Improving the Affordable Care Act Markets (Part 2)

Improving the Affordable Care Act Markets (Part 2)

By JONATHAN HALVORSON

In a previous post, I described how some features of the Affordable
Care Act, despite the best intentions, have made it harder or even impossible
for many plans to compete against dominant players in the individual and small
employer markets. This has undermined aspects of the ACA designed to improve
competition, like the insurance exchanges, and exacerbated a long
term trend toward consolidation and reduced choice, and there is evidence it
is resulting in higher costs. I focused on the ACA’s risk adjustment program
and its impact on the small group market where the damage has been greatest.

The goal of risk adjustment is commendable: to create
stability and fairness by removing the ability of plans to profit by “cherry
picking” healthier enrollees, so that plans instead compete on innovative
services, disease management, administrative efficiency, and customer support.
But in the attempt to find stability, the playing field was tilted in favor of
plans with long-tenured enrollment and sophisticated operations to identify all
scorable health risks. The next generation of risk adjustment should truly even
out the playing field by retaining the current program’s elimination of an
incentive to avoid the sick, while also eliminating its bias towards incumbency
and other unintended effects.

One important distinction concerns when to use risk
adjustment to balance out differences that arise from consumer preferences. For
example, high deductible plans tend to attract healthier enrollees, and without
risk adjustment these plans would become even cheaper than they already are,
while more comprehensive plans that attract sicker members would get
disproportionately more expensive, setting off a race to the bottom that pushes
more and more people into the plans that have the least benefits, while the
sickest stay behind in more generous plans whose premium cost spirals upward. Using
risk adjustment to counteract this effect has been widely beneficial in the
individual market, along with other features like community rating and
guaranteed issue.

However, in other cases where risk levels between plans differ
due to consumer preferences it may not be helpful. For example, it has been
documented that older and sicker members have a greater aversion to change (changing
plans to something less familiar) and to constraints intended to lower cost
even if they do not undermine benefit levels or quality of care, like narrow networks.
These aversions tend to make newer plans and small network plans score as
healthier. Risk adjustment would then force those plans to pay a penalty that in
turn forces enrollees in the plans to pay for the preferences of others.

If new plans, or innovations to control costs and avoid
over-utilization such as narrow networks and tiered pharmacies were not in the
public interest, then those penalties could be justified. But since the ACA
relies on contracting strategies available to private plans (not rate setting)
to control costs, penalizing such innovations through risk adjustment will
undermine competition and efforts at cost control. These constraints may also
actually improve the quality of care and quality of life by avoiding
unnecessary care and the complications it can create, and better coordinating
care among more integrated providers. There is evidence in Massachusetts and
elsewhere that risk adjustment penalties due to these preferences harm the public
interest.

A small insurer that contracts with the same providers as a
large one is going to pay more for each service provided, especially at
hospital systems and medical groups that have a strong position when negotiating
rates. A careful analysis
of the New York market found that this was likely the single largest driver of
losses among start-up health plans, but the risk adjustment model makes no
accommodation for it. The only way for a smaller plan to partially counteract
this large plan cost advantage is to have a more narrow network and form a
close alliance with a limited number of provider partners. In doing so, that
insurer will exclude some important institutions in the local area, and people
who are least amendable to this tend to be older and sicker. The risk
adjustment model makes no allowance for this selection preference.

The increased willingness of younger and heathier people (and
small businesses) to try something new could help mitigate the benefits of size
and incumbency, but the current risk adjustment model throws up roadblocks to
this opening for innovation.

The measurement methodology itself also creates issues. As
mentioned in my previous post, inevitably a dominant insurer will pull the
average statewide risk score to be closer to its level than competitors, and
what can seem like a small payment to it is huge to its competitors as a share
of their premium. The largest incumbent plans also have a lot of historical
data needed to effectively confirm each year what conditions (scorable risks)
its members have, and sophisticated operations to find and confirm new
diagnoses every year, as the ACA requires. This results in plans receiving
higher risk scores than others that do not reflect true underlying differences
in risk.

So, what can be done? Below are three suggestions for
further discussion:

  • Add Value Control Factor – A Value
    Control factor could be established for select innovations that address cost
    and quality but may be selected against by enrollees with higher costs. Such
    factors could include small integrated networks, restriction to in-network
    benefits, reliance on a PCP to coordinate care, and tiered formularies. The
    amount of any risk transfer payments from a plan with eligible cost/quality
    controls could be reduced by this factor, in order to reduce penalties for
    innovative solutions that align incentives more closely between payers and
    providers, avoid waste and inflation, and improve collaboration in care
    management. This factor would be empirically established in each state, and if
    there is no measured impact then no factor would be applied. Plan designs that
    simply increase member cost-sharing would not be eligible for a Value
    Control factor.
  • Provide Relief for Small Plans – If a
    plan in a highly
    concentrated insurance market has less than a certain market share (e.g., 5%),
    it should be allowed relief from some of the burden of risk adjustment
    transfers. Plans could be made to opt-in to this program in advance to avoid
    gaming, and market share should be set at the level of the insurer in a
    particular market (namely the individual or small group market) rather than a
    specific insurance product. This relief is necessary to counter some of the
    advantages larger plans typically have from their long-tenured membership,
    favorable contracted rates with providers, and close relationships with brokers
    who steer coverage decisions.

The ACA has done well given the limitations it has faced. Millions more Americans have insurance than before, and those with existing health conditions are freed from the fear of being rejected for coverage simply because they are sick. Even under an administration hostile to it, enrollment has been stable for those receiving subsidies on the exchanges. However, the unsubsidized individual market and the small group market have been shrinking, while the dominant insurers keep getting more dominant. We face the prospect of stagnant marketplaces with shrinking competition, higher premiums and fewer enrollees. HHS has repeatedly invited states to submit their own proposals for alterations to the federal risk adjustment program to suit the conditions of each state, though so far only Alabama (in 2018) and New York (in 2017, as an emergency measure) have done so. It is better late than never for states to take HHS up on its offer.

Jonathan Halvorson is a Senior Healthcare Consultant at Sachs Policy Group and has a long-term interest in the transformative potential of technology on the health care system