Thursday, September 08, 2016

The World Turned Upside Down: Risk adjustment and its discontents

In Kimberly Leonard's US News story about the quest to bring more young adults into the ACA marketplace, this input from Caroline Pearson of Avalere Health made my head spin:
Pearson says another phenomenon is contributing to the problem: Insurers don't receive adequate help in paying for this population from the government.

"There is an adverse incentive to aggressively recruit younger healthier people because insurers aren't being compensated adequately for them," she says, adding that this is something the administration could address without Congress.
That's counterintuitive, in that healthy young adults famously cost far less to insure that sicker older adults (or sicker younger ones, but the odds are with the young, as Leonard points out).  Indeed, a longstanding complaint about the marketplace from conservatives such as Avik Roy is that the oldest enrollees can only be charged three times as much as the youngest adult participants, compared to a prior industry norm of 5-to-1.  That is, conservatives argue that marketplace premiums should be lower for young adults, and higher for older ones.

The marketplace, however, is a tended garden, not a wilderness, and its plants are pruned by government shears, a.k.a. risk adjustment. In an email, Pearson explains what kind of compensation she was alluding to:

It has become clear that the risk adjuster is underpaying for healthy people with no diagnosis codes. So, after transfer payments, plans are actually losing money on those people. It is counter intuitive because the market overall needs more healthy people to improve the risk pool. But individual plans do not want too many healthy people because the lose money on them under risk adjustment. So the plans have no incentive to aggressively enroll the healthy individuals.
Risk adjustment, implemented to deter insurers from designing plans that attract only the healthiest customers, can lead to large revenue swings among insurers. Such swings should not render profitable enrollees unprofitable, but that is the complaint.

CMS has issued a proposed rule that would make various adjustments to its risk adjustment formula for 2018. Chief among them are considering prescription drug data, separating out the most expensive claims and covering them separately, and taking into account the higher costs incurred by those who enroll via Special Enrollment Period, outside the open enrollment season. Pearson notes that the proposed rule "is also looking for ways to better predict risk for healthier sub-populations." But any adjustments on this front would not take place until 2018.

Update: via a reader, here is Adrianna McIntyre back in Jan. 2014 relaying a Milliman forecast of the counterintuitive impact of risk adjustment, working in concert with risk corridors and reinsurance (the 3Rs). How the underfunding of the risk corridors and the pending phase-out of them and the reinsurance program would affect/are affecting the calculus, God only knows. But while the assumptions behind the chart Adrianna clipped, pasted below, may be out of date, the forecast certainly illustrates the "world turned upside down" premise:



  1. @Andrew

    Does this mean that the cost of healthcare consumed by the so-called healthy people exceeds the premium revenue, government subsidies and risk adjustment payments received for this group of people?

  2. Something is fishy. I have seen most of the filings from Blue Cross MN and from Preferred One, and what I saw was pretty clear that sick people were major money losers, and the risk adjustment payments received were much less than the losses.

    Something fishy in this article.