PPACA’s risk adjustment mechanisms: Sharing the burden of chronic disease
The Sacramento-based Center for Health Improvement (CHI) recently hosted an informative seminar on risk adjustment components of the Patient Protection and Affordable Care Act to help health plans and insurers manage and balance medical risk once they must begin accepting all applicants regardless of pre-existing medical conditions starting Jan. 1, 2014. (Background and a webcast of the seminar are available at the CHI webpage.)
Medical underwriting that can make obtaining affordable coverage difficult for many prospective insureds in the individual and small group market segments ends on that date. The framers of the PPACA put in place these risk adjustment mechanisms to ensure balance and stability in the individual and small group insurance marketplace when it arrives. They are intended to avoid adverse selection — when medical claims costs and premiums rise in a self-reinforcing manner and threaten insurers’ ability to spread risk among healthier people, threatening the solvency of the insurance pool — as well as cherry picking. The latter term refers to insurer risk selection aimed at weeding out people who could incur high medical bills and attracting healthier insureds less likely to file costly claims.
The PPACA provides three risk adjustment techniques for health plans and insurers. Two are of limited 3-year duration, intended to ease the transition from medical underwriting to community-based rating during the period of Jan. 1, 2014 to Jan. 1, 2017. They include reinsurance designed to help cover the cost of actuarially unexpected, very high cost claims that could lead to overall higher premiums, and risk corridors. Risk corridors are an equalizing mechanism that subsidizes insurers incurring disproportionally high claims costs and inversely, surcharges those that incur lower than expected claims costs.
The ongoing mainstay risk adjustment mechanism — risk adjustment — also employs a similar redistribution mechanism for insurers and health plans that shifts funds from insurers and plans enrolling low risk insureds to those with more risky, sicker insureds. Risk adjustment employs dollar weighted risk differentials assigned to each insured that take into account that person’s likely medical treatment costs going forward based on their medical diagnoses and conditions.
The American Academy of Actuaries has prepared an excellent primer on the three risk adjustment components of the PPACA.
Panelist John Bertko of the Centers for Medicare & Medicaid Services’ (CMS) and director of special initiatives and pricing for the center for Consumer Information and Insurance Oversight, summed up a key goal of the PPACA’s risk adjustment mechanisms: a means of sharing the growing burden of chronic disease across payers come 2014. It remains to be seen just how great that burden will be in 2014 as the cost of treating chronic, complex diseases such as diabetes and heart disease in an aging population continues to trend upward. While the PPACA’s risk adjustment mechanisms can help allocate these costs across payers, the overall increased cost will ultimately have to be borne by everyone covered by health plans and insurers in the form of higher premiums.