Q: What is risk adjustment?
A: Risk adjustment is a tool utilized to ensure that insurers receive appropriate revenue for the healthcare costs of the population they are insuring. Recent studies demonstrate the critical role that risk adjustment plays in ensuring insurer premiums and benefit designs do not discriminate against individuals with significant health needs and preserving a competitive private market for health insurance.1
In the individual market, the risk adjustment program transfers funds from insurers with low-risk enrollees to insurers with highrisk enrollees. In the 33 states where risk adjustment is utilized in Medicaid managed care, capitation rates for insurers with high-risk enrollees are balanced against those with lower-risk enrollees, maintaining budget neutrality and assuring that state funding is allocated appropriately based upon population health status. In other words, risk adjustment provides financial assistance to insurers that provide coverage to enrollees with higher healthcare costs by spreading financial risk among insurers.
Q: How does risk adjustment work?
A: In the individual market, states have the option of administering their own risk adjustment methodology; but, at present every state has elected to defer to administration by the Department of Health and Human Services (HHS). No taxpayer dollars are involved in risk adjustment; the risk adjustment transfers are designed to balance, meaning money paid in by insurers equals money paid out, and a user fee is assessed on all participating insurers to cover the programs’ administrative expenses.
Payment transfers between insurers are calculated based upon the average health status of each insurer’s enrollees, including adjustments for variances in premiums, actuarial value, months of participation and certain geographic factors. Payment transfers occur once annually and data for the funds transfer is scrutinized by a robust data validation process administered by HHS.
In risk-adjusted Medicaid managed care states, state actuaries establish a risk adjustment model that is unique to the state. Based upon data submitted by insurers, future capitation payments are adjusted to maintain budget neutrality, based upon health status and other state-specific variables, such as the basis upon which particular individuals became eligible for Medicaid.
Q: Why is risk adjustment important?
A: Risk adjustment is designed to ensure that insurers receive appropriate premium revenue or compensation to cover medical costs for the enrollees they insure. In the individual market, under the Affordable Care Act (ACA) provisions that have broad support, issuers of individual health insurance coverage generally cannot charge more for the same product depending upon health status (this is known as community rating). Further, individuals cannot be denied coverage based upon health status (known as guaranteed availability of coverage).
Without risk adjustment, premiums set via community rating may be too high or too low for the population a particular insurer enrolls. Risk adjustment also deters insurers from taking steps to discourage sick patients from enrolling; insurers are compensated more from risk adjustment for sicker patients. Risk adjustment can become especially important if changes are made to permit more variability in benefit design or premium rating in the individual market, such as changes to standardized benefits or actuarial values or age rating, which could create a risk for adverse selection. If these changes were not offset by appropriate risk adjustment transfers, they could destabilize the individual market.
Q: How is risk adjustment different than reinsurance and risk corridors?
A: Reinsurance and risk corridors are designed to solve different problems than risk adjustment. In particular, the transitional reinsurance program established under the ACA was designed to lower premiums overall if particularly high-cost enrollees enter the market. High-risk pools serve a similar purpose by removing the highest cost enrollees from the standard risk pool and reducing premiums overall. Risk adjustment, in contrast, balances risk among insurers to encourage insurers to price plans based upon the expected utilization of the average enrollee in the state, not the highest cost enrollees who could pick a particular plan. As enacted by the ACA, while reinsurance and the temporary risk corridors involve federal spending and are temporary, risk adjustment does not require federal spending and is permanent.
Q: How does Change Healthcare assist insurers with risk adjustment?
A: Through its acquisition of Altegra Health in 2015, Change Healthcare provides risk adjustment, quality reporting, government program assistance, and advisory services to more than 120 Medicare Advantage (MA), Medicaid, and commercial insurers operating in all 50 states, as well as the District of Columbia. Change Healthcare works closely with insurers to help them obtain accurate risk scores for their enrollees and support policies that strengthen risk adjustment programs.
Change Healthcare services begin with proprietary technology and expertise to assist insurers in converting their source data and managing errors to facilitate timely and accurate submission to the HHS risk adjustment data gathering system, known as an EDGE server. Change Healthcare adds proprietary technology and analytics that are utilized by insurers to evaluate the documented health status of their enrollees and identify gaps between health status, provider documentation, and reported quality and risk scores. Change Healthcare currently supports more than 20 insurers in the individual market covering nearly 2 million enrollees.