Revenue neutral risk adjustment

Allison Bell at LifeHealthPro  has a couple of concerns about the risk adjustment process for the Exchanges.  I don’t think they are big concerns:

Privacy concern:

One possible threat is consumer privacy concerns. Consumers may not be thrilled to learn that insurers are assigning them risk scores.

I don’t think this is a strong concern. Every insurer has some means of identifying who is healthy and who is not, and then how unhealthy a person is unlikely to be. There are dozens of vendors that have systems that crawl through claims and other data in an attempt to predict which individuals will have preventable big claims in the future. I have three meetings before Christmas concerning one particular vendor whose analysis is actually better than what their sales people promised.

Any insurer that is involved in any other guaranteed issue offering (CHIP, Medicaid, Medicare Advantage) will also have some type of government risk scoring system because population health will change capitated revenue. Any insurer that is involved in a gain sharing or ACO provider model has some type of risk adjustment. It is a fact of life.

Revenue neutrality means more insurer on insurer fighting:

In the new PPACA HHS-RADV system, all of the payments to insurers have to come from other insurers. Insurers have an incentive to “upcode” their enrollees, but other insurers have an incentive to detect the upcoding, or to leave the individual and small-group market if they feel the risks of having to pay into the risk adjustment program outweigh the potential benefits of being in the individual and small-group markets.

This to me is far more interesting.  Medicare uses a non-revenue neutral model.  An additional diagnosis of diabetes means the insurer gets a payment bump for the incrementally diagnosed individual.   The incentive here is to maximize coding to maximize revenue.

Exchange, and some state Medicaid programs use revenue neutral risk adjustment models.  That model changes insurer incentives towards a red queen race:

The problem is insurance companies that elect not to chase their providers for higher diagnosis coding intensity will see their risk scores look comparatively lower compared to high intensity coding companies, and thus they’ll lose money. So everyone has to do it, or no one has to do it. Right now we are in a stable, socially negative equilibrium of high intensity claim coding for risk score optimization.

Red queen racing is already happening in other revenue neutral risk adjustment programs.  This is not a change in behavior only a change in breadth of a behavior.  I don’t think her concern that insurers will be fighting other insurers is a big deal (besides for popcorn farmers as they’ll get to go on vacation more often).  State and federal risk pool administrators don’t care too much as the money is not coming out of their budgets.  Insurers know the data best.  They’ll know that when they look at the statistics that there is no way in hell Insurer X is covering every single known hemophiliac in the country despite what their risk score is saying about the incidence of very severe hematological conditions.  Instead, they’ll appeal the data and discover that a single provider had been miscoding low level diagnosistic  claims as their biller was flipping codes once every three hundred submissions by a software error.

The insurers are the entities that are closest to the data, so they are the entities that are most likely to be able to call bullshit in real time.  I don’t see this as a bad thing.