Preexisting conditions, reinsurance, and risk adjustment
States rethink high-risk-pool plans
By Brett Norman
POLITICO, January 29, 2013
When the health exchanges open next year, they will cover some of the sickest and costliest patients, people who cannot easily get insurance precisely because they are so likely to run up bills that no insurer would want to be on the hook for.
The federal health law contains several measures designed to spread the risk and tamp down some of the expected turbulence in the market. But a recent change in how the Department of Health and Human Services plans to run a three-year, $20 billion fund — known as reinsurance — to cushion health plans that end up with lots of high-cost customers is forcing states to rethink their own timetable for shifting some of their highest-risk people into the exchanges.
The fear, of course, is that if all the sick people flood the exchanges and younger, healthier ones hold back, premiums could surge. The health law has a bunch of mechanisms to try to avert rate shock — but questions remain about how well they will work.
More than 300,000 people are now covered through special plans for people with pre-existing conditions — about 100,000 in pools created by the health law and more than 200,000 in older, state-run pools.
The federal plan was designed from the start to be temporary and to shut down as soon as the exchanges open.
But many states had planned on moving their high-risk pool populations into the exchanges slowly to mitigate the shock to the individual market. But now, the state high-risk pools may offload as many people as they can onto the exchanges as soon as they open in 2014 or risk losing a piece of that $20 billion pie.
The Affordable Care Act program requires all insurers to pay into the reinsurance fund — and to be paid out of it if they have a big share of really expensive customers in the individual market. State officials had anticipated having a voice in distributing those payments to hard-hit plans in their states, but HHS in December proposed that it would give the money to plans with enrollees that cost more than $60,000 per year. And state high-risk pools wouldn’t be eligible for the cash.
The reinsurance program is front-loaded, with $10 billion in the first year, $6 billion in the second and $4 billion in the third and final year. By year three, the hope is that a broad range of people will be in the state exchanges, balancing out the really high-cost patients.
“I don’t think it’s going to be enough — it will offset some but not all of the effect of the high-risk pools on the individual market,” said Jonathan Gruber, an MIT economist who has studied the issue in several states.
HHS Risk Adjustment Model Algorithm Instructions
Centers for Medicare and Medicaid Services
The Center for Consumer Information & Insurance Oversight
Section 1343 of the Affordable Care Act provides for a permanent risk adjustment program. To protect against potential effects of adverse selection, the risk adjustment program transfers funds from plans with relatively lower-risk enrollees to plans with relatively higher-risk enrollees. It generally applies to non-grandfathered individual and small group plans inside and outside Exchanges.
The methodology that HHS proposes to use when operating a risk adjustment program on behalf of a State would calculate a plan average risk score for each covered plan based upon the relative risk of the plan’s enrollees, and apply a payment transfer formula in order to determine risk adjustment payments and charges between plans within a risk pool within a market within a State. The proposed risk adjustment methodology addresses three considerations: (1) the newly insured population; (2) plan metal level differences and permissible rating variation; and (3) the need for risk adjustment transfers that net to zero.
The proposed risk adjustment methodology developed by HHS:
• Is developed on commercial claims data for a population similar to the expected population to be risk adjusted;
• Employs the hierarchical condition category (“HCC”) grouping logic used in the Medicare risk adjustment program, with HCCs refined and selected to reflect the expected risk adjustment population;
• Establishes concurrent risk adjustment models, one for each combination of metal level (platinum, gold, silver, bronze, catastrophic) and age group (adult, child, infant);
• Results in payment transfers that net to zero within a risk pool within a market within a State;
• Adjusts payment transfers for plan metal level, geographic rating area, induced demand, and age rating, so that transfers reflect health risk and not other cost differences; and
• Transfers funds between plans within a risk pool within a market within a State.
This document provides the detailed information needed to calculate risk scores given individual diagnoses. (The report then goes into 14 pages describing the algorithm for the HHS-Hierarchical Condition Categories risk adjustment model.)
By Don McCanne, M.D.
In a single payer financing system, health care is simply paid for out of a publicly-financed, single risk pool that covers everyone, regardless of how much appropriate health care is provided to each individual.
In our current fragmented financing system, risk pools are segregated and thus are each vulnerable to an influx of high-cost patients (adverse selection). The spending on an excess of high-cost patients drives premiums up ever higher until they are no longer affordable, patients drop out, and the insurer must then shut down (death spiral).
To protect against excessive costs being borne by any single risk pool, policies have been established to cover patients who have preexisting disorders, to provide reinsurance for costs exceeding defined limits, and to transfer funds from risk pools that enrolled healthier patients to risk pools that cover more high-cost patients.
When the Affordable Care Act (ACA) was written, it was recognized that many people with preexisting conditions could not purchase insurance because the insurers wanted to keep their premiums competitive, so they refused to accept these patients. For that reason, a temporary three-year program was established to provide subsidies to new risk pools that concentrated patients with preexisting disorders. Only about 100,000 people were enrolled since the premiums were still unaffordable for many who would otherwise qualify, plus there were restrictions such as a requirement to be uninsured for at least 6 months.
Although these pools for those with preexisting disorders didn't work very well, at least these individuals would be able to participate in the state insurance exchanges once they become operative next January 1, since ACA requires that every qualified person be accepted regardless of prior conditions (guaranteed issue).
A problem is that adding high-cost patients will drive premiums up, perhaps to a level that could precipitate a death spiral. It was thought that this would be a problem only initially, since later on the pools would be filled with younger, healthier patients who could absorb the higher costs of the sicker patients (a very dubious assumption which we will not address here).
Since this was thought to be a temporary problem, the authors of ACA added another special three-year program - a reinsurance scheme. For any enrollee whose costs exceed $60,000 per year, the government would pick up the balance. Many believe that the $20 billion to be authorized over the three years of the program is not enough to cover the anticipated need.
Well, by the time that plan is terminated, there will have been established a permanent plan to address this problem of unequal distribution of risk between these segregated risk pools - a risk adjustment scheme. This is to be done through the HHS-Hierarchical Condition Categories risk adjustment model mentioned above.
It should be pointed out that a fairly recent study of the Hierarchical Condition model used for Medicare Advantage plans has demonstrated that the private insurers have already learned how to game the system, making patients appear much more ill than they really are (NBER Working Paper No. 16977, April 2011).
It's too bad since, by enacting a single payer system, Congress could have eliminated the need for temporary high-risk pools, the need for temporary reinsurance, and, especially, the need for risk adjustment schemes which the private insurers will always manipulate to their own advantage.
You might want to click on the link to the HHS Risk Adjustment Model Algorithm (above) and skim through the pages just to get a feeling of the complexity of the risk adjustment process. Better yet, click on the following link and in one picture you'll understand how the process really works: