Risk adjustment strategy is key to future health plan success
Much of the recent news around the Affordable Care Act (ACA) marketplace has focused on anticipated premium increases for 2017.
This should not be a surprise as there are several known factors that are prompting this spike. Two of the "three Rs" – reinsurance and risk corridors (implemented as part of the ACA to provide protection for insurance companies against big losses) – are phasing out at the end of 2016. In 2015, an estimated $7.8 billion in reinsurance payments alone were made to nearly 60 percent of insurers. Second, it's no secret that many insurers have seen unexpected losses despite these safety nets and have exited or announced their exit from the ACA market. Decreased competition typically leads to increases in prices.
The public and the media are often quick to blame Obamacare for such increases in premiums. However, another way to look at this anticipated spike is that premiums were set too low from the start. The ACA enabled insurance to be purchased by those who had never been insured before; without any historical data on the demographics and the health status of the previously uninsured, premiums were bound to be off. Accurate insurance pricing is dependent on the ability to accurately estimate risk in the covered membership.
This is why the last of the three Rs – risk adjustment – becomes critically important for organizations continuing to offer ACA plans.
Risk adjustment in the ACA
Fundamentally, risk adjustment aims to measure and account for the expected medical costs of each individual enrolled in a health plan. Two factors that drive the risk scores of members are their demographics and health status. The ACA's risk adjustment program works by transferring funds (known as transfer payments) from plans with lower-risk enrollees to plans with higher-risk enrollees. The goal is to spread the financial risk across the market and encourage insurers to compete based on the value and efficiency of their plans, rather than by attracting healthier enrollees.
Why risk adjustment is important
With reinsurance and risk corridors set to expire in 2017, risk adjustment becomes the sole mechanism to mitigate the impact of risk selection and promote market stability. Furthermore, premium increases could drive cost-conscious members to shop around for cheaper options. As a result, many plans, especially those offering cheaper options, are going to see brand new enrollees and won't have access to their prior health histories. It will be critical to identify these members early in the year so that they can be accurately risk adjusted and their costs accounted for during the coverage period.
As premiums stabilize, plans hope to see membership churn decrease, which will improve their ability to accurately risk adjust. As more plans improve their risk adjustment capabilities, the zero-sum nature of transfer payments continues to raise the bar for accurate risk scoring. A plan must have a differentiated strategy for risk adjusting its population in a competitive market.
Finally, accurate risk adjustment can drive strategies for financial success. Accurately identifying all risk present in its membership allows a plan to proactively outreach and manage the care of high-risk members in a cost effective manner. Aetna has already signaled a go-to-market strategy that relies on risk adjustment – they are offering an insurance plan targeted towards diabetics (a population previously avoided by insurers), presumably because they believe they can manage this population profitably with risk adjustment.
Mastering risk adjustment with modern technology
Part of the challenge with risk adjustment is that current processes are messy, and it is difficult for organizations to capture the full risk adjustment opportunity. Even though the number of risk adjusted lives has grown more than ten-fold in the last decade, the processes that support risk adjustment continue to rely largely on people rather than scalable solutions.
These labor-intensive processes will not support demand as the ACA membership continues to grow and markets become more competitive. There are ways to leverage technology to automate processes and better utilize existing data sources to risk adjust more accurately and efficiently. The result is a more sophisticated, technology-based risk adjustment process that not only better serves health plan needs today, but also scales as membership inevitably grows – in numbers and complexity – in the future.
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