June 1, 2016
Several New York insurance companies are looking to the Cuomo administration for help as they grapple with a provision of the Affordable Care Act they believe is having unintended consequences and stifling competition in the marketplace.
The risk adjustment program was designed to dissuade insurers from targeting only healthy people and avoiding those with chronic medical conditions. In theory, it’s a simple program. The Centers for Medicare and Medicaid Services gives insurers a score based on enrollee demographics and medical diagnoses, which stands in for the health of their population. Those with a low score — meaning they have a healthier than average population — pay those with a higher score.
The problem is that measuring metrics often encourage companies to optimize their score. The companies which can do that the best receive the highest reward even if it is not an accurate representation of their population.
“The reality right now is that risk adjustment promotes better risk coding as opposed to better risk management,” said Mario Schlosser, CEO of Oscar Health Insurance.
And that appears to be what is happening in the insurance market in New York and across the country. Experienced insurers, particularly those that dominate the marketplace in a given area, are showing significantly sicker customers than less experienced, smaller insurers.
Small players are being asked to fork over substantial sums, in effect, subsidizing their largest competitors.
“What we’re seeing is that in practice the smaller, more innovative plans end up paying into the risk system,” said Joel White, president of the Council for Affordable Health Coverage, an advocacy group. “There is definitely a growing concern that there is some kind of reverse Robin Hood effect going on.”
There is a lot riding on getting this right. In 2014, the risk adjustment program in New York collected and distributed $141 million to the individual market and $195 million to small group plans, according to CMS data.
The federal government, acknowledging some flaws in the program, has given states the latitude to explore changes and insurers have begun meeting with the state’s Department of Financial Services to discuss their concerns. The Cuomo administration could make life easier for small insurers by making data from other carriers more available, or by capping the risk adjustment penalty, or by tying the maximum penalty to a percentage of revenue.
Alan Murray, CEO of CareConnect, the insurance product offered by Northwell Health, met with state officials last week and explained why he feels his company is at a disadvantage. “They were very sympathetic to the position CareConnect is in,” Murray said. “They acknowledged the oddity in the New York market and showed a commitment to look into it ... We want to work with the state to find an appropriate solution. The situation is complicated but something needs to change."
Like many critics of the risk adjustment program, Murray believes large institutional players are more skilled at the complex reporting requirements of the risk adjustment program and more adept at manipulating data. In the small group market, where there is less churn, larger companies also have troves of claims data upon which to work so they tend to have a pretty good idea of who the sick people are among their members, and can ensure that group is properly accounted for.
That smaller players should find themselves with healthier populations is not in and of itself terribly suspect.
Patients with chronic diseases might feel more comfortable choosing an established player such as UnitedHealth Group. Large insurers might have partnered with specialty hospitals that attract patients with expensive medical conditions. Oscar advertises to younger, more tech savvy customers who tend to be healthier.
What is alarming to Murray, Schlosser and others is just how much healthier their populations are, and the size of the risk adjustment payments smaller companies are being asked to make.
Oscar, for example, has paid more than $40 million into the risk adjustment program over the last two years. That’s a hefty sum for a company with a 2015 net premium revenue of $127.3 million.
Oscar operates on the individual market but the problem may be even more severe in New York’s small group market, which is where businesses with fewer than 100 employees may shop for insurance.
CareConnect is looking at paying 30 percent of its 2015 small-group premiums in a risk adjustment penalty.
“Any company looking at 30 percent of their premiums going out the door is going to have some problems,” Murray said. “There is no doubt that a broad solution has to be found.”
EmblemHealth owed nearly $30 million in the small group market in 2014, while MetroPlus, the insurance arm of New York City Health + Hospitals owed $54 million in the individual market, according to CMS data.
UnitedHealth Group, which makes up 80 percent of the small group, has consistently shown to be caring for a less healthy population. In 2014, its Oxford subsidiary was due a $145 million payment in the small group market.
"The risk adjustment was an important component of the ACA, put in place to ensure greater stability in the marketplace and to ensure individuals, regardless of health status, have access to a broad selection of health plans at a predictable cost" Maria Gordon Shydlo, a spokeswoman for UnitedHealth, said in an email. "This is not about coding. While we cannot comment for other insurers, we followed the risk-adjustment guidelines and requested appropriate premium rates to include costs associated with individuals who have greater health care needs."
New York is just one example of where the risk adjustment program is causing concern. Smaller insurers across the nation are exasperated by a system that has them subsidizing large competitors.
Viva Health in Alabama was asked to pay $1.7 million. 40 percent of its premiums. Blue Cross and Blue Shield of Alabama, the state’s dominant player, is receiving more than $2.5 million from the risk adjustment program, according to the Washington Post.
The co-ops, which have become a stain on the Affordable Care Act’s legacy because so many have failed, were also disproportionately hit with risk adjustment penalties.
Health Republic Insurance of New York, forced to shut down late last year when it became clear it was no longer financially solvent, paid more than $80 million in risk adjustment funds in 2014, despite the fact that the doomed co-op received $58 million from the federal government’s reinsurance program, which pays back a percentage of claims costs over a certain threshold.
“It is hard to reconcile why a health plan would receive significant [reinsurance] payments for high-cost individuals at the same time it is paying out [risk adjustment] payments to plans with a presumably higher-risk enrolled population,” remarked a United Hospital Fund report.
Health Republic Insurance of New Jersey, the only health insurance co-op in the nation to show a profit in the first nine months of 2015, posted a net loss of $17.6 million for the year, largely attributable to a $17.1 million payment the nonprofit insurer had to make toward the Affordable Care Act’s risk adjustment program.
One of the primary goals of the Affordable care Act was to increase competition among insurers, which would, in turn, lead to lower prices on the marketplace.
But the risk adjustment program may be having the opposite effect. Insurance commissioners in New Mexico and Maryland have also gone on record warning that the program may stifle competition because it appears to be punishing newer players.
Schlosser is wary of joining the small group market because of how the risk adjustment program is structured, he said. And CareConnect won’t survive long as a small group provider if it is giving back 30 percent of its premiums.
“The consequence is this contributes to higher exchange premiums and fewer choices so that’s a real problem,” White said.
Other complaints have surfaced as well. The risk adjustment score does not take into account pharmacy claims, which might provide additional clues to the health of a population.
It’s also too slow, said Schlosser. Insurers have already submitted 2017 rates but have not yet paid or received money related to the 2015 risk adjustment program. No one knows yet what their 2016 risk adjustment score will be.
That kind of lag makes it hard to predict what the future will bring, and is a challenge when trying to calculate premiums for the coming year.
The federal government, which has for two years defended the risk adjustment model, may now be having a change of heart. On May 6, the Obama administration issued a new rule that said it “has become aware that certain issuers, including some new, rapidly growing, and smaller issuers, owed substantial risk adjustment charges that they did not anticipate.”
The rule encouraged states to explore solutions, kicking the problem back to the local level.
The state has not yet made any formal announcement beyond promising to evaluate the issue.
The problem is the DFS doesn’t have a lot of time. CareConnect will have to make its very large payment by the end of the summer.
“Something has to happen,” Murray said.