Risk adjustment cannot solve all selection issues—network contracting edition

Risk adjustment cannot solve all selection issues—network contracting edition

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In our Hamilton Project paper, Nicholas Bagley, Amitabh Chandra, and I explain why a health insurance market in which plans compete on cost effectiveness won’t work. (Click through, download the PDF, and read Box 2 on page 9, titled “Why Health Plans Cannot Differentiate on Coverage.”)

The recent NBER paper by Mark Shepard makes the same argument we made, but to illustrate problems in hospital markets with heterogeneous preferences for costly, star hospitals. Some key quotes from Mark’s paper:

But even excellent risk adjustment is unlikely to offset costs arising from preferences for using star (or other expensive) providers. These preferences create residual cost variation that can lead to a breakdown of risk adjustment (Glazer and McGuire 2000). Second, the two channels may have different cost and welfare implications. While sickness makes individuals costly in any plan, preferences for a star hospital only make enrollees costly if a plan covers that star hospital. Stated differently, preferences affect how much an individual’s costs increase when their plan adds coverage of the star hospital. […]

My results suggest that consumer preferences for high-cost treatment options – star hospitals in my study, but the same idea could apply to any expensive provider, drug, or treatment – can naturally lead to adverse selection, and specifically selection on moral hazard. […]

In the current system, consumers get access to star hospitals based on their plan choice, after which use of these providers is highly subsidized by the insurer. This setup leads to higher costs (moral hazard) and selection on moral hazard. Policies that reduce this moral hazard – e.g., higher “tiered” copays for expensive hospitals or incentives for doctors to refer patients more efficiently – may also mitigate the adverse selection. Differential plan prices for different groups may also improve the efficiency of consumer sorting across plans.

Mark’s paper is also noteworthy because it is one of the few to address consequences of network contracting. This is a hard area to study because plans’ hospitals and physician networks are not easily observed. Other good work in this area has been done by my colleagues at the Leonard Davis Institute.

Risk Adjustment at Heart of “Incredibly Complex” Health Care Reform

http://www.realclearhealth.com/articles/2017/03/06/risk_adjustment_at_heart_of_incredibly_complex_health_care_reform_110479.html?utm_source=RealClearHealth+Morning+Scan&utm_campaign=9e734f1560-EMAIL_CAMPAIGN_2017_03_06&utm_medium=email&utm_term=0_b4baf6b587-9e734f1560-84752421

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President Donald Trump’s core principles for health care include ensuring that Americans with pre-existing conditions have access to coverage, and that Americans should be able to purchase the health insurance plan they want, not one forced on them by the government. Each of these goals is laudable and achievable, taken separately. But President Trump and others are about to confront what others have learned the hard way: Achieving both goals simultaneously is extremely challenging.

Those attempting to implement the Affordable Care Act (ACA) have faced the dilemma under easier conditions and, even after years of trying, have not solved it. Unless President Trump’s technocrats can fix something known as “risk adjustment” that has bedeviled the Obama administration, his dual principles cannot coexist.

The problem arises from the peculiarities of insurance markets. If insurance policies can vary greatly in their coverages and networks, people will tend to sort themselves into the coverages and networks that fit them best.

On the surface, this sounds great: Americans get the plans they want, not uniform plans put together by some government bureaucrat who knows best or is attempting to use insurance to achieve political goals. But in the unique case of insurance markets, there are adverse consequences.

With a great diversity of plans available, people who believe themselves to be high-risk usually purchase policies that have great coverages and broad networks. People who believe themselves to be low-risk usually purchase policies with lesser coverages and narrower networks. This separation means that the policies with great coverages are going to start to get really expensive, because they are full of higher-risk policyholders.

Neither Democrats nor Donald Trump want to let insurers charge people buying the same policy different rates based on their health conditions. And they don’t want to let insurers impose pre-existing condition limits that would make the more generous policies less expensive for insurers to service. The result, under these constraints, is that only one group of people will buy the premium policies: People with really, really expensive medical conditions.  The price of these policies go up until they essentially no one can afford them.

In the end, almost everyone else would migrate to lesser policies, and we would end up with an unstable environment in which only policies with poor coverages and narrow networks are really able to survive. So, yes, insureds and insurers on paper have freedom to design policies that they actually want, but the market this freedom produces is fatally unstable.

 

Why risk adjustment is a crucial component of individual market reform

https://www.brookings.edu/blog/up-front/2017/01/25/why-risk-adjustment-is-a-crucial-component-of-individual-market-reform/

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The mantra of ‘Repeal and Replace’ has escalated in recent weeks, though what, specifically, the ‘Replace’ component might look like is still unclear. However, many of the current proposals include, at a minimum, some type of continuous coverage provision that allows people with chronic health conditions who have continuously maintained coverage to buy health insurance at standard rates. For example, Paul Ryan’s A Better Way proposal and Tom Price’s Empowering Patients First Act would each prohibit insurers from charging sicker patients more than standard premiums in the individual market as long as they have maintained continuous coverage since before becoming sick.

Such provisions are important to keep patients from seeing their health insurance premiums sky-rocket after becoming sick, which would defeat the purpose of insurance in the first place. However, these provisions also require that insurers sell policies to these patients at premiums that they know will not cover their expected health care spending, generating losses for the insurance company. On its own, this would create a situation where insurers have a strong financial incentive to avoid enrolling these sicker patients.

Risk adjustment combats disincentives to provide coverage for sicker patients

In order to mitigate these incentives for insurance companies to avoid sicker patients, policymakers will need to include a risk adjustment program in any replacement reforms that require insurers to issue insurance to any applicant (also known as “guaranteed issue”) and set limits on adjusting premiums to fully reflect an enrollee’s health status. Continuous coverage provisions are one example of such limits, but risk adjustment will be necessary to combat against adverse selection across a wide range of potential reforms.

A risk adjustment program would make behind-the-scenes financial transfers to insurers to adequately compensate them for enrolling these sicker patients when they are not allowed to charge the individual higher premiums. Risk adjustment will be necessary to promote a well-functioning market where private insurers compete based on the value they deliver and not simply by avoiding sicker patients.

The Opportunities and Challenges of the MSSP ACO Program: A Report From the Field

https://www.aledade.com/new-journal-article-a-report-from-the-field/

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The trillion dollar shift in healthcare payment “from volume to value” is well underway with both public and private payers and purchasers pushing provider organizations to participate in outcome-based risk contracts, stepping up from pay-for-performance and medical home models to a variety of accountable care and bundled payment programs.

But what are we to take away from the mixed results of these programs — from the lack of savings in the Comprehensive Primary Care demonstration, to the dropouts from the Pioneer program, the recently released underwhelming results from the first year of the Bundled Payment for Care Improvement Initiative, or the 2015 results from the Medicare Shared Savings Program?

One approach would be for partisans for each of these approaches to search for positive nuggets in the results from their preferred program, while heaping scorn on the other “competing” reforms.

Another would be to retreat altogether from the aspirations of achieving better care at lower cost, towards either resignation towards ever-escalating health care costs or more likely to (altogether regretful!) rationing of access to good healthcare for the most vulnerable in our society.

A third path would be to acknowledge that there is no magic bullet for “transforming healthcare” overnight, and that the work of redesigning our delivery systems to meet the expectations of the outcome-based payment models will be slow, hard, and uneven. We would accept that there are likely multiple payment reforms that will need to be implemented alongside each other, targeting different healthcare markets and different participants. (Capitated payments for truly integrated delivery networks. Mandatory bundled payments for proceduralists and hospitals. Accountable care for independent physician networks). And each model will need to be iterated and tweaked and incrementally improved.

That is what I choose to believe.

We are publishing today in the new issue of the American Journal of Managed Care, “A Report From the Field,” the detailed description of what our two ACO “freshman” accomplished in 2015, and openly discussing the challenges we faced, what we are doing differently now, and some policy changes that can put more wind to the backs of those in these trenches.

Here are a few of the key findings:

http://www.ajmc.com/journals/issue/2016/2016-vol22-n9/The-Opportunities-and-Challenges-of-the-MSSP-ACO-Program-A-Report-From-the-Field

Conclusions:

We have learned that, given the right support and incentives, independent primary care practices can embrace population health and practice redesign. These efforts can begin to bear fruit in improved patient access, quality of care, and appropriate utilization in the short term. We strongly believe that the benefits of the program to patients and the taxpayer are not limited to those ACOs that received shared savings distributions. However, lack of recognition of these contributions may stifle continued innovation and physician engagement with alternative payment models. Aledade is committed to navigating these challenges and we are committed to sharing our learning so that more independent physician-led ACOs can succeed in their mission to profitably deliver better care at lower cost. We also hope that policy makers and commercial payers continue to work to remove the unintended policy headwinds ACOs must presently overcome. – See more at: http://www.ajmc.com/journals/issue/2016/2016-vol22-n9/the-opportunities-and-challenges-of-the-mssp-aco-program-a-report-from-the-field/P-5#sthash.3V1BtAtZ.dpuf

 

Explaining Health Care Reform: Risk Adjustment, Reinsurance, and Risk Corridors

Explaining Health Care Reform: Risk Adjustment, Reinsurance, and Risk Corridors

Figure 1: Risk Adjustment Under the Affordable Care Act

As of January 1, 2014, insurers are no longer able to deny coverage or charge higher premiums based on preexisting conditions (under rules referred to as guaranteed issue and modified community rating, respectively). These aspects of the Affordable Care Act (ACA) – along with tax credits for low and middle income people buying insurance on their own in new health insurance marketplaces – make it easier for people with preexisting conditions to gain insurance coverage. However, if not accompanied by other regulatory measures, these provisions could have unintended consequences for the insurance market. Namely, insurers may try to compete by avoiding sicker enrollees rather than by providing the best value to consumers. In addition, in the early years of market reform insurers faced uncertainty as to how to price coverage as new people (including those previously considered “uninsurable”) gained coverage, potentially leading to premium volatility. This brief explains three provisions of the ACA – risk adjustment, reinsurance, and risk corridors – that were intended to promote insurer competition on the basis of quality and value and promote insurance market stability, particularly in the early years of reform.

CONCLUSION

The Affordable Care Act’s risk adjustment, reinsurance, and risk corridors programs were designed to work together to mitigate the potential effects of adverse selection and risk selection. All three programs aimed to provide stability in the early years of a reformed health insurance market, with risk adjustment continuing over the long-term. Many health insurance plans are subject to more than one premium stabilization program, and while the programs have similar goals, they are designed to be complementary. Specifically, risk adjustment is designed to mitigate any incentives for plans to attract healthier individuals and compensate those that enroll a disproportionately sick population. Risk corridors were intended to reduce overall financial uncertainty for insurers, though they largely did not fulfill that goal following congressional changes to the program. Reinsurance compensated plans for their high-cost enrollees, and by the nature of its financing provided a subsidy for individual market premiums generally over a three-year period. Premium increases are expected to be higher in 2017 in part due to the end of the reinsurance program.

Struggling to Stabilize the Exchanges

Struggling to Stabilize the Exchanges

Six years after passage of the Affordable Care Act (ACA), the individual and small-group insurance markets—the markets that the ACA remade—are still having growing pains. Health insurers have endured large losses and a number of ACA-created co-ops and other small insurers have failed. Consolidation among providers and insurers is an increasing and concerning trend. And many insurers are poised to raise premiums substantially for 2017, further stoking frustration with the insurance industry.

Even as the press vilifies insurers, however, the ACA’s supporters can’t afford to be indifferent to their struggles. Private insurers sell the managed care plans that are the central vehicle for expanding access to middle- and lower-income Americans. One day, those plans may cover many of the 11 percent of Americans who remain uninsured.

Part of insurers’ difficulty is that the risk pool in the individual and small-group markets, particularly on the exchanges, is sicker and smaller than originally projected. But the three programs—reinsurance, risk corridors, and risk adjustment—that the ACA’s drafters would hope stabilize premiums in the revamped markets have also not performed as expected. Dashed expectations have led to market instability and to a flurry of lawsuits around the “3Rs.” What does this unpredictable and difficult situation mean for 2017 and for the ACA more generally?

Pressure Mounts to Risk-Adjust for Poverty

http://www.healthleadersmedia.com/finance/pressure-mounts-risk-adjust-poverty?spMailingID=9084486&spUserID=MTMyMzQyMDQxMTkyS0&spJobID=941950601&spReportId=OTQxOTUwNjAxS0#

child-poverty

Hospital associations and trade groups are lobbying federal officials to account for how “the disease of poverty” impacts the health of patients—and costs hospitals.

What Risk Adjustment Does — The Perspective Of A Health Insurance Actuary Who Relies On It

http://healthaffairs.org/blog/2016/03/29/what-risk-adjustment-does-the-perspective-of-a-health-insurance-actuary-who-relies-on-it/

Lobbyist Paul Miller is seen on Capitol Hill in Washington, Friday, March 20, 2009.   (AP Photo/Susan Walsh)

Commercial payers: Don’t leave money on the table

http://managedhealthcareexecutive.modernmedicine.com/managed-healthcare-executive/news/commercial-payers-dont-leave-money-table

Money Physician