A Centers for Medicare and Medicaid Services proposal to modify the risk adjustment formula for health insurance exchange carriers could help better predict the costs of healthier enrollees. But industry watchers caution regulators that these changes could prompt insurers to cherrypick the healthiest customers.
The change could reshuffle the winners and losers in the individual insurance market, as insurers covering a larger share of healthy people will see their risk adjustment calculations benefit relative to those with a sicker share of the population.
Last month, CMS proposed several changes to risk adjustment for exchange policies in plan year 2023. One of the biggest may be a proposal to change the calibration for both adult and child risk adjustment models to give more weight to healthier enrollees.
Risk adjustment in the exchanges aims to discourage plans from seeking lower-risk enrollees and transfers funds from insurers that cover more lower-risk people to insurers that enroll higher-risk populations.
But the current model tends to under-predict costs for healthier enrollees, which make up approximately 80% of people in the individual and small-group markets, according to the proposed rule. Insurers have expressed concerns about this trend and asked the agency to look into improving the model, CMS wrote in a white paper published in October.
The solution CMS came up with requires two stages. The first is essentially the same as the current risk adjustment recalibrations. But in stage two, healthier enrollees are more heavily weighted so the statistical model improves its cost predictions. This also systematically reduces the influence of very expensive enrollees risk adjustment calculations, according to CMS.
The agency initially suggested this change in the proposed rule for the 2022 plan year, but decided not to finalize the policy. After commenters suggested CMS give the industry more information on more time to consider the idea, the agency tabled the plan until the new draft regulation. In the meantime, CMS provided technical documentation detailing its intentions.
Health insurance companies getting the short end of the stick when it comes to under-prediction of healthy enrollees' costs might leave the market if the problem isn't fixed, CMS acknowledged in the white paper..
"This is not just a wonky technical issue. This is an issue related to the actual health of the market," said Amol Navathe, assistant professor of health policy and medicine at the University of Pennsylvania. "Although this is kind of a technical fix to it, I think the science is in the right place, the approach to the policies in the right place."
But since this model is so new, CMS needs to proceed cautiously, Navathe said. The agency especially should keep tabs on how the modified risk adjustment model affects compensation for treating patients with certain disease groups, he said. CMS found the model significantly worsens cost predictions for 17 different disease states.
CMS is "kind of tilting the model a little bit—for a good reason, again, to make the health insurance plans in the markets work. But we're tilting it in a way that could have some perverse effects on individuals who we might worry more about," Navathe said.
Despite worse predictions in some areas, the fact that this new model more accurately predicts cost for healthier enrollees—a much larger group of people—is worth it, CMS maintains.
"The trade-offs in model improvement for the lowest-risk enrollee subpopulations were worth slightly worsening the model fit in other areas," the white paper says.
But Matthew Fiedler, a fellow with the USC-Brookings Schaeffer Institute for Health Policy, is less convinced CMS is on the right path.
This new risk adjustment model will make enrolling healthier people more attractive to insurers, he said. Insurers may change their plan designs to attract healthier enrollees and discourage sicker customers, perhaps by implementing narrower provider networks, Fiedler said.
Even if plan design stays constant, changing risk adjustment could force insurers offering more generous plans to charge higher premiums and allow those with less-extensive plans to reduce premiums and attract more cost-conscious customers, Fiedler said. Either way, the value of the premium tax credit would shrink, meaning net premiums for subsidy-eligible individuals wouldn't actually go down, he said.
"The risk adjustment proposals in the rule just seem to have a very different theory of what's wrong, of what the problems in the individual market are, relative to the rest of the rule," Fiedler said. Other provisions in the 2023 proposed rule specifically bolster nondiscrimination provisions for plans.
The comment period for the proposed regulation, which ends Jan. 27, should shed important light on how insurers themselves look at these potential concerns, Navathe said.
Comments on the two-stage weighted procedure from last year's proposed rule illustrate a divide within the health insurance industry.
Insurers including the Blue Cross Blue Shield Association, Cigna and Molina Healthcare opposed revising the risk adjustment system and asked for meetings and white papers on the proposal in their comments. Meanwhile, Centene supported the policy change.
The Alliance of Community Health Plans was also pleased to see the proposal come up again in the 2023 exchange rule and supports advancing it, said Michael Bagel, the policy director at the trade association, which represents not-for-profit insurers. The current risk adjustment model doesn't always reflect the actual patients plans serve, and the recalibration CMS proposes seems like a good step forward, he said.
Even if this change were finalized, CMS should continue to monitor the risk adjustment model and tweak it when necessary to tackle geographic and community variation within states, Bagel said.
"They're important changes to be made. I hesitate to say that they are all good changes until you see them operationalize and see what the practical impacts of them are," he said.