Refining Risk-Adjustment Model Could Improve the Way ACA Plans Are Paid

Potential modifications to the risk-adjustment model used for the Affordable Care Act (ACA) commercial plans could improve the model and appropriately compensate plans that enroll sicker enrollees, according to a new report from Avalere Health. This change would encourage plans to compete based on cost, quality, and health management.

The report, “Evolving the Risk-Adjustment Model to Improve Payment Accuracy in the Individual & Small Group Market,” examines the risk-adjustment program used for the ACA in the commercial market, provides an analysis of the limitations facing the current model, and suggests potential modifications that could improve it.

The ACA created a risk-adjustment program to promote accuracy for health plans by appropriately compensating plans for the financial costs of their enrollees, the report explains. The risk adjustment allows the plans to receive a higher payment for sicker enrollees with costlier care and a lower payment for healthier enrollees, whose care costs less. The goal of the risk-adjustment program is to encourage insurers to compete based on the efficiency and value of their plans, as opposed to attracting healthier enrollees.

“If the risk-adjustment model is inaccurate, then plans that enroll a disproportionate share of sicker enrollees may experience financial losses and exit the market, even if they have priced premiums accurately,” said Tom Kornfield, vice president of Avalere. “By appropriately compensating plans, an accurate model encourages plans to compete based on cost, quality, and health management.”

Limitations to Existing ACA Risk-Adjustment Model

The report identifies 3 main limitations of the existing risk-adjustment model for the individual and small-group market:

1. The exchange and individual market population is different than the large employer group population used to estimate the model. Potential solution—Exploring ways to estimate the model based on the individual and small group commercial population could improve the accuracy of predictions.
2. The diseases used to predict costs in the model are not reflective of the health needs of the population. Potential solution—Reevaluate the coverage criteria for diseases included in the model.
3. By excluding prescription drug information to identify an enrollee’s health conditions or adjust for disease progression, the model does not take a holistic view of healthcare costs. Potential solution—Use a risk-adjustment model that takes into account prescription drug information to identify conditions beyond those captured by diagnoses and adjust for disease severity based on medication use.

The Avalere report concludes that the unique characteristics of the exchange and individual market populations are not being adequately accounted for in the existing risk-adjustment model, so changes should be made to the model to ensure that health plans have an incentive to remain participants in the exchange market.