By using this site, you agree to the Privacy Policy and Terms of Use.
Accept
Health Works CollectiveHealth Works CollectiveHealth Works Collective
  • Health
    • Mental Health
    Health
    Healthcare organizations are operating on slimmer profit margins than ever. One report in August showed that they are even lower than the beginning of the…
    Show More
    Top News
    improving patient experience
    6 Ways to Improve Patient Satisfaction Within Hospitals
    December 1, 2021
    degree for healthcare job
    What Are The Health Benefits Of Having A Degree?
    March 9, 2022
    custom software development is changing healthcare
    Digital Customer Journey Mapping and its Importance for Healthcare
    July 21, 2022
    Latest News
    Grounded Healing: A Natural Ally for Sustainable Healthcare Systems
    May 16, 2025
    Learn how to Renew your Medical Card in West Virginia
    May 16, 2025
    Choosing the Right Supplement Manufacturer for Your Brand
    May 1, 2025
    Engineering Temporary Hospitals for Extreme Weather
    April 24, 2025
  • Policy and Law
    • Global Healthcare
    • Medical Ethics
    Policy and Law
    Get the latest updates about Insurance policies and Laws in the Healthcare industry for different geographical locations.
    Show More
    Top News
    Can Thinking Younger Make You Live Longer?
    April 20, 2011
    Image
    Obesity’s Outlook Unchanged
    June 13, 2011
    When It’s An Emergency Elderly Not Treated As Well in Hospitals
    July 16, 2011
    Latest News
    Building Smarter Care Teams: Aligning Roles, Structure, and Clinical Expertise
    May 18, 2025
    The Critical Role of Healthcare in Personal Injury Recovery: A Comprehensive Guide for Victims
    May 14, 2025
    The Backbone of Successful Trials: Clinical Data Management
    April 28, 2025
    Advancing Your Healthcare Career through Education and Specialization
    April 16, 2025
  • Medical Innovations
  • News
  • Wellness
  • Tech
Search
© 2023 HealthWorks Collective. All Rights Reserved.
Reading: Risk Adjustments in ObamaCare
Share
Notification Show More
Font ResizerAa
Health Works CollectiveHealth Works Collective
Font ResizerAa
Search
Follow US
  • About
  • Contact
  • Privacy
© 2023 HealthWorks Collective. All Rights Reserved.
Health Works Collective > Business > Finance > Risk Adjustments in ObamaCare
BusinessFinanceHealth ReformPolicy & LawPublic Health

Risk Adjustments in ObamaCare

Greg Scandlen
Last updated: January 25, 2014 9:00 am
Greg Scandlen
Share
10 Min Read
SHARE

risk adjustments in obamacareMost of the commentators on the exchange roll out caution against the “death spiral,” in which failing to attract the young and healthy raises overall premiums. This further deters low-cost people from enrolling, resulting in even higher premiums.

risk adjustments in obamacareMost of the commentators on the exchange roll out caution against the “death spiral,” in which failing to attract the young and healthy raises overall premiums. This further deters low-cost people from enrolling, resulting in even higher premiums.

This is absolutely true in a normal market. But a new report from the actuarial consulting firm Milliman shows how the Affordable Care Act has turned normal market principles on their head.

Here is the problem. Because health insurers are no longer allowed to ask any questions about an applicant’s health, they have absolutely no way of knowing who they are enrolling in terms of past or present illnesses or health conditions. They might attract a group of pretty healthy people or a group of pretty sick people, but they won’t know until people start filing claims. So it is impossible to accurately set premiums, at least for the first few years.

More Read

Rise of People Power or Arrogance of the Academy?
Why ACOs Might Not Make an Impact (transcript)
Sales Reps Not Included: On e-Commerce Site, Device Firms Discount Routinely Used Implants
Health Care Buzz Today
Connected Health, Reimbursement, and the Law of Unintended Consequences

Another problem is that some insurers may attract a whole lot of very sick people while others attract mostly healthy people. In a particular state BlueCross may be known as the best place to go if you have cancer or heart disease, while Aetna may be famous for its discounts on gym memberships. The healthy people will be drawn to Aetna while the really sick people prefer the Blues. If companies could set premiums to accurately reflect their enrolled population, BlueCross premiums would be outrageously expensive while the Aetna premiums would be cheap.

ObamaCare tries to fix these problems in several ways. It incorporates a “reinsurance” program to reimburse companies for some of the costs of very high claims. John Graham has written about this here. This is a temporary program that phases out once participating insurance companies have a better handle on whom they are enrolling.

It also includes what it calls a “risk corridor” program, so that if some companies get hit with a surge of bad risks, they are assured of being compensated for their extraordinary expenses. This, too, is a temporary program. It is supposed to be paid for by an assessment on all insurance companies, but it is currently looking like the entire ObamaCare market is made up of bad risks, so the administration is now expecting that all of the participating companies will need to be compensated, rather than just a few. And there is not enough money from the assessments to pay for that, so they are looking for additional taxpayer money to ensure company profitability. This idea is extremely controversial as an “insurance company bailout.”

It also underscores the essential problem of government control over prices — once the government has control over what companies can charge, it also must ensure that companies are profitable. We saw this with state hospital rate-setting systems. So suddenly, even poorly run, inefficient companies are assured of profitability, and the decision to close one becomes a political, not an economic, decision.

The final fix is a “risk adjustment mechanism.” Since ObamaCare uses “community rating” each enrollee pays the same premium regardless of his or her claims cost or health status. But some enrollees will cost a whole lot more than others and the companies that cover them need to get more money for doing so. This program is the focus of the Milliman study, and we will look at that below.

Now, notice that these programs are all aimed at protecting individual insurance companies from the consequences of ObamaCare enrollment and rating restrictions. None of them ensure the solvency of the market as a whole. Indeed, they do just the opposite — they encourage the sickest people to enroll by subsidizing them while discouraging the healthiest people to enroll by overcharging them. So, while individual companies may be exempt from the “death spiral,” the program as a whole is not.

Milliman calls these three risk adjustment provisions the “3Rs.” The first two of these are scheduled to phase out, but the last is permanent and has the biggest effect on company profitability. Milliman says –

The results of our analysis are, in most cases, the precise opposite of what one would expect without these programs. In several important ways, the nuances and interactions inherent in the 3Rs can generate impacts that actually turn traditional risk management practices upside down.

For example, carriers would expect to have an 8.8% loss on males age 60 and above, but the risk adjustments turn that into a gain of 7.3%. For males age 25-29, an expected gain of 34.3% becomes a loss of 3.2% after the risk adjustments. So a company that wants to make money has every incentive to avoid the young males and attract the oldest ones. The report provides a comparison of males and females for each age cohort.

Health and Human Services has developed a risk adjustment model that assigns one or more of 127 “Hierarchical Condition Categories” (HCCs) to each enrollee and gives each enrollee a “risk score,” which results in higher or lower adjustment payments to the health plan. Milliman says that people with “seven conditions would actually produce profit margins in excess of 1,000% of premiums.” But Milliman cautions –

Bear in mind that in practice there may be very few members with some conditions, and these members may be difficult or impossible to identify in advance.

They add:

At the other end of the spectrum, insurers that cover only members without a condition recognized by the HHS HCC model will make payments into the risk adjustment pool large enough to produce an average pretax loss of approximately 5.0% of premium.

They note that the level of adjustment is greater than the “average relative costs of those conditions,” and that the various risk adjustments “do not interact, so issuers can be reimbursed twice for many high-cost claimants.” As a result, “those paying into the pool tend to pay too much and those receiving funds tend to receive too much.”

So what does all this mean?

  1. There is no such thing as a “price” in the Affordable Care Act. First, people will pay in premiums whatever the government thinks they should pay. Favored groups will pay very little while disfavored groups will pay a whole lot more — for the exact same coverage. But even those payments have nothing to do with what the insurance companies will receive. The actual payment for coverage depends entirely on how much the Department of Health and Human Services “adjusts” the payment, based on a complex and ever-changing formula of risk adjustments.
  2. The business model for health insurance companies has been completely turned on its head. Not only has all incentive been removed to enroll the young and the healthy, but so has any incentive to reduce costs or increase efficiency.
  3. These incentives are precisely the opposite of what needs to happen to make the program work. For ObamaCare to be sustainable it must bring in the young and the healthy, and it must encourage efficiency and cost containment.

Unfortunately, the health insurance industry is now locked into this system. Their very survival now depends on having the government provide “risk adjustment payments” (i.e. annual bailouts). They now have only one customer — the Secretary of Health and Human Services. No one else matters.

(txking / Shutterstock.com)

TAGGED:ACAobamacare
Share This Article
Facebook Copy Link Print
Share

Stay Connected

1.5kFollowersLike
4.5kFollowersFollow
2.8kFollowersPin
136kSubscribersSubscribe

Latest News

Clinical Expertise
Building Smarter Care Teams: Aligning Roles, Structure, and Clinical Expertise
Health care
May 18, 2025
Grounded Healing: A Natural Ally for Sustainable Healthcare Systems
Grounded Healing: A Natural Ally for Sustainable Healthcare Systems
Health
May 15, 2025
Learn how to Renew your Medical Card in West Virginia
Learn how to Renew your Medical Card in West Virginia
Health
May 15, 2025
Dr. Klaus Rentrop Shares Acute Myocardial Infarction heart treatment
Dr. Klaus Rentrop Shares Acute Myocardial Infarction
Cardiology
May 13, 2025

You Might also Like

MBAs for Practicing Physicians: Learning to Lead in the New Millennium

March 27, 2013
breast cancer in india
Global Healthcare

Breast Cancer Rates Rising in India, Especially Among Younger Women

November 1, 2013
biopharma beat diagnostics
DiagnosticsMedical DevicesMedical EducationMedical InnovationsPublic HealthTechnologyWellness

BioPharma Beat: The Promise of Diagnostics and Precision Medicine

November 4, 2013

Looking Good

September 2, 2011
Subscribe
Subscribe to our newsletter to get our newest articles instantly!
Follow US
© 2008-2025 HealthWorks Collective. All Rights Reserved.
  • About
  • Contact
  • Privacy
Welcome Back!

Sign in to your account

Username or Email Address
Password

Lost your password?