Hanging in the balance: Risk adjustment
In order to have a system in which everyone can obtain health insurance regardless of their health status, there has to be a way to balance the cost of caring for those with significant medical needs with those that are healthier and need less care. Risk adjustment is how that balance is achieved. The goal is to ensure that insurance companies within markets and states compete for customers based on factors other than the health status of their enrollees, such as hospital and doctor networks, the breadth of benefits covered, and customer service.
Risk adjustment is essential for health insurance to work properly and appropriately balance the cost of care so that everyone can obtain quality coverage regardless of their health status, yet misinformation about how risk adjustment works threatens to disrupt coverage for millions of Americans.
Here are the top myths about risk adjustment, debunked:
Myth: Risk adjustment is too new and complex to be effective.
Fact: The Affordable Care Act did not begin risk adjustment, and it is not a new concept. Both Republicans and Democrats have long supported risk adjustment through programs like Medicare Advantage. In fact, Medicare Advantage and Medicaid in at least 23 states have risk adjustment programs, and these important programs have worked for years to balance the cost of care between healthy Americans and those with significant medical needs.
Myth: The risk adjustment formula is flawed.
Fact: An accurate risk-adjustment system is critical to the stability and sustainability of the individual and small group markets, where 23.6 million Americans obtain their health coverage. Experts, including the American Academy of Actuaries and the Centers for Medicare and Medicaid Services (CMS), have found that the risk adjustment program is working as intended. For example, a recent CMS analysis found issuers that received risk adjustment payments were those that: Enrolled a large share of HIV/AIDS patients; attracted more patients with significant medical needs due to networks that include key specialty hospitals; and had a history of serving individuals with substantial medical needs. Small insurers with isolated cases of catastrophically ill patients also received payments.
Myth: The risk adjustment program disadvantages small insurers.
Fact: It is a common misperception that that insurers receiving risk adjustment payments are winners and those paying out are losers. In fact, there are no winners or losers in risk adjustment. Transfers provide payments to health insurers that disproportionately provide coverage for those with significant and often costly medical needs, such as people with chronic conditions. The funds come from insurers with enrollees who use fewer medical services. This helps assure level competition and helps minimize incentives to design benefits, networks and marketing approaches in order to attract primarily healthy consumers. Additionally, risk adjustment helps to ensure health plans price based on the statewide average risk, meaning if insurers price correctly, it won’t matter whether they are a payer or receiver. Essentially risk adjustment ensures that consumers’ health is taken out of the price equation and that health plans compete for membership based on networks, benefits and service.
In fact, there is a fairly even split among insurers with low and high market shares between risk adjustment payers and receivers. For example, among individual market insurers with less than 20 percent of market share in 2016, 110 insurers were receivers and 142 were payers.
Myth: Risk adjustment costs taxpayers money.
Fact: Taxpayers do not fund risk adjustment in the individual and small group markets. The program works by transferring money among insurance companies in the individual and small group markets, with no cost to taxpayers.
Read more about risk adjustment here.