-9975-P)
BlueCross BlueShield Association
October 31, 2011
We strongly recommend that HHS use a distributed model for accessing risk adjustment data. Our recommended model: 1) alleviates members’ privacy concerns since States will not be collecting confidential, individually identifiable health information; 2) retains issuers’ control of proprietary data that has strategic importance; and 3) allows States/HHS to maintain the same control over the process while alleviating the burden of creating, securing, maintaining and updating a large costly centralized multi-payer database.
http://www.regulations.gov/#!documentDetail;D=HHS-OS-2011-0022-0543
And…
National Bureau of Economic Research report on risk adjustment in the Medicare Advantage Program:
Thus the authors conclude that the Medicare Advantage program both increased total Medicare spending and transferred Medicare resources from the relatively sick to the relatively healthy, and that risk-adjustment was not able to address either of these problems.
https://pnhp.org/blog/2011/10/03/private-medicare-plans-shockingly-game-risk-adjustment/
Comment:
By Don McCanne, MD
Insurers that corner the market of healthy individuals have an unfair advantage over insurers that cover a greater number of high cost, sicker patients. To protect those insurers with high costs from failing in the markets, risk adjustment corrects for the market distortions by taking funds from the insurers with low cost patients and transferring them to the insurers with high cost patients.
Risk adjustment may be a great theory, but in practice it doesn’t work very well. As an example, even though prohibited from selectively enrolling healthier patients, Medicare Advantage plans have been very successful at selectively marketing to the healthy. Insurers end up with significantly lower costs, even though they are paid higher amounts than are paid for patients in the traditional Medicare program.
In 2004, Medicare began to adjust for risk, but the Medicare Advantage insurers gamed the system, as was demonstrated in an NBER report (link above), further increasing the unfair differential to about $3000 per patient. The Medicare-supervised risk adjustment was ineffective, not due to the incompetence of Medicare, but rather due to the deviousness of the Medicare Advantage plans in coding patients with just a touch of illness, making them appear as being more seriously ill than they were.
Now the insurers want to do their own “distributed model” of risk adjustment, preventing federal or state bureaucrats from looking over their shoulders as they do their dirty deeds. This applies not only to Medicare Advantage plans but to all plans in and out of the exchanges, except for grandfathered plans. They claim that this secrecy is necessary to maintain patient privacy and to protect the insurers’ proprietary data, but risk adjustment of the Medicare Advantage program has demonstrated that these are not valid concerns.
Risk adjustment does not work, as the insurers will always game the system. The insurers’ solution is to allow them to do it in greater secrecy, with a “trust us” attitude that certainly has not been earned based on their previous behavior.
A solution that would benefit all of us would be to totally eliminate the need for risk adjustment. How do you do that? You simply eliminate multiple risk pools by eliminating the private insurer middlemen, and then establish a single, universal risk pool – an improved Medicare for all. There would never be a need for Medicare to risk adjust itself.