Thursday, January 31, 2013

Fwd: qotd: Preexisting conditions, reinsurance, and risk adjustment

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-------- Original Message --------
Subject: qotd: Preexisting conditions, reinsurance, and risk adjustment
Date: Thu, 31 Jan 2013 14:01:29 -0800
From: Don McCanne <>
To: Quote-of-the-Day <>

January 29, 2013
States rethink high-risk-pool plans
By Brett Norman

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


Centers for Medicare and Medicaid Services
The Center for Consumer Information & Insurance Oversight
HHS Risk Adjustment Model Algorithm Instructions

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.)

Comment: 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

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

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:

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