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Insurers’ Risky “Risk Adjustment” Proposal

To encourage insurance companies to compete for customers based on price and quality — not on attracting the healthiest enrollees — the Affordable Care Act calls for insurers in the individual and small-group markets with sicker-than-average enrollment to receive payments to compensate them for their resulting higher costs.  The payments will come from plans that enroll healthier-than-average people, who do not cost as much to cover.

The Department of Health and Human Services (HHS) has proposed that the state or federal officials administering this “risk adjustment” system in a given state determine the health status of plan enrollees based on data that insurers give them.  That’s similar to how risk adjustment in Medicare works today.  But some insurance companies, as well as some House Republicans, are urging the federal government instead to allow insurers to measure the health status of their enrollees themselves, without submitting any data.

As our new paper explains, this insurer-backed alternative would place the ACA’s risk adjustment system at much greater risk of error and fraud.

Without the data used to measure enrollee health status, officials would be far less able to ensure that they are calculating risk adjustment correctly and that insurers aren’t gaming the system, such as by making their enrollees seem sicker than they actually are.  That, in turn, would undermine the credibility of the risk adjustment system among all insurers and threaten the long-term viability of the new health insurance exchanges and major insurance market reforms that take effect starting in 2014.

That’s why some other insurers support the proposed HHS approach.

Insurers that want to withhold data on enrollees’ health status claim that requiring them to provide such data would endanger enrollees’ privacy.  But history shows that it’s possible to protect patient privacy while also ensuring an accurate risk adjustment system.  Medicare already collects, uses, and protects such data for tens of millions of beneficiaries as part of its risk adjustment systems for Medicare Advantage and the Part D drug benefit.

HHS should continue to ensure that states and the federal government have the data they need to administer risk adjustment effectively.