Incentives matter for hookers and blow

Last week, Anonymous at Work in comments made a profound and vital policy statement:

Make the insurer sensitive and make it so the insurer’s attempts to treat chronic conditions or find better management for the highest cost enrollees becomes a source of honestly-earned “hookers and blow” money?

For anything that involves technocratic tinkering and fairly large error bands, we have a policy decision to make.

We have to decide what type of error is aligned with a policy goal and is acceptable to make.

A risk adjustment system that makes, on average, some identifiable population more profitable than others will mean that insurance companies that want to make money will tilt their product offerings and pricing to attract that particular subgroup. If risk adjustment makes individuals with chronic conditions and high costs, on average, more profitable than covering folks with almost no service use, then insurers will make networks a little bit bigger, prior authorization a little bit looser, and put a little more of their cost sharing into deductibles while decreasing their maximum out of pocket amounts. If risk adjustment makes healthier folks more profitable to cover, insurers will do everything they can to reduce premium as premium is the thing that matters to healthy/low cost folks.

Choosing the acceptable or desirable direction of error is a massive policy choice.