ACA’s risk-adjustment program endangers some exchange plans

The latest data on the Affordable Care Act’s risk-adjustment program have some small health insurers up in arms. Many are demanding the federal government halt the payments and make immediate dramatic changes to the program or risk having more health plans shut down during a presidential election year.

“If you keep the risk-adjustment formula the way it is … right now for the next two to three years, you’re going to lose a lot of these new entrants,” said Dr. Peter Beilenson, CEO of Evergreen Health Cooperative. “They are going to end up with one or two big carriers in each marketplace. That raises the rates.”

Beilenson’s co-op, based in Maryland, sued the federal government in June over the risk-adjustment program—one of the law’s three insurance risk policies—and expects other insurers to join the legal battle. Evergreen owes $24.2 million while the state’s dominant carrier, CareFirst, will receive more than $50 million.

Risk adjustment shuffles money from plan to plan in each state, resulting in a zero-sum game. Plans with healthier enrollees funnel money into insurers with seemingly sicker enrollees. The goal is to eliminate cherry-picking the healthiest people.

However, the gripe among smaller, regional plans and the new co-ops— which have far less capital than more established insurers to comfortably make large risk-adjustment payments—is that their membership bases look healthier than they are. It’s unclear whether many legacy carriers are receiving money due to attracting sicker patients or if they have a leg up on coding their members’ diagnoses.

“It’s kind of tricky to disentangle these two things,” said Tim Layton, a health economist at Harvard Medical School. “Even if (large insurers) know which (members) have diabetes, they still have to get a doctor to code it. They can’t just assign a code.”

Blue Cross and Blue Shield plans, excluding the for-profit Anthem, cumulatively will collect more than $1.4 billion from risk adjustment for 2015, according to the latest CMS report. Sicker patients flocked to the Blues’ well-known brand, therefore justifying the companies’ higher risk-adjustment payments. But they also likely have more historical data to code more diagnoses, Layton said.

Still, some of the big carriers are paying large sums into the risk-adjustment pool. Aetna’s obligations for 2015 totaled more than $600 million, and Kaiser Permanente’s charges reached $237.5 million.

Many policymakers and economists say risk adjustment is less of a burden than another related program: risk corridors. Congress required risk corridors to be budget-neutral for 2014 and 2015 and possibly will do so again this year. Insurers have received only 12.6% of their risk-corridor requests, which has forced several insurers to sue and numerous others to shut down.

In the meantime, new and fast-growing plans are asking to be temporarily exempted from risk adjustment or to cap payouts to 2% of premium revenue. The CMS committed to making some changes, although they won’t be effective immediately. For example, starting in 2018, the CMS proposed that prescription drug data be used for risk adjustment, an idea that insurers support.

“If an individual doesn’t have a diagnosis in a claim, at least the drugs they are taking is a good indicator of the conditions they may have,” said Matt Aug, president of Cox Health Plans, a hospital-owned insurer based in Springfield, Mo., that only sells off-exchange plans to individuals and small businesses. Cox owes $3.1 million under risk adjustment for 2015, more than double what the company expected, and it still doesn’t anticipate selling on the exchanges yet because of the financial uncertainty, Aug said.

But Sean Creighton, senior vice president of risk adjustment at analytics firm Verisk Health and a former CMS official, said tying risk adjustment to drug utilization is a “terrible idea.” He believes it could force doctors to write unnecessary prescriptions, all in the name of coding.

Instead, he said the program could benefit from more specific data from individual insurers.

“CMS is not providing the data to allow us to look at, in-depth, this kind of year-over-year variation,” Creighton said.

A CMS spokesperson said the agency has “encouraged states to examine whether any local approaches, under state legal authority, may be used to help ease the transition for companies in their state to the new health insurance markets.”