The plan would install a so-called circuit breaker to prevent companies from paying more than 2% of their premium revenue into the program each year. That boundary would make insurers’ financial obligations more predictable and avoid the kinds of surprise payouts that contributed to the destabilization of several health plans in 2015.
Franchini is leading the push to overhaul the risk adjustment program amid concern that the program is flawed and will prompt small insurers and startup companies to leave the ACA’s individual exchange market. The idea is still in its early stages and has yet to be formally announced. But Franchini said several other insurance regulators have privately expressed interest in the proposal.
PPACA is a reconstruction of the private and small group insurance market. It is a transition away from where profitability meant a core competency of running away from risk towards a basic core competency of covering sick people and a future goal state of preventing people from getting too sick. Restricting risk adjustment payments re-emphasizes competency at running away from sick people while charging healthy people high rates.
The easiest way to make money in health insurance is to not pay claims. The easiest way to not pay claims that does not involved really ugly stories on the local news or long prison terms is to only cover healthy people.
PPACA with guaranteed issue and modified community rating for the small group and individual markets takes away the bluntest tool to avoid covering the sickest people. We can’t use previous medical history to not cover highly probable high cost individuals.
However, it still is not that “hard” to craft plans that are amazingly unappealing to sick people in order to gain a disproportionately healthy risk pool. Capping risk adjustment exposure is an invitation to create some extraordinarily ugly policies and plan designs. These ugly plan designs would be optimize to attract extremely healthy people and scare away expensively sick people.
Uncapped risk adjustment makes ugly selection optimized plans far less profitable and thus less attractive to offer.
There are a couple of techniques to create ugly plans.
In 2014, insurers in Florida used formulary decisions to be ugly to AIDS/HIV Patients. They would not cover any AIDS/HIV drugs on anything other than the highest cost sharing tier. Anyone with AIDS/HIV would hit their out of pocket limit within three months of enrollment.
Benefit design decisions (the split between deductibles, co-pays,co-insurance etc) have dramatically different distributional consequences. Plans that rely only on deductibles to meet their cost sharing are more attractive to very sick individuals than plans that have no deductibles but $4,000 co-pays for in-patient admissions. Finally, network manipulations can lead to selection occurring. Narrow networks are less attractive to very sick individuals as there is a chance that a needed provider(s) are not in the network. Narrow networks with no major specialty hospitals are cheaper than narrow networks with specialty hospitals and they are both much cheaper than broad networks.
Right now there are two features that counteract the desire of an insurer to be as ugly as possible to sick people. The first is the 80% MLR ratio. Insurers have to spend 80% of their premium dollars on claims and limited quality improvement activities. It makes no sense to create an ugly plan and price it $1 underneath the 2nd Silver point of a non-ugly Silver plan. A lot of the revenue will go out the door as rebate checks.
Now if the plan is priced appropriately low so that the 80% MLR rebate scenario only accidentally comes into play, the other major element comes into play as a deterrent. Risk adjustment is a transfer payment from insurers with healthy risk pools within a state/metal band group to insurers who have sicker risk pools. Right now it is an unlimited potential liability. If an insurer is only covering 23 year male former D-1 athletes, they are sending massive checks over to the insurers that are covering 64 year olds who takes 15 pills every morning.
The combination of MLR requirements and open ended risk adjustment dramatically reduces the attractiveness of pursuing an ugly to sick people strategy. There just is not enough probability of making a lot of money that way.
Now if the risk adjustment transfer is limited to 2% or 5%, insurers can make a rational calculation that creating an absolutely hideous but low cost product that will only be picked by very healthy people can be very profitable to the limits of the MLR requirement. There will be a 2% tax of RA payments, but a lot of probable profit.
Bringing the core issue out 2 steps, I understand why the co-ops, smaller insurers and new entrants to the market want some type of limitation or predictability on RA payments. There is significant evidence in Medicare Advantage that insurers aggressively seek to maximize the projected disease burden of their covered population. Large national carriers have entire buildings devoted to coding experts and physician relationship managers who seek to maximize defensible coding. A common technique is to have providers add a “Z” (ICD-10) or a “V” (ICD-9) disease status code along with the specific disease code. Some models will double the value of a diagnosis if it is reported via the status code instead of the acute code.
Running that type of risk score and thus revenue maximization program is both expensive and requires significant expertise plus lots of time to build relationship with providers. New entrants and small players either don’t have the money, the time or the expertise, so even if they are covering an identical risk pool, they are most likely presenting to the risk adjustment system pool that scores as less sick than that of an incumbent, large insurer.
So it makes sense that small insurers, low overhead insurers and new insurers want predictability in their risk adjustment exposure. But giving those insurers that type of predictability massively destablizes the market from offering decent insurance to only offering hideous insurance for anyone who actually needs it. I don’t think that is a good idea.[/av_textblock] [av_social_share title=’Share this entry’ style=” buttons=” share_facebook=” share_twitter=” share_pinterest=” share_gplus=” share_reddit=” share_linkedin=” share_tumblr=” share_vk=” share_mail=”][/av_social_share]