Industry Voices—Risk adjustment payments unfreeze, but uncertainty keeps progress at a glacial pace

CMS is letting politics get in the way of real progress. (Getty/marchmeena29)

In a political era where partisan bickering has turned even commonsense concepts into tendentious talking-points, the Centers for Medicare & Medicaid Services (CMS) took a step forward by agreeing to make good on the $10.4 billion in risk-adjustment payments they had promised to insurers in 2017.

michael abrams
Michael Abrams

This recent decision is a rare instance of a government program giving good  politics a back seat to sound policy. Even so, the agency’s back-and-forth shuffle on the risk adjustments has given some providers another reason to be cautious about adopting value-based practices, uncertain of what the federal government might do—and then undo—next.

When it came to reinstating its risk-adjustment payments, CMS made the right call. But the fact that this quick reversal took place at all reflects the fact that CMS does not have a clear understanding of its strategic role in reshaping our healthcare system or the very predictable way that market players will react to uncertainty.


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CMS, by virtue of its size and market power, is the only payer in a position to drive change in the healthcare business model before our current inefficiency, combined with a demographic “age wave,” drives the country off a financial cliff. Other payers across the country are waiting for CMS to provide cover for them by pushing for accountability in cost and quality, but CMS seems to neither understand its own role in this nor comprehend the urgency of change.

CMS periodically allows itself to be caught up in politics, like the risk payments kerfuffle, while remaining seemingly oblivious to their impact on prospects for change across the system. Providers won’t initiate change on their own, and other payers don’t have the market power to do so. Introducing further uncertainty simply causes all market players to push their timeline for change further back.

As healthcare costs approach 25% of GDP, we can’t afford that.

When bureaucratic back-and-forth governs patient care, the law of unintended consequences inflicts the heaviest penalties on those who least deserve them. The CMS’ prior decision to “freeze” its risk-adjustment payments is a case study to this effect. Inaugurated as part of the ACA, the payments were intended to reinforce rules that prohibited risk selection by insurers.

Risk selection was the practice, exercised by some insurers, of excluding unhealthy consumers from obtaining coverage under their plans. And like the risk adjustment freeze itself, it was a shortsighted effort to cut short-term costs.

Predictably, high-risk, uninsured consumers who became ill were forced to obtain care—usually short-term, sub-par care—at taxpayers’ expense. These consumers found themselves trapped inside a revolving door of hospitals, pharmacy lines, waiting rooms and urgent care clinics, and all players in the market found themselves on the hook for the cost.

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Risk adjustments help solve this problem. Insurers who enroll lower-risk populations make payments into a central fund that can be used to compensate insurers who cover higher-risk populations. With premiums fixed at the same level for everyone, this dissuades insurers from “skimming the cream” by only covering younger, healthier individuals.

By encouraging payers to make their policies attractive to all prospective enrollees regardless of health status, the risk adjustments carry another market-based benefit: mitigating the threat of adverse selection. This describes healthy individuals’ tendency to opt out of coverage, leaving only those with the most significant health needs to purchase insurance and creating a ripple effect of ever higher risk pools—and even higher premiums.

By incentivizing insurers to find their competitive advantage through consumer-friendly product features and services, the risk adjustment program cuts down on the likelihood that adverse selection might occur. This evens the playing field in spite of an insurance company’s risk pool–and that drives healthy competition.

Some have criticized risk adjustments as redistributive, which is inaccurate. Truly redistributive policies aim at replacing market forces with federal mandates, reducing market influence. Risk adjustment payments, on the other hand, catalyze value-based market competition and reinforce inclusion by eliminating the incentives for excluding high-risk individuals.

The problem is that after 30 years of ineffective government policies attempting to substitute for market forces, stakeholders have been conditioned to base their decisions on legislative, rather than consumer dynamics. Even as payers and providers acknowledge the inevitability of value-based approaches, they show little urgency for implementation.

Cutbacks in education, public and social services, security and public safety are taking place across the country, and growth in the cost of healthcare is a significant factor. The truth is that not only do we spend twice as much on healthcare per capita as other developed countries, but we also get inferior outcomes. An intelligent society doesn’t grow its way out of this problem.

CMS needs to recognize its pivotal role in achieving a sustainable approach to healthcare, and the clock is ticking. It’s time for the agency to rise above politics, reject the siren song of industry pressure groups, and take a more responsible, strategic, and assertive approach to reshaping the healthcare business model. Strategies like risk adjustment payments that force stakeholders (providers, payers and manufacturers alike) to compete based on market forces should be prioritized —before more direct intervention becomes our only choice.

Michael Abrams is co-founder and managing partner of Numerof & Associates, a firm that helps businesses across the healthcare sector define and implement strategies for winning in dynamic markets.

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