By Mark A. Hall

The Commonwealth Fund, May 2011

Abstract

To achieve the aims of the Affordable Care Act, state and federal regulators must construct an effective system of risk adjustment, one that protects health insurers that attract a disproportionate share of patients with poor health risks. This brief, which summarizes a Commonwealth Fund–supported conference of leading risk adjustment experts, explores the challenges regulators will face, considers the consequences of the law’s risk adjustment provisions, and analyzes the merits of different risk adjustment strategies. Among other recommendations, the brief suggests that regulators use diagnostic rather than only demographic risk measures, that they allow states some but limited flexibility to tailor risk adjustment methods to local circumstances, and that they phase in the use of risk transfer payments to give insurers more time to predict and understand the full effects of risk adjustment.

Conclusion

The Affordable Care Act presents an opportunity to make the health care system more accessible and affordable, especially for patients with preexisting or chronic health conditions. But accomplishing health reform’s goals requires effective risk adjustment to ensure that the highly skewed distribution of medical costs across any population does not destabilize insurance markets by favoring some insurers over others. Although risk adjustment may be the thickest of technocratic regulatory weeds, wading into this thicket is critical if insurance reforms are to succeed.

http://www.commonwealthfund.org/~/media/Files/Publications/Issue%20Brief/2011/May/1501_Hall_risk_adjustment_ACA_guide_for_regulators_ib.pdf

Comment:

By Don McCanne, MD

Private health insurers, as businesses competing in the marketplace, have a responsibility to maximize profits and to maintain a competitive edge by offering insurance products with lower premiums. The surest way to do both is to enroll as many healthy individuals as possible while avoiding patients who have or may develop expensive health problems.

In a fragmented system of financing health care dependent on a multitude of private insurers, such as we have under the Patient Protection and Affordable Care Act, it is essential that policies be established to prevent insurers from basing their success on their ability to defeat the very purpose of insurance, which is to equitably shift the costs of health care from the few with greater health care needs to the many with fewer needs.

For an equitable, multi-payer health care financing system that theoretically covers everyone, not only must each insurer pool risks within their respective insurance pools, but regulators must have tools to redistribute funds from those pools comprised of mostly healthy individuals to those pools that have enrolled sicker patients who require more expensive care. This process of transferring funds from healthier pools to sicker pools is known as risk adjustment.

This twelve page Commonwealth Fund brief by Mark Hall is an excellent primer for trying to understand the processes and deficiencies of risk adjustment. Without going into any of the details, on reading this primer the conclusion can be reached that there are a multitude of opportunities for private insurers to game the system, and game it they will. We’re not talking about crooks. We’re talking about private businesses that have a duty to gain a competitive edge by exercising whatever innovations will give them that edge.

Although an inventory of gaming opportunities cannot possibly be provided in this comparatively brief message, a single example can demonstrate this problem.

One tool for adjusting risk is to use the diagnostic codes of the patients in the insurance pool. As the Commonwealth brief states, “Using diagnostic information will likely lead to some degree of upcoding (i.e., increased identification of higher-cost conditions), but some degree of increased diagnostic coding is desirable in order to correct for inaccurate or undercoding.”

Because of both patient confidentiality and the need to protect proprietary information, the coding is done by the insurer. Upcoding is a given since it rewards the insurer with transfers from pools with healthier diagnostic codes, but can you believe that the insurer would ever allow its employees to undercode?

Risk adjustment is important when risk is borne by third parties in multiple, fragmented pools. What would happen in a single payer system? Risk would be borne solely by the government, obviating the need for risk adjustment between pools.

That was the way Medicare worked until private Medicare Advantage plans were introduced. Although risk adjustment mechanisms have been introduced for these private plans, the insurers undoubtedly find ways to enroll the healthy while reporting them as being sick so that they benefit from risk adjustment.

Why have we not been apprised of this scandal? It is difficult for CMS to audit confidential, proprietary information that may have been manipulated in a manner that covers the trails that lead to results benefiting the insurers, especially when CMS is swamped with other work and is funded by austere budgets.

So this is one more reason to switch to an improved Medicare that covers everyone. It eliminates the need to attempt to accomplish the nearly impossible task of accurately adjusting for risk – a totally unnecessary task simply because the single government payer would bear all of the risk.