I’m not a big fan of risk adjustment. The case for risk adjustment is pretty simple; insurance carriers should not be penalized if the folks who sign up for their plan are sicker, and therefore require more care, than average.
To make the market ‘fair’, risk adjustment advocates believe that the plans with lower costs (presumably due to their ‘healthier’ population) should send money to the plans with higher costs. There are several risk adjustment models in place, each with its own features. Germany’s system is an oft-cited example where adjustments for age, sex, disability, and level of sick pay benefits are calculated. The Dutch also look at age, sex, and disability status, and add employment status and region to their formula. The Israelis, Swiss, and Belgians also employ risk adjustment techniques; and each methodology has significant problems. To be sure, these countries are working on improving their techniques and formulae, but they all have been doing this for years and still find challenges.
But say these countries find the right algorithm, and figure out how to make the risk adjusment system ‘fair’. What then?
A massive deviation towards the mean – all insurers will become ‘average’. The logical problem is obvious – a risk adjustment eliminates any reason for an insurer to invest in keeping their insureds healthy, to effectively manage care, to seek out the best providers and help them deliver the best, most cost-effective care. Instead, it de-motivates insurers – there is no reason to work hard to improve health status and outcomes and minimize cost if there is no financial reward for success.
If insurers have no motivation to control medical costs, they won’t. Instead, health plans will slash costs, eliminate programs and jobs, and ignore results.
Risk adjustment assumes that regulators will not prevent insurers from exercising their well-honed risk selection skills; the transfer mechanism is a kind of backstop to ensure that even if those wiley insurance execs do fool the regulators, their trickery will not pay off.
I’ll grant that some insurers will try whatever they can wherever then can whenever they can to get ahead, and (pause, cross fingers) if some day we have universal coverage and ban medical underwriting and target marketing that will not change . There are always going to be cheaters – that’s why we have whistleblower laws, and Federal agents, and prosecutors, and jails. No, we’re not going to catch all of them.
But I don’t think they will cause nearly enough pain to offset the gains we will enjoy when insurance companies finally start turning their brains from risk selection to keeping us healthy.
And the only way to motivate that behavior is to reward those insurers that do it well.
Feb
20
I have to disagree with you a little here, Joe. Risk-adjustment is only unfair when risk is something that the payor wants to avoid.
I have in mind a payment model, which I take, not from healthcare but from school funding. In Michigan, in the early 1990s, the Legislature passed a law to divorce local school funding from local property taxes. The idea came about to help prevent schools from declining funding in communities — mainly Detroit, but also places like Flint and Ypsilanti — where the property tax base was eroding.
I’m painting some broad strokes here, and leaving out some important details, but to fund a school district’s operations, most property tax collections for schools were pooled at the state level (much like social insurance) and redistributed back to each individual school district on a per-pupil, per-school-year basis. Sounds a lot like capitation, doesn’t it? But not every school district gets the same amount per pupil, simply because it costs more to deliver services (in this case education) in places like Detroit than it does in places like, say, Alpena. So they risk-adjust, in a manner of speaking.
The end result hasn’t been perfect, but it has at least solved the problem of communities going through cycles of decline where industry leaves and the local schools either have to beg the citizens for higher taxes or go broke. And it also “brought up the bottom” so to speak in establishing a state minimum of funding below which a community need not fear falling to continue educating its children (there are limited schemes for each district to tax more for itself, with voter approval, so that those at the top of per-pupil spending can stay at the top if they believe there is value in doing so).
The similarities are interesting, but the point I want to focus on as most important is that the money follows the student. They take headcounts on the fourth Friday of each semester, twice a year, and the funding — called a Foundation Grant — is a blend of the two. So if the family relocates, even during the school year, the district gets no more and no less than a semester’s-worth of grant money for him or her. No one gets a free ride, but no one gets short-changed either.
And Special Ed students, because of their higher costs for delivery of service, are risk-adjusted too if I remember right. Each mainstream student counts as 1 Full-Time Equivalent, much like the Department of Labor counts employees. Special Ed kids count as more than 1, and are actually calculated separately anyhow.
I bring this up because, wouldn’t this be a great model for healthcare financing? Where the money follows the patient, and reimbursement for the provider is adjusted fairly on the true costs of delivery in that specific community or setting? And each individual patient carries a certain Health Risk Score, which would be higher the more unhealthy he or she is?
Wouldn’t it be great if insurers were elbowing each other out of the way to get at the really unhealthy patients because they had a higher risk score, and therefore a higher reimbursement, than the single-digit-body-fat, 25-year-olds who hit the gym three times a week and eat macrobiotic diets? I’m not against competition at all. I just think we ought to be competing over the right things, like service and benefits, rather than who can best avoid the highest risks and cover the most healthies.
Joe – I disagree as well. Following up on Rick’s comment, if we were able to develop a decent model of individual risk scoring and each insurer were paid based on the blended risk score of the population it winds up with (assuming they have to take all comers), there is plenty of opportunity to compete and prosper. Suppose five different insurers, for example, each had a similar number of members with diabetes, heart disease, and asthma. If one of the insurers develops a superior disease management approach that minimizes ER visits, hospital admissions and re-admissions, etc. it will have lower medical costs than its competitors but a similar payment per member with those conditions based on the risk score. On the other hand, if the revenue sharing is based on medical costs actually incurred by each insurer, then the incentive to keep patients healthy tends to break down as you suggest. If the risk adjustment model is sufficiently robust, I see absolutely no reason why it cannot work.
Joe– there is an assumption here that flies in the face of experience– that insurance companies can do much of anything to keep people healthy. Each person makes a myriad of decisions every day which impact his/her health. Insurance companies have no impact on those decisions. It is, in fact, unclear how people do make these decisions, but we know that people are very irrational in making economic decisions and in other areas of their lives. As long as we give any credence to the idea that insurance companies can/should keep us healthy in any way, shape or form, we will be barking up the wrong tree. Insurance companies select risks and pay bills and that’s all they do.
One program that my insurer has taken up, which seems to at least motivate those that can be motivated, as opposed to those that have a hard time being motivated, is the Virigin Health Miles Program (yes same Virgin as Sir Richard Branson.) http://www.virginhealthmiles.com/
Members/users are rewarded for reaching goals in number of steps/per day etc… Rewards are in dollars ($$$) and can count towards gift certificates to retailers etc… Currently it’s only available to employers of 300+ employees, but they’re hoping to extend it to smaller employers and individuals.
I had heard of similar initiatives at a few health club/fitness centers. Except in this case, members were able to reduce the membership fees (premiums) based on how much time they spend on a bike that was connected to an electricity generator. ie saving the health club money on their electric bills. Similar idea as hybrid cars- not “wasting” energy by creating electricity while braking.
(As a side note, I always thought something similar to biking-for-energy would be a perfect program for prisoners in jails, except they’d be cycling off their sentences while generating electricity for the prison/community. While this does have some potential ethical/moral dilemas, perhaps it could be a voluntary program.)
I think transparency also helps in showing exactly what insurers are attempting to do. Profit margins of many insurers do not exceed double digits (and that’s pre-tax). On average they’re paying out roughly 80% of the premiums (revenue) they take in. This is before they pay any salaries, marketing, etc… To say that they’re working the system would be quite far from the truth. Take pharmaceutical companies for example who typically average 15-18% on their pre-tax margins. Grrrr!
I agree that risk pools do need answers and that a focus on creating/maintaining healthy lifestyles is imperative for many of these companies to succedd.
Sorry if this is a bit off tangent. This is my first official blog post, but I’ve been reading this more and more recently and thought I’d add my two or three cents. I promise to be more concise and to the point in the future.
Thanks!
Joe,
Can you give me your definition of personal responsibility?
Health insurance premiums are a derivative of the price of care (PRICE), charges from a doctors office, hospital, RX etc. multiplied by the frequency that care is needed (VOLUME) plus the admininstrative costs to pay the expenses with the premiums the carrier receives. Total equation is PRICE X VOLUME + ADMIN CHARGES = PREMIUM
When many employers get their renewal rates annually, what you find is that the cost of care has gone up slightly, but the volume has gone up significantly. The carrier asks for more premium in anticipation of more volume. The employees get mad, but they are the accumulators of the claims. Some out of their control, but more than you might think are in their control. Lifestyle control.
If we as a society are going to attempt to control costs we must also look at reducing volume based on lifestyle choice.
If I am a wreckless driver, numerous speeding tickets, and multiple accidents, should the carrier not adjust risk and allow me to pay the same as someone who has a clean record and drives responsibly. Risk adjustment applied the correct way will force individuals to accept responsibility where it should be accepted.
Maybe seeking to understand your definitions will help me in understanding your perspective.
Just another point of view that is submitted,
Respectfully,