The Achilles Heel Of Reform: Risk Adjustment Mechanisms

The Dutch government, who have a history of “managed competition” among for-profit health insurance companies, called the lack of well-designed risk adjustment mechanisms the Achilles Heel of a health care system. In their system, over half of all money spent on health insurance is redistributed as part of risk adjustment. Without it, insurance companies would compete primarily by trying to drive away unhealthy customers, instead of by trying to provide higher quality plans, better consumer service, or lower prices. Without robust risk adjustment and regulations, it is impossible for an insurer to provide high quality, low cost coverage. It would soon be overwhelmed with unprofitable, less healthy customers.

The CBO and CMS conclusions about what the lack of sufficient risk adjustment mechanisms in the House bill would do to the public option should be a wake up call. They concluded that the new public option would be forced to charge higher premiums because of the serious problem of adverse selection. But the public option can be a stand in for any insurer that tried to be socially responsible, be it a private company, public entity, non-profit, or new insurance co-op. Any “well behaved” insurance company would soon be flooded with less healthy individuals.

Are the risk adjustment mechanisms in either of the Senate bills better? Unfortunately, the answer is basically no. In both the Senate HELP committee bill and the Senate Finance Committee bill, language dealing with risk adjustment is nearly identical to the House legislation. Both leave the risk adjustment issue completely up to the Secretary of HHS to work out. The Senate Finance Committee bill does establish an additional transitional reinsurance program for the individual market. This reinsurance fund would only stay in place for the first three years. Risk adjustments mechanisms would get worse not better as reform progresses.

On probably the single most important issue determining the success or failure of reform, all three bills are practically silence. It will be the job of the Secretary of HHS to make sure reform does not fail do to adverse selection.

The Swiss health care system has taken several steps beyond what any of the US bills have proposed to reduce discrimination and gaming of the system. It has a highly standardized, mandatory, basic benefits package, and all health insurance companies that sell the basic benefit packages must be non-profits. All insurers, except managed care plans, must pay uniform reimbursement rates to providers. Still, in a given area of Switzerland, there can be a dramatic difference in the cost of premiums. The Commonwealth Fund concluded:

For the year 2005, for example, the difference between the lowest and highest premium for coverage in Zurich with a 300 CHF ($255) deductible is 89 percent (BAG 2007). This situation can only persist over time because, despite periodic open enrollment, relatively few individuals change insurer from year to year. Nearly all the difference in premiums appears to be attributable to risk selection not adequately compensated for in the risk equalization system.

Despite some risk adjustment mechanisms, standardized benefit packages, regulation against discrimination, uniform provider reimbursement, being non-profits, etc., the Swiss health insurance companies have not stopped trying to game the system. Timothy Stoltzfus Jost, Professor at Washington and Lee University wrote,

Swiss insurers have become exquisitely adept at risk selection, even though it is technically illegal and to some extent disincentivized by a risk pooling program. Insurers, for example, offer multiple policies and steer high cost insureds to higher cost policies and low cost insureds to lower-cost policies. Insurers commonly offer attractive deals on supplemental health coverage, life insurance, or other forms of insurance which they can risk underwrite to attract lower risk insureds. Insurers use high deductible policies and policies for which no-claims rebates are available to woo low risk insureds. There are reports of insurers closing offices in high-claims areas and of using software to identify unprofitable insureds or applicants so that they can ignore inquiries and contacts from them. There is considerable evidence that virtually all of the competition among Swiss health insurers to date has been based on risk selection. Premiums in the Switzerland vary dramatically from one policy to another, yet switching of insurers is relatively uncommon, often because insureds have other forms of insurance with insurers and are reluctant to switch.

I'm truly frightened by the possible ramifications that potentially insufficient (and currently completely undefined) risk adjustment mechanisms will have on our health care system after reform. Our system will rely heavily on for-profit insurance corporations, and they would be given much greater flexibility in tailoring insurance plans to discourage enrollment by less healthy (unprofitable) customers compared to Switzerland. It will be a system much easier to game, dominated by entities with huge incentives to skirt regulation. Obama current refusal to truly take on the health insurance industry does not fill me with hope that his Secretary of HHS will design and/or strongly enforce the regulations and robust risk adjustment programs necessary to make a “managed competition” health insurance system work.