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How Health Plan Risk Adjustment Models May Change Under the ACA

Risk adjustment is a key mechanism to ensuring appropriate payments for Medicare Advantage plans, Medicare Part D drug plans, and Medicaid health plans.  Since health plans vary in their mix of healthy and sick enrollees, risk adjustment modifies premium payments to better reflect the projected costs of members served and compensate plans that enroll high-cost patients.

Historically, risk adjustment was only used in Medicaid and Medicare – in effect, redistributing some revenue from health or drug plans with a relatively healthier mix of members to those plans with a more costly enrollment profile.  However, the Affordable Care Act (ACA) extends risk adjustment to the individual and small group health insurance markets starting in 2014.

A new brief from The Synthesis Project tackles the issue and makes several interesting recommendations for how to improve risk adjustment methods for the post-ACA market. Without accurate risk adjustment, health plans have a strong financial incentive to seek out only the healthiest enrollees, especially under ACA-mandated adjusted community rating.  Under adjusted community rating, health plans may not vary premiums based on health status or sex and are limited in how much they may vary premiums based on age.  Under ACA, the healthy, the young, and men subsidize the health costs of the unhealthy, the older, and women.

Risk adjustment is therefore a necessary factor in stabilizing the dramatically new post-ACA health insurance marketplace, particularly the new Health Insurance Exchanges.  Even then, the ACA is a giant game of musical chairs.  The market under ACA will be chaotic and challenging, with a mix of winners and losers once the music stops and the dust settles, which will take at least three to five years.

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