The Role of Risk Adjustment and Risk Mitigation in Stabilizing the Individual Health Insurance Market

Wednesday, July 19, 2017
Summary and Key Findings: 

The Urban Institute (Urban) and the American Action Forum (AAF) recently partnered to host a panel discussion that addressed an often misunderstood or overlooked mechanism of health care: risk adjustment. The panel was the continuation of a conversation that began earlier this year, when Urban and AAF convened a group of roughly 20 experts from the health care industry, academia and the actuarial community to explore the role of risk adjustment in overcoming challenges of instability and high premiums in the individual health insurance market. Urban and AAF then detailed the findings of from that conversation in a white paper: “Stabilizing the Individual Health Insurance Market: What is the Role for Risk Adjustment and Risk Mitigation?”

To continue the discussion and review the report’s findings, on June 28, several of the experts met at Urban to publicly present and discuss the report. Presenters and panelists included:

  • M. Kate Bundorf, associate professor of health research and policy, Stanford University School of Medicine
  • Stan Dorn, senior fellow Healthy Policy Center, Urban Institute
  • Douglas Holtz-Eakin, president, American Action Forum
  • John Kaelin, senior advisor, Centene Corporation; member, Dean’s Council, George Washington School of Public Health
  • Timothy Layton, assistant professor of health care policy, Department of Health Care Policy, Harvard Medical School
  • Cori Uccello, senior health fellow, American Academy of Actuaries
  • Sarah Rosen Wartell, president, Urban Institute

Understanding Risk Adjustment

In this post, we’ll share some of the key takeaways of the recent panel discussion, as well as the key findings of the “Stabilizing the Individual Health Insurance Market” report.

First though, it’s important to put risk adjustment in the proper context. By risk adjustment, this group was referring to the process of payments being made to or from insurers to compensate for the difference between the expected claims costs of an insurer’s members (their “risk level”) and the insurer’s premium revenue. Varied systems of risk adjustment are used across health insurance programs (e.g., individual market, Medicare Advantage), but the paper and discussion focused primarily on the individual health insurance market. 

In general, risk adjustment helps mitigate the effects of risk selection against plans, which is when sicker (“higher risk”) enrollees disproportionately select one plan over another. Risk adjustment lets insurers compete on value to consumers, rather than by avoiding higher risk individuals within a market, such as those with pre-existing conditions or overall poor health and high health care costs. Risk adjustment is especially important in markets that prohibit insurers from denying coverage entirely, or for pre-existing conditions specifically, and from pricing premiums based on health status.

Risk Adjustment in an Uncertain Health Care Environment

Panelists at the Urban event agreed that the individual health insurance market is in transition, and that the current risk adjustment system may need to change with the passage of a new health care bill.

Below are a number of the key points addressed by the event participants:

  1. Risk adjustment is a very technical process and ensuring it functions well is important so as not to create additional uncertainties or poor incentives for insurers, which in turn could negatively impact the plan options available for consumers. 
  2. One of the challenges of the risk adjustment program in the individual market is that insurers have to estimate more than a year in advance what they think their risk scores will be, whether their enrollees will be healthier or sicker than the market average, and by how much. As the program matures and insurers have more experience with the market, this may become easier.
  3. Difficult as it may be, risk adjustment is here to stay. Several panelists commented that though often problematic and troublesome, risk adjustment is still the best way to help promote a stable, functioning market when market rules guarantee coverage for pre-existing conditions and require community rating (i.e., premiums can’t vary by health status). By limiting the risk to insurers of enrolling a population with a disproportionately higher illness burden, risk adjustment increases access to health insurance, and health care, for consumers.
  4. Nevertheless, as the range of products offered broadens – such as if future rules permitted different types of plans, a wider range of benefits or benefit value – risk adjustment both becomes more important and harder to do. Policymakers may need to consider complementary risk mitigation approaches to help stabilize the individual market.

In the end, the panelists arrived at the conclusion that by making deliberate, specific changes to risk adjustment, the system can continue to evolve and improve.

Key Findings from the Report

The report, “Stabilizing the Individual Health Insurance Market: What is the Role for Risk Adjustment and Risk Mitigation?” goes into greater detail about these issues. It addresses questions of risk adjustment from the ground up, by laying out key terms and level-setting on what could be done to improve the current system.

The report also explores general risk adjustment themes that apply almost regardless of the rules in an individual market, such as:

  1. Risk adjustment is important but hard to do well.
  2. Designing risk adjustment systems requires making trade-offs. 
  3. Risk adjustment takes health status into account, regardless of age.
  4. Operational details matter.

The report also analyzes the operation of risk adjustment in the current individual market and explores how policymakers could structure risk adjustment and other risk mitigation measures if the ground rules governing that market changes (e.g., through passage of legislation modifying the existing rules).

This report—and the panel discussion that it inspired—shed light on a complex but important component of the individual health market. The report’s authors put it best when they say, “[risk adjustment] and other risk-mitigation measures involve technical issues that are rarely the subject of entertaining dinner-table conversation between ordinary humans. Nevertheless, resolving those issues intelligently and pragmatically is crucial to the effective functioning of individual markets.”

Read the full report here

You can also read additional thoughts on this research from the Health Affairs Blog

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