Warning: This article is inherently depressing and presents a far-less-rosy view than is typical of how this optimist of an author normally sees the world. It was my greatest desire to be able to present an optimistic point of view once 2015 risk adjustment results were released on June 30. Alas, that just wasn’t meant to be. Instead, it is my hope that if I present the evidence as I see it from the front lines, our actuarial community can work to put the puzzle pieces together in a way that results in a benefit to the American public and a future for the Affordable Care Act (ACA) exchange market as it was envisioned back in 2010.
Boiling all my thoughts on risk adjustment down to a few salient points was a real challenge. It is nearly impossible to describe what drama this program has brought to my life in the past three years. Truly, that is not an understatement—I currently am in the process of winding down my time as chief actuary of Land of Lincoln Health, Illinois’ CO-OP. New studies and articles on 2014/2015 risk adjustment data are being published on a seemingly daily basis, and they present lots of interesting statistics and correlations. They demonstrate just how much money is moving around in total (10 percent of total individual market premiums) and that the variability is greatly exaggerated for smaller insurers (half of issuers with fewer than 1,000 individual lives were owed or due more than 35 percent of their annual premium).1
Problems with the Current System
A lot of focus also has been given as to why startups and high-growth companies have been disadvantaged by the current risk adjustment system. Explanations include:
- Little or no history with the membership to enable efficient risk score optimization techniques.
- Higher expense load due to breadth of membership across which costs can be spread.
- High numbers of partial-year members, which are significantly underscored in the current risk adjustment schema (especially detrimental to high-growth companies).
- Learning curve on how to maximize coding opportunities.
- A culture focused on the consumer, rather than bottom line profitability with respect to product offerings and risk adjustment.
All of this data and information is fascinating, but it easily bogs us down and distracts us from a critically-needed conversation on a fundamental problem underlying the individual market as it’s currently structured. Namely, without significant retooling, the morbidity of the risk pool is in danger of spiraling to levels that will dissuade all but the sickest consumer from participating. We will be left with high-risk pools and pre-ACA volumes of the uninsured.
There are two fundamental dynamics that need altering (at a minimum) to rectify the future of ACA exchanges. First, the risk adjustment program has removed the incentive for individual insurers to attract and retain healthy members. Healthy doesn’t pay under risk adjustment. In fact, some of the latest studies show there is a direct correlation between issuers who receive risk adjustment payments and positive overall margins. Yet, the market collectively must attract and retain healthy members to maintain the viability of the overall risk pool. How does the market achieve this when it’s not in any one participant’s interests in isolation to do so?
Second, we need to do some serious reimagining of how we pool the costs in this market segment. The ability and economic incentive for individuals and families to only purchase insurance when there will be financial benefit is so much stronger than any sort of tax penalty from an economic perspective, behavioral or otherwise. Given how expensive non-preventive/run-of-the-mill illness care is, it is just not reasonable to expect that pooling these risks over such great personal winners and losers is sustainable.
Which brings me to … what do we do about this?
It certainly seems that to preserve the health of the risk pool and keep the market morbidity from rapidly increasing, we need to put some of the incentive back into the market for insurers to attract and retain the young and healthy. To capture this audience’s attention, we need to allow for and promote opportunities for companies to develop new consumer experiences. Members need to feel they are getting good value, even if they do pay more in premium than the insurer covered in medical expenses.
The innovation and vision to create these new and appealing options is exactly the niche the CO-OPs and new ventures like Oscar Health are trying to fill. But being a startup is very difficult, notwithstanding risk adjustment. Throw an extra cost of 20–30 percent of revenue on top, and you get 16 of 23 CO-OPs shutting their doors (as of July 15). You also get reductions in exchange offerings down to those from established carriers that deal with the insured as they’ve always done. We need to promote these new ventures offering health insurance through innovative and varied approaches. We need to create brand loyalty and entice the healthy into the market, and then keep them.
All the reasons delineated earlier have placed an incredibly high burden on these companies doing their utmost to attract and retain new membership. Compensating more for the healthy in the risk adjustment formula, thus helping to keep product offerings fresh and morbidity trends from being double digits, seems worthwhile for all involved, even if it reduces revenue for the largest players in the market by 1–2 percent relative to where they sit today. This is a solvable problem under the current regulatory framework, but it needs to be addressed quickly by the Centers for Medicare and Medicaid Services (CMS) risk adjustment team to save the remaining innovators and foster new innovators to join the fray. CMS’s latest proposed changes for 2017 and 20182 are a step in the right direction (we need to begin somewhere), but are unlikely to completely solve the issue by themselves.
Exchange Pool Makeup
The second issue—the enormous economic incentive for individuals and families to select against the exchange pool—seems to require more fundamental changes to the overall structure of the individual market.
Whereas most other types of insurance protect against events the member doesn’t want to happen, health insurance covers both unwanted expensive acute illnesses as well as all sorts of preventive and routine care that members do want. A lot of this is driven by our messy price system in which the uninsured face much higher unit prices and thus need insurance for the “discount card” purpose as much as for insuring against catastrophic events. This has been muddied together in our current system for years, but it seems even more noticeable in the exchange pool.
Consumer behavior demonstrates the exchange pool currently combines these two distinct categories of people: those who have expensive conditions (and were previously underwritten out of the market), and those for whom the premium subsidies help make health insurance affordable. It is a stark reality that there are so many expensive patients in the pool. It is unreasonable to expect that spreading the burden of those costs only among individuals who already are acutely price sensitive is sustainable.
For the sickest in our society (a great number of whom have fallen out of the group market into the individual risk pool), perhaps we choose to spread their costs over the entire working-age population—much like a permanent version of the ACA’s transitional reinsurance program—and let the costs borne for less-catastrophic care be pooled across a like consumer base through the exchanges. There are probably a number of other options that would have much of the same effect.
In closing, change is not easy. Providing affordable coverage in a guaranteed-issue individual market never was going to be easy. However, our industry has already undergone six years of growing pains and has made a strong start at reforming the way individuals, families and even small groups are able to access health insurance. We now have two full years of experience under our belts working within the current risk adjustment system. We are a group of problem solvers. We take the information available to us and put our best estimate forward. Rather than retreat from this challenge, let us rise to the occasion and continue to refine this complex system that we, as actuaries, are particularly qualified to reform.