Tilting the table and risk adjustment

The federal district court judge in New Mexico is making actuaries and insurance plan designers weep when he decided to not vacate his opinion on the risk adjustment lawsuit with sweeping sentences like the following (Case 1:16-cv-00878-JB-JHR Document 90 Filed 10/19/18 Page 102 of 112):

Second, insurance companies cannot avoid sick enrollees, because the ACA still requires them to cover people with pre-existing health connections and prevents them from charging these enrollees higher premiums.

Bullshit.

Individual market insurers operating in a guaranteed issue, community rated world without risk adjustment can be very, very competent at avoiding sick people.  This is irrelevant if there is only a single insurer in a state as risk adjustment is already irrelevant to that insurer.  Their premiums are supposed to be set to cover any and all medical risk.

Risk adjustment minimizes incentives to race to the bottom when there are two or more insurers in a state.

There are several profitable large insurers (Centene, Molina etc) that routinely have very large risk adjustment outflows.  This means that they are covering a population that is coded as healthier than state wide average.  Conversely the other insurers in Centene/Molina states have, on net, covered populations that code as sicker than the state wide average.  The insurers that pay into risk adjustment are (partially) compensating other insurers for taking on expensive risk that their business strategies don’t want to handle well.

How do they select for low cost risk?

There are a couple of different strategies that Centene and Molina use.  The most important one is that they tend to use narrow, low cost networks.  This often means that they’ll exclude hospitals and doctors that tend to treat unusual and expensive conditions as well as charge high rates for normal conditions.  More specifically, carving out a few specialists who are the regional rare/expensive disease providers will make everyone who has that rare/expensive disease go to the insurer that has those specialists in their network.

Benefit design can also matter.  Centene uses “Donut” designs where there is a very high deductible and out of pocket maximum but several common and low cost services are carved out of the deductible. Individuals who have typical low utilization of one or two PCP visits, an urgent care visit and generic antibiotic prescriptions over the course of a year may pay nothing out of pocket even though their plan could easily have a $5,000+ deductible. These plan designs are attractive to healthy people and unattractive to people who know that they are going to cap out compared to plan designs that include lower but more inclusive deductibles and lower out of pocket maximums.

Thirdly, limited market entry can matter. Insurers can choose where they offer plans. Centene is entering North Carolina and Pennsylvania in 2019. For both states, Centene is entering a very small geographic footprint that will allow them to avoid pockets of high cost/high morbidity in the state as well as a chance to get their feet wet.

In a well functioning market, we should want insurers to specialize in covering the people that they are good at covering while not shifting costs to other insurers and individuals. Risk adjustment is a mechanism that allows insurers to specialize in covering low risk/low expensive folks as well as covering high risk/high expense folks. It is not perfect as there are exploitable hooks in the ACA formula but those are not the hooks that are being argued about in the lawsuit.

If there was no risk adjustment, the insurers that are currently covering a disproportionate number of individuals with high costs and high risk scores would be in trouble. They are currently covering those costs with a combination of premium revenue and net risk adjustment inflows. If risk adjustment disappeared, the two fundamental choices would be to either raise premiums to a point where a significant chunk of the insurer’s low risk population looks at the new, higher premiums from their current insurer and see the much lower premiums (now that the low risk insurer is no longer sending money for risk adjustment, their premiums drop) of the low risk insurer and move or the high risk insurer finds way to dump risk.

If they elect to dump risk, they’ll only offer narrow networks with donut benefit design and only in certain counties. If their data tells them that there is a huge cluster of individuals who need Hep-C treatment or who are on a liver transplant list in Northnowhere County, they won’t offer any plans in Northnowhere County. If their data says that there are a dozen individuals with hemophilia, they won’t offer coverage of the regional hemophilia treatment center. Of if there are political reasons to not fully pull out of a region, then only plans with extremely high premiums will be offered in those regions. Those decisions are not frequently made today because risk adjustment either makes the high risk insurer whole for covering these folks or at least closes the loss to an acceptable level.

An obligation to accept the signed contract of anyone who wants to buy coverage (Guaranteed issue) only matters if coverage is being offered. We have live demonstrations of how insurers can legally avoid risk right now in a risk adjusted environment. Those strategies are currently profitable but they are not the only profitable strategy on the individual market. If there is no risk adjustment, then the insurers covering high risk/high cost individuals either need to get out of the market, create local monopolies or adopt risk dodging strategies.