It’s no secret that many health plans are struggling with their business lines tied to the Affordable Care Act (ACA). In fact, UnitedHealth Group Inc. recently reported a $720 million loss for 2015 on its exchange business segment. This total includes $245 million set aside in the fourth quarter of 2015 to prepare for the $500 million that UnitedHealth anticipates losing in 2016. Upon announcing this news, UnitedHealth said it is reevaluating whether it will participate in the ACA Marketplace in 2017.
Although United didn’t specify the reasons for its exchange losses, I can’t help but wonder if some of the losses were attributable to inaccuracies in risk adjustment. In the new healthcare landscape under the ACA and the shift to value-based care, effective risk adjustment is the difference between profitability and losses.
A Simple Premise
At a high level, the concept of risk adjustment appears fairly straightforward. Started in 2014, the ACA’s risk adjustment program aims to provide financial support to health plans that attract high-risk enrollees, such as those with chronic conditions, and reduces the disincentive for issuers to enroll these patients. The program works by transferring funds (known as transfer payments) from plans with lower-risk enrollees to plans with higher-risk enrollees. The goals of the program are to spread the financial risk across the market, stabilize premiums, and encourage insurers to compete based on the value and efficiency of their plans, rather than by attracting healthier enrollees.
It’s Anything but Simple to Implement
Putting the ACA’s risk adjustment program into practice, however, reveals its difficulties:
- Risk Scoring – A health plan’s average actuarial risk is determined by the individual risk scores of its enrollees. There are some inherent challenges in accomplishing this, such as:
- Low Probability, High Impact – less than 20% of the ACA membership is likely to have any risk adjustment conditions, so identification of members with risk is critical to accurately reflect the plan’s overall risk.
- New Enrollees – There may be limited information on new members who enroll for coverage, making risk adjustment a difficult task. This was certainly the case when the ACA started its insurance exchanges in 2014, and members continue to churn as premiums fluctuate and new plans enter the market.
- Reporting Model Complexity – The hierarchical condition category (HCC) risk adjustment model developed for the ACA has complexities beyond the model used for Medicare Advantage:
- Age Groups – To account for differences in risk across multiple age groups, there are three different HCC models that need to be used for the ACA population – Infant, Child, and Adult.
- Metal Levels – Average risk scores are calculated and compared against other plans for each cost sharing level (Bronze, Silver, Platinum, and Catastrophic), further complicating the process.
- Magnitude – Coordinating these efforts among a growing base of enrollees and hundreds of health plans adds complexity:
- In 2014, 8 million individuals enrolled in plans on the ACA Marketplace, and 11.7 million enrolled in 2015. There were an estimated 12.7 million members enrolled as of January 31, 2016.
- 758 health plans participated in risk adjustment transfer payments for 2014, with a 28 percent increase in the number of plans offered in 2015.
How Risk Adjustment Impacts Business Performance
The ACA Marketplace is extremely competitive, and consumer choice is highly driven by premium prices. Risk adjustment not only impacts transfer payments, but it also has implications on premium rates. Health plans that underestimate their risk may under price their premiums and jeopardize profitability, while also attracting a much higher number of new enrollees with unknown health risks. Underestimating risk may also prevent a health plan from being eligible for transfer payments because its risk score was too low. On the other hand, overestimating risk may result in health plans raising their premium rates and losing membership because they are not as competitive in the Marketplace.
Improving Risk Adjustment
Today’s health plans largely rely on manual processes to analyze claims and patient records to determine risk scores. These manual processes will not support demand as the industry continues its move toward value-based care and payment models that rely on risk adjustment. Technology needs to be leveraged to automate processes and more deeply penetrate existing data sources to derive more accurate risk scores.
- The ACA Marketplace is extremely competitive, which increases the pressure for health plans to keep their premiums low. More accurate risk adjustment – preferably with clinical data – is needed to support premium pricing models that will ensure that plans succeed in the market.
- The ACA Marketplace is a zero-sum game due to the transfer payments. A plan must have a differentiated strategy for risk adjusting the population in a competitive market; otherwise they risk financial stability.
- Advanced risk adjustment processes are no longer a luxury; they are a competitive necessity. Health plans that choose to participate in the ACA Marketplace must establish sophisticated, technology-driven risk adjustment processes that can scale with the growing membership.