How Risk Adjustment Challenges the Health Insurance Market

August 23, 2016 - Ever since the provisions of the Patient Protection and Affordable Care Act came into effect on January 1, 2014, healthcare payers have been unable to deny health insurance or charge larger premium costs to those with pre-existing conditions. Along with the public health insurance exchanges, patients with pre-existing conditions have a much easier time affording coverage today. However, other provisions had to be incorporated in order to stabilize the health insurance market when payers began to serve sicker, more costly populations.

The Henry J. Kaiser Family Foundation outlines the provisions necessary to keep payers incentivized to accept sicker enrollees instead of finding ways to bypass this population. For example, risk selection occurs when healthcare payers have more incentive to avoid enrolling sicker, more costly patients.

However, the Affordable Care Act created a provision for the health insurance market called risk adjustment. Risk selection is minimized with the incorporation of risk adjustment, which transfers funds from health plans with low-risk enrollees to health plans with more high-risk enrollees.

PricewaterhouseCoopers LLP or PwC released a report that outlines some of the current issues the health insurance market is facing when it comes to operating within the risk adjustment clause of the Affordable Care Act.

“The [risk adjustment] program was created to create a level playing field so that there’s no incentive for the health plans to handpick or cherry pick the best risk in their health program,” Jinn-Feng Lin, Principal at PwC Health Research Institute, told HealthPayerIntelligence.com in an interview. “By doing risk adjustment, it mitigates the company or the health plan trying to pick out only the healthy members instead of the sicker members. Really, that’s one of the key goals [of the risk adjustment program].”

The healthcare payers that are experiencing trouble from the risk adjustment clause are those who are start-ups and much smaller than more established health insurers. These health plans often attract younger and healthier members, but have had difficulty anticipating the costs of the risk adjustment payment contributions. Due to less experience, many of these payers have priced their premiums too low to account for the risk adjustment contributions.

“I think the biggest challenge is the uncertainty of the final risk adjustment annulled because it is a concurrent calculation meaning that you don’t find out how much you owe or you get until six months after the year finished,” Lin explained some of the issues surrounding risk adjustment.

“It’s somewhat difficult when you are projecting and looking at the financial results for the current year to really have a good sense of what you’re looking at and also how to use that information with regard to the future.”

Health insurance cooperatives have also seen significant obstacles, according to the PwC report. Montana Health Cooperative, for example, has had to contribute $6.4 million through the risk adjustment clause while the Group Health Cooperative in Washington has to spend more than $13 million to reduce risk selection in the health insurance market.

“Your risk score in relation to each state’s pool of risk is part of that challenge,” Jon Schaper, Director at PWC Health Research Institute, told HealthPayerIntelligence.com. “I think the other thing that has been such a focus on the Medicare and Medicaid risk adjustment programs is that insurers are still ramping up on the commercial ACA to get the same level of attention and vendor support to enhance their risk scores. It’s coming along, but it’s a critical piece [to the challenges of risk adjustment].”

Less experienced start-up insurance companies did not anticipate how costly the risk adjustment contributions would be despite the fact that they serve a less expensive and healthier consumer base. When asked what the technicalities and issues are behind the reason why these healthcare payers have struggled, Schaper expanded upon the former explanation.

“I don’t know if they are necessarily struggling as much as they weren’t anticipating how much their transfer payment would be so they didn’t bill that in,” Schaper noted. “They may not have assessed the magnitude. I think, more importantly, there may be smaller risk adjustment and informatics departments so they may be more resource-constrained as far as forecasting. Bringing in other vendors to enhance their risk scores through additional capture of diagnostic data is beneficial.”

“Definitely, I think for smaller plans, just because they are less sophisticated in how risk adjustment works, [are the ones struggling],” Lin explained. “Even though they may be receiving the younger and healthier populations, they did not anticipate the level of the amount they have to pay back into the program.”

Lin clarified that there may have been difficulty on the part of these less experienced payers to predict the future of their financial stability and future pricing with regard to the risk adjustment program.

“The struggle is not being able to have visibility into the true, final results of the financials and how to use that to build future pricing,” Lin continued.

“We’ve definitely run across some payers who are not even able to reproduce the scores on their end so it’s very hard to monitor the risk scores on their end and then identifying where the gaps are and to monitor how they’re developing over the course of the year,” Schaper added.

The PwC report outlines some steps that healthcare payers can take to avoid these obstacles. First, payers will need to factor risk when setting their premium prices. Secondly, additional resources may need to be incorporated including the need to improve the information flow of risk adjustment data to vendors and providers. Payers may need to monitor provider coding and vendor performance as well.

Finally, payers will need to remove any barriers that exist between public and private, commercial health plans when monitoring claims. Once these issues are managed, the risk adjustment program may fully benefit the health insurance market. Lin concluded the interview by outlining some of the important benefits that the risk adjustment program does offer to the health insurance market.

“It really helps level the playing field,” she said. “It’s more of a premium stabilization program. It’s really trying to stabilize the ACA market and, again going back to the level playing field, you get more revenue by taking on riskier members as compared to the resources required to serve a younger and healthier population that brings payers to pay it back into the program.”