How insurers should prepare for future ACA risk adjustments

The first-year results of the Affordable Care Act's (ACA) Risk Adjustment Program are in, and while the experience may not have been a home run, it might be characterized as an RBI double.

A major component of the ACA, the risk adjustment program is intended to spread out the cost of covering patients with pre-existing conditions by distributing payments, in part, according to the risk factors of those insured patients. The goal was to encourage insurers to cover high-risk patients by transferring funds from insurers focused on relatively low-risk populations.

According to an April 2016 policy paper by the American Academy of Actuaries’ Risk Sharing Subcommittee, the program is largely headed in the right direction. Among its primary findings, the committee noted that the program “compressed the loss ratio differences among insurers with low loss ratios and reduced loss ratios for insurers with high loss ratios.” Simply put, the program did its job of shifting funds from plans with low-cost enrollees to others with high-cost enrollees.

Not everyone, however, benefitted equally. The report says that “Risk adjustment experience can vary among insurers due to operational issues (e.g., technical issues with loading enrollment and claims data, timely processing of claims), which may have impacted some small or new insurers to a greater degree than large and more established insurers.” It also noted that the impact of premiums, upon which risk adjustment factors had a strong influence, also came into play for various payers.

“Risk adjust transfers as a percent of premium were more variable and likely to be higher for insurers with a smaller market share,” the report states. “Insurers with a larger market share were by definition closer to the market average while small-market-share insurers were more likely to be skewed toward either low-risk or high-risk individuals.”

Across the U.S., plans that are new have been understandably hindered the most in mastering the intricacies of the program. A survey by a coalition of 35 small insurers participating in ACA exchanges found that 27 were compelled to write checks to the program as a result of risk adjustments. Even some longtime payers were impacted; Earlier this year, The Washington Postreported that a decades-old South Florida HMO, Preferred Medical Plan, received a risk adjustment bill of $97 million.

Larger plans generally fare better because they have the resources to chase claims and can more quickly identify high-risk members. Nonetheless, several such plans have struggled with ACA exchange participation since 2014. Humana Inc., while reporting a small profit on individual plans in Q1 of 2016, says it will make changes that may include statewide market and product exits, both on- and off-exchange. UnitedHealth Group reported a $720 million loss for 2015 on its exchange business segment, of which $245 million is a set aside for an anticipated loss of $500 million for 2016. It anticipates withdrawing from all but a small portion of the 34 states in which it offers exchange plans by 2017.

Next: Balancing risk, cost and revenue

Uncertainty and even turmoil is not uncommon when fundamental change hits an industry—and the growing pains involved with ACA implementation are no exception. As insurers struggle to find their footing in this new era, significant financial shifts will undoubtedly continue, although they should lessen in intensity over time.

Premiums, in particular, will fluctuate. It should be noted, however, that the risk adjustment program is a zero-sum endeavor, meaning that—at least as planned—payers who are penalized under the program will be offset by others who benefit through accurate measurement and reporting of their risk. The federal government is also offering premium subsidies for many lower-income consumers; flowing directly to the insurer, the subsidies reduce the impact of large premium increases.

As the healthcare industry looks ahead, it’s clear that the balance of risk, cost and revenue will be tricky to master. Risk adjustment, for example, drives more than transfer payments; the projected risk factor for a plan has a direct role in premium prices. Health plans that underestimate their risk may underprice their premiums and jeopardize profitability, while also attracting a much higher number of new enrollees with unknown health risks. Underestimating risk may also prevent a health plan from being eligible for transfer payments because its risk score was too low. On the other hand, overestimating risk may result in health plans raising their premium rates and losing membership because they are not as competitive in state marketplaces.

Preparing for the next round of risk payments, for nearly all insurers, will require a much tighter assessment of the risk level of their populations. For many payers, determining risk scores is a tedious process. Claims are often analyzed manually; moreover, any sources of data are typically structured, meaning that the information is already stored in digital formats.

The trouble is, much of the most influential information isn’t in digital form at all. Unstructured data—physician notes, lab reports, personal health records, forums, affinity groups and the like—are either handwritten or a part of forms and files that cannot be converted. Unstructured data is typically left out of risk calculations, despite the fact that such information can provide better insight and understanding of a patient’s overall health status. It can also help uncover misdiagnosed or undiagnosed conditions, improve treatment recommendations, and ensure that chronic conditions are correctly managed for better long-term clinical and financial outcomes.

As insurers take a hard look at their approach to risk assessment, it will be critical to incorporate more sophisticated forms of technology into the resource mix. Many insurers are only now grasping the full challenge presented by the shift to value-based care—an environment where complete and compelling data, submitted to the rigorous standards of the ACA and its federal administrators, is king.

Undoubtedly the mixed results of the ACA Risk Adjustment Program will improve in the years ahead as state and federal agencies refine the standards and procedures involved. It will be the job of insurers and providers, however, to respond to those refinements with infrastructure that ensures fair and equitable payments for all concerned. It remains to be seen if the program can bat 1.000 in its stated goals—but with the right technologies in place, everyone’s average can become a lot higher. 

Anand Shroff is co-founder, chief technology and product officer of San Mateo, California-based Health Fidelity, a provider of technology solutions for healthcare organizations.