Risk adjustment is the process by which insurers with sicker than average populations get money from insurers with healthier than average populations. One of the goals is to make cherry picking an inherently not particularly profitable activity. Some companies, like Centene/Ambetter, will deliberately seek out to insure a reasonably healthy population while accepting that they’ll have a massive cash outflow. Risk adjustment occurs by the calculation of relative health/risk scores where individuals with certain diagnosises are scored in different manners. The score will (roughly) reflect the average incremental cost multiplier for people who have a condition compared to the general population where everything else is held equal.
These risk scores are very rough guesses. They are averages with wide error bands. In Medicare, in 2015, an individual with Type 2 Diabetes was assumed to cost 15% more than the average Medicare beneficiary. However there is wide variance in individual costs for people who have the same risk score.
And that is an area of an interesting possibility of an exchange hack. Some Exchange insurers have started to issue condition specific policies. There are several plans on Exchange that are actively recruiting individuals with diabetes. This is odd and a clear signal of the transformation of the individual market. Insurers are actively seeking to take on risk.
There are two reasons why insurers would want to do this. The first is that risk adjustment is accurately pricing the incremental cost of treatment on average. These insurers offering specific condition policies may have come up with either a better treatment regimen or they are merely paying their providers very little so the same treatment regime costs less than the risk adjustment bump payment. This is a straightforward change that will put some downward pressure on pricing.
The other thing that could be going on is that insurers are skimming the low cost variance of the diabetes population. This could be done by benefit design, it could be done by marketing these plans at gyms and nutritionist offices which would be attractive to people who are already mostly compliant with their treatment plans. It could be done in a half dozen ways. If these specific condition plans are primarily a risk selection play for low actual but high designated transfer payment individuals than it is a cost shift as the remaining diabetic population is being covered by other insurers who are not getting sufficiently large transfer payments to cover the incremental cost.
Left everyone speechless with this one :)
Kidding aside, very interesting, but challenging to grasp. For me anyway.
Which is precisely why single payer makes much more sense. No need to deal with this silliness.
@liberal: yeah, well the votes weren’t there for that. And still aren’t, so get cracking on GOTV. Until we flip Congress, we aren’t going to have nice things.
@satby: When I read the RW comments in the online version of my local newspaper, I think to myself “this is why we can’t have nice things.”
@Germy Shoemangler: yep. Politics of spite, as Krugman called it. I’m surprised there isn’t an epidemic of bright yellow people walking around some of them are so full of bile.
@satby: Only two comments till the glib dismissal. is that a new record?
I say this with all due respect. This stuff you constantly post is rather high brow for a site that is the political equivalent of fart jokes. Just sayin.
By what mechanism does this occur? The insurance’s insurance company ?
@Lee: Good question — via the Center for Medicare and Medicaid Services (the operational arm of the Department of Health and Human Services.) Insurers submit all of their claims to CMS, CMS runs the claims through an algorithm and compares Insurer A against Insurer B and then says Insurer A has 98% of the average risk in the region while Insurer B has 102% of the average risk, so Insurer A will send 2% of premiums over to Insurer B to make them whole for taking on more medical risk.
It is a bit more complicated than that but that is the TLDR instead of the 1,400 page technical document that I need to reread at some point.
@shomi: Balloon Juice is evolving, and has always evolved. We have our fart jokes, our pet pictures but also dedicated but idiosyncratic subject matter experts. Adam is a SME on national security education and strategy formulation, Kay is an SME on voting rights, I know healthcare, Tom is an SME on creative non-fiction and science communication.
As I see it, Balloon Juice is the college faculty bar a couple blocks off campus where the profs and research staff go to unwind… there is some serious snark and stress release and a few very in-depth conversations about something amazing, interesting and esoteric discussions in the corner booths. Not everyone wants to get into a deep dive with three post-docs in the corner, but the place is safe and accepted to have that type of discussion in between periods of the hockey game on TV.
I get the impression that this has been going on for years if not decades. To me this is really an amazing revelation (and I’m not sure why).
@Lee: Yep, risk adjustment has been going on for half a generation in Medicare, all of my career and some more for Medicaid managed care, and since Day 1 for ACA. Basically if you’re going to have guaranteed issue, community rated insurance offered by private insurers, the system needs risk adjustment to avoid cherry picking.
@Richard Mayhew: Ah. Continuing education is fun eh?
Says the tax pony in ACA class.
Since there’s not a lot of comments – maybe you (Richard Mayhew) could comment on some pricing I don’t understand.
We’re in open enrollment with my employer (which is a University system so the fiscal year starts in July and we have open enrollment Apr 15-May15. We can choose between 3 plans
“Regular” – $750 deductible, $4250 out of pocket max
“High Deductible” – 1250 deductible, $5000 out of pocket max – premiums (single person) are $1278 less per year
“Consumer Directed” – $1500 deductible, $5000 out of pocket max, can set up health savings plan – premiums are $1664 less per year
With Obamacare now the plans are very similar (wellness care 100%, no lifetime max etc, reimbursement rates same, same network). If the savings on the premiums is more than the difference in the deductible or even the out of pocket max why on earth wouldn’t I go for the high deductible or the CDHP? (Which I’m currently on now but I’m thinking of switching to the CDHP and starting an HSA since you don’t lose it at the end of the year.)
Is there something I’m missing? Thanks in advance if you care to answer.
@maeve: I am not a broker, so this is not advice, just commentary.
I don’t think you’re missing much if anything.
The idea is that the High Deductible and Consumer Directed plans will see lower utilization because the person is on the hook for more of the initial expenses. The higher deductible in the CD will save the insurer a direct $376 that the patient pays directly PLUS some percentage of claims that never come in the door due to the higher deductible scaring people away from using the health system on a marginal case.
Thanks. That makes sense. We’re self-insured and your commentary over time has made sense for how things have changed in the health plan over the past few years.
@Richard Mayhew: The number of comments tells me all I need to know. These high brow posts of Richards are lucky to break out of double digits. Cole posts one of his paranoid rants about drones or big brother watching us or how all blacks are shot for no reason at all by all cops or how Fat Bastard Christie Kreme is a heck of a guy, oh and by the way his dog puked today….and the comment post skyrockets.