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Obamacare Stability Rests On Shaky Risk Adjustment

Set forth below are brief excerpts from my recent blog entry on Risk Adjustment under the Affordable Care Act that has been posted on Forbes The Apothecary.  To read the rest, you’ll need to go to that site.

What’s interesting, though, is what happened at almost exactly the same time as I released my Forbes blog entry.  New CMS Administrator Andrew Slavitt, whom I noted in the article had actually expressed concern about Risk Adjustment,  told Inside Health Policy, an outstanding trade publication, that some changes to the risk adjustment methodology in the draft Notice of Benefit and Payment Parameters for 2017 may instead be implemented in the 2016 plan year. CMS’ proposal calls for the 2017 risk adjustment to use a blended rate from earlier years and account for patient use of preventative services. I know that may not be the sexiest announcement ever made, but it’s important.  I’m not going to pretend that my blog entry motivated Mr. Slavitt to start looking hard at CMS methodology — although he would be well educated if he started each day with The Apothecary.  But, along with his recent actions taken to reduce the ability of insureds to game the Special Enrollment Period, Administrator Slavitt’s critical attention to Risk Adjustment suggest a willingness to take a fresh look at Obamacare implementation failings. 

The Affordable Care Act originally appeared to promise a choice of plans on the Exchanges across at least two spectra: the amount of cost sharing an insured would have to assume and the degree of choice the individual would have in selecting their healthcare providers.  Although this ability to customize both choice and “metal tier” was generally considered a feature of Obamacare, it has turned out to pose significant issues.  And here’s why: plans with the greatest degree of choice (PPOs) and the lowest amount of cost sharing (mostly Platinum) are magnets for the unhealthy.  So, unless there’s something to neutralize the extra costs to the insurer created by this “magnetic attraction” or unless insurers can simply decline to offer plans with high choice or low cost sharing, the freedom to select a plan in fact becomes destructive.

The choice touted by proponents of Obamacare induces a weakened form of an adverse selection death spiral. The whole system may not immediately collapse, but the system’s physics becomes highly unstable. The plans most attractive to the unhealthy become unavailable. The unavailability occurs either because insurers can’t persuade regulators to let them charge the high rates needed to break even or because all but the sickest insured’s won’t buy them at such a price. The most expensive 20% of individual insureds, after all, cost on average more than 60 times as much per person as the least expensive 50%. The Platinum refugees then migrate to the second most attractive plans —  in our case often Gold or Silver. (Remember Silver plans have low cost sharing for poor families). But then these plans become disproportionately populated by the sick and can also become considerably more expensive.  If there is a point of stability, it is likely to be one in which there is far less choice of physician and far more cost sharing than originally contemplated.  Most people might end up in a Bronze HMO.

The stability of Obamacare likely rests significantly on the arcane and challenging technology of  Risk Adjustment.  Run it poorly in ways insurers can game and look for the market to fall into a Bronze HMO basin of attraction or collapse altogether.  Run it without the strictest safeguards for medical privacy and see a mass rebellion from insureds. Obamacare would have a better chance at stability with a diversity of plans if Risk Adjustment worked considerably better than has so far been the case.

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