Earlier this week, the Food and Drug Administration (FDA) approved a new cystic fibrosis (CF) treatment that can be used against the mutations that 90% of the people who have CF and are over the age of 12 have. This is a major risk adjustment problem.
- Perfect risk adjustment should make insurers indifferent to population characteristics
- Risk adjustment is never perfect
- Most risk adjustment systems don’t deal well with shocks
- Selection and screening are to be expected
The Food and Drug Administration has approved a triple combination therapy manufactured by Vertex that would treat 90% of patients with cystic fibrosis.
The big picture: The approval of Trikafta came in record time at five months and will be priced at $311,503 annually, or $23,896 per 28-day pack
That is a lot of money. Insurers don’t collect enough in premiums from someone with CF to cover that expense. Instead, they must rely on reinsurance and risk adjustment to help cover the expense.
The ACA risk adjustment system currently adjusts for cystic fibrosis. In 2020, an individual with cystic fibrosis (HCC 159) has a risk adjustment co-efficienct between 6.2 and 6.673 times the average statewide premium. Nationally, that means an insurer covering someone with cystic fibrosis will receive a credit of about $40,000. The $40,000 is not perfect. Some people will have lower incremental costs than that, other people will have significantly higher incremental costs than that. It varies widely at the individual level and there is error at the group level as well.
Costs can be trended and adjustments can be made. However these models have trouble when there is a major technological shock.
A new treatment that is used for a large proportion of the potential population of interest and which is notably more expensive than the baseline treatment regime blows the calculation out of the water. All of a sudden, a lot of the people who had relatively low incremental costs because the previous best course of treatment might not have been that good but it was cheap are now getting a much more expensive and effective treatment. This is good for their quality of life. It is bad for functioning insurance markets as insurers are no longer close enough to risk indifferent due to the change in the mix of folks who are now receiving high cost treatments versus the much smaller number of folks who are receiving low cost treatments.
Insurers when faced with a population that is unexpectedly but now predictably high cost net of risk adjustment and reinsurance will have strong incentives to find ways to not cover folks with cystic fibrosis. Strategic entry and exit from certain counties is one tool. Hoop jumping and administrative frictions for pre-authorization and re-authorization of prescriptions could be another as well as network adjustments to cut out the leading centers and clinicians that treat most of a region’s patients who have CF would be another viable strategy.
Risk adjustment does not handle technological shocks well as the current systems effectively assume that the present and near future will look like a somewhat lagged past.