Risk adjustment and Silver Loading

Susannah Luthi at Modern Healthcare (subscription only) raises a very good point about Silver Loading; it will make risk adjustment in some states completely unpredictable.

“If told that enrollees are now lower-risk than in the past, which is now the case, plans with a higher number of gold members may get too much compensation under risk adjustment,” Dorn said.

If higher-risk enrollees opt for bronze because they have free or very cheap premiums thanks to the increased subsidies, the carriers insuring those plans could lose money in the risk-adjustment payments. This could impact companies like Security Health Plan, which has seen a shift to bronze plans even though its population, which skews older, does need to use their coverage.

The ACA risk adjustment process is a zero sum game within each state. The formula assigns weights to demographic characteristics and some diagnosis and prescription information. The weights vary by metal bands. Two identical people will produce a different total score if one buys Silver and the other buys Gold.

This is not a problem if the state is a single insurer state.

This is a minor problem if all of the market(s) in the state showed very similar shifts in metal band market share.

This is a minor problem if the changes in metal band composition were a reasonably efficient sorting by health status. If the new Gold buyers who normally would have bought Silver are sicker than average and the new Bronze buyers are healthier, then things wash out.

It is potentially a significant problem in states where there is significant variance in metal share distribution. Pennsylvania and Georgia have a lot of variance happening in their Gold uptake.

In Pennsylvania, every county except Philadelphia and the four county Mainline suburbs had at least 20% of the on-Exchange buyers purchase a Gold plan. There is significant variation by county and insurer. Central Pennsylvania counties in one rating region had over half the buyers go Gold because of pricing advantages. All else being equal, risk adjustment would over score the rest of Pennsylvania and under score Greater Philadelphia. This is counter-balanced to some degree by Greater Philadelphia have a lower Bronze percentage than most of the state. But on first pass, the significant variation and overweighing of Gold plans will pull net risk adjustment out of Greater Philadelphia and Independence Blue Cross and Blue Shield and send that money to everyone else in the state.

Georgia is even more complex of a story. One insurer, Alliant, aggressively Silver gapped and Silver loaded. Most of their service area was heavy on Gold and Platinum plans (Platinum also gets a risk adjustment bump) and light on Silver and Bronze. Other insurers in the state are very heavy on Silver compared to both national averages and Alliant’s share.

The challenge in risk adjustment for the ACA is that the actuaries for a single insurer have to project both their own marketshare and covered population characteristics and all other insurers’ market share and covered population characteristics in the state. Projections of company owned data with a known strategy has inherent variance. Trying to project risk adjustment due to the actions and enrollment of other companies several months before open enrollment starts is a Sisyphian task.

We should expect to see some companies take mid-year charges as variable strategies lead to significant changes in the underlying risk adjustment flows. Real money won’t change hands until the summer of 2019 but capital cushions will expand and contract this summer.