CMS explores changes to risk adjustment program

In response to criticism from some health insurers, federal regulators are considering some changes to the Affordable Care Act's risk adjustment program starting in 2018.

The Centers for Medicare & Medicaid Services (CMS) describes those proposed changes and details how it calculated 2014 benefit year payments and charges in a new discussion paper issued ahead of a March 31 meeting about the risk adjustment program.

The risk adjustment program seeks to stabilize ACA marketplaces by transferring funds from individual and small-group plans with healthier, lower-cost enrollees to those with sicker, higher-cost members. Initial findings from 2014 show that, in general, the risk adjustment methodology the program uses "is working as intended," CMS says in its paper.

Yet some--including consumer operated and oriented plans--argue that in practice the program ends up benefitting larger, entrenched payers at the expense of smaller, innovative health plans.

CMS notes that "an issuer's size did not predetermine if they received a risk adjustment payment or charge," saying that on average in the individual market, smaller insurers received payments while larger insurers owed money to the program. However, risk adjustment transfers as a share of issuer premiums varied much less for larger insurers.

In response to industry concerns, CMS says it's looking into whether the current risk adjustment methodology "appropriately addresses plan differences." The formula currently takes into account premium-variation factors such as metal level, age and geographic cost factors, the paper says, but does not account for network differences, plan efficiency or effective care coordination or disease management.

Therefore, CMS is considering modifying its risk adjustment equation "using a plan's own premium," though the agency says it's aware that such an approach could be vulnerable to errors from inaccurate rate setting or create incentives for plans to game the system by raising or lowering premiums.

Through its Risk Adjustment Data Validation program, the agency has already taken steps to prevent insurers from assigning risk scores that make enrollees look sicker than they are.

In addition, CMS says it seeks comment on possible changes, such as making the risk adjustment model more accurate for partial year enrollees, using prescription drug utilization as a predictor in the model and pooling high-cost enrollees. In the longer term, the paper says, CMS wants to explore the possibility of using socioeconomic status or other sociodemographic factors as predictors in the risk adjustment model.

A recent analysis from the advisory firm Avalere supports several changes to the risk adjustment program, such as exploring ways to estimate the risk adjustment model based on the individual and small group commercially insured population--rather than the large employer group population--to ensure greater accuracy. It also suggests that CMS re-evaluate the coverage criteria for diseases included in the model as well as use prescription drug information to identify conditions beyond those captured by diagnoses and adjust for disease severity based on medication use.

To learn more:
- here's the discussion paper (.pdf)
- read the Avalere analysis (.pdf)

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