A project of the George Washington University's Hirsh Health Law and Policy Program and the Robert Wood Johnson Foundation

Health Affairs and RWJF issue brief warns risk adjustment establishment could be challenging

Posted on September 6, 2012 | No Comments

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Last week, Health Affairs and the Robert Wood Johnson Foundation released a policy brief detailing what risk adjustment is, how it works, and how policy issues are involved in its implementation. Risk adjustment involves a third party such as the federal or state government collecting data from claims and diagnoses for all enrollees in a particular market. Then, plans with higher than average health risks will receive payments whereas plans with lower than average risks will pay more. Under the Affordable Care Act (ACA), risk adjustment systems must be set up for all qualified health plans (QHPs) that are sold in the individual and small group markets starting in 2014. The purpose of risk adjustment is to protect plans from losing money as a result of covering individuals with high-cost conditions. The system is currently used for Medicare Advantage plans, Medicare Part D benefits, many Medicaid managed care programs, and the Massachusetts exchange market.

The risk adjustment methods currently in place under Medicare Advantage and Medicare Part D may not translate well to the populations covered and to the individual and small group plan offerings under the ACA, according to the issue brief. A RAND Corporation simulation found that risk adjustment was variably successful in adjusting payments across the different types of exchange plans to be offered.

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A new set of Frequently Asked Questions (FAQs) issued by the Centers for Medicare and Medicaid Services (CMS) answers several questions concerning the risk corridor provision of the Affordable Care Act (ACA). Pursuant to the Notice of Benefit and Payment Parameters for 2015 final rule, CMS stated that the risk corridor provisions would be implemented in a budget neutral manner. The new FAQ stated how the administration will address various issues that may arise in providing risk corridor payments, including sufficiency and medical loss ratio (MLR) determinations.
The Center for Consumer Information and Insurance Oversight (CCIIO) recently announced that the U.S. Department of Human Services (HHS) may use a a concurrent model for risk adjustment. The overall goals of the risk adjustment model are to mitigate impacts of adverse selection and stabilize premiums in the individual and small group markets. HHS will use the Hierarchical Condition Category (HCC) classification system as a basis for the HHS risk adjustment model. This model utilizes diagnoses from all physician and hospital encounters, and profiles beneficiary medical problems with diagnostic categories (HCCs) that are not mutually exclusive. HCC classification provides a diagnostic framework for developing a risk adjustment model to predict medical spending and plan accordingly. The concurrent risk adjustment model, if implemented, will use diagnoses in the current year to predict expenditures for that same year. Importantly, HHS plans to select a different set of HCCs for the Federal risk adjustment methodology than those used in Medicare to reflect the differences in population. HCC was originally developed for CMS to do risk adjustment for Medicare Advantage and Part D prescription drug plans. The model will have to be adapted for the Affordable Care Act's (ACA's) risk adjustment due to the presence of the private insurance market.
Today the U.S. Department of Health and Human Services released a final rule implementing standards set for States related to reinsurance and risk adjustment, and for health insurance issuers related to reinsurance, risk corridors, and risk adjustment. These programs, created as provisions under the Affordable Care Act (ACA), are intended to mitigate the impact of potential adverse enrollment selection and stabilize premiums in the individual and small group markets as insurance reforms and the Exchanges are implemented, which will begin in 2014. These three programs will help ensure that insurance plans compete on the basis of quality and service as opposed to attracting the healthiest individuals (known as adverse selection). Better competition leads to improved coverage so that both healthy and sick consumers can pick the best plan for their needs. Click here for a summary of risk adjustment, reinsurance, and risk corridors.
The temporary risk corridors program allows the federal government to share a QHP’s profits or losses among other QHP issuers due to inaccurate rate setting inside the Exchanges from 2014-2016. To determine whether a QHP issuer has inaccurately set premium rates that lead to an unjustified profit or loss, a QHP’s “allowable costs” must be calculated per the requirements in the Premium Stabilization Rule. The IFR modifies the definition of “allowable costs” such that a QHP’s allowable costs are to be determined based on its pro-rata share of the QHP issuer’s incurred claims for all non-grandfathered health plans within a state, and allocated to the QHP based on premiums earned by the issuer in the market...
This Age Curve portion of the sub-regulatory guidance reminds states that in the absence of a state-established and HHS-approved uniform age rating curve for the purpose of age rating in the individual and small group markets, a federal default standard will apply. The statute and final rule require that the premium rate charged by an issuer in the individual and small group market (for non-grandfathered plans) may vary by age, but not by more than a 3:1 ratio for adults. Moreover, the final rule defines, and the sub-regulatory guidance reiterates, the standard age bands for insurance rating purposes as follows...
The Patient Protection and Affordable Care Act (ACA) included health insurance market reforms designed to ensure that individuals and small businesses could not be denied coverage or be charged significantly higher premiums because of an individual’s health status. While some of the market reforms enacted in the ACA were designed to go into effect shortly after enactment (e.g., requiring issuers and employer-sponsored plans to cover adult children up to age 26 on a parent’s health plan, and limiting pre-existing condition exclusions) the most sweeping reforms...
The reinsurance, risk corridor and risk adjustment programs, established under the ACA at sections 1341, 1342 and 1343, respectively, were developed to mitigate possible health insurance adverse selection and to maintain stable premiums in the individual and small group markets as implementation of the ACA’s insurance market reforms and health insurance Exchanges begin in 2014. Under ACA section 1341, each state must establish a temporary reinsurance program for years 2014-2016 to help stabilize premiums for coverage of high-risk individuals in the private market. Section 1342 of the ACA requires the HHS Secretary to establish a temporary risk corridor program...
A new report from the Robert Wood Johnson Foundation, in conjunction with the Urban Institute, released today explores the impact of using a more constrictive 3:1 age rate band set forth in the Affordable Care Act (ACA) against the 5:1 age rate band that is currently being used in the insurance industry. As a result of the ACA, insures are prohibited to charge a premium to an older adult over three times more than the premium they would charge a younger adult for the same plan. Insurers believe that this provision will increase costs for younger adults, forcing them to leave the insurance market and raise premiums for older adults. A study on age rating bands, performed by the Urban Institute, showed that loosening the age rate band from 3:1 to 5:1 would have minimal impact on the out-of-pocket costs to younger adults when accounting for the availability of government subsidies.  
In a study led by the Dartmouth Atlas Project and The Dartmouth Institute for Health Policy & Clinical Practice, researchers raise questions regarding the risk adjustment that Medicare and others apply to insurance claims data in an effort to make effective comparisons about the performance of doctors and hospitals and to credit providers for treating patients who are sicker than average. The study examines commonly used risk-adjustment methods and finds that regions and hospitals with more physician visits, referrals, tests, and imaging can make some patient populations appear to be sicker than others when they are not. As a result, these regions and providers with more diagnoses receive higher reimbursements.