What The Senate Bill Does Better, Part 5: Slightly Stronger Risk Adjustment Mechanisms

The risk adjustment mechanisms are probably the single most important component to any managed competition health care system. The Dutch Ministry of Health realized that it is the Achilles heel of a regulated private health insurance system. Risk adjusters force insurers to compete on quality instead of by simply trying to avoid signing up/dropping sicker customers. It does this by redistributing funds from all the plans on the exchange to prevent one company from getting rich simply because it happened to sign up all the people under thirty. The CBO and CMS have both concluded that the House bill's risk adjustment mechanisms are completely inadequate.

The CBO also concluded that the Senate bill's risk adjustment mechanisms are insufficient to stop adverse selection, although they are slightly stronger than the House bill. This adverse selection would doom any socially responsible insurance entity (be it co-op, non-profit, private, or public option) trying to treat people well because it would soon be flooded with all the expensive customers dropped by the insurance companies gaming the system.

A strong set of risk adjustment mechanisms is critical to the success of health insurance marketplaces like the new exchange. Unfortunately, the House bill spends only 151 words on this essential component reform:

(b) Coordination of Risk Pooling- The Commissioner shall establish a mechanism whereby there is an adjustment made of the premium amounts payable among QHBP offering entities offering Exchange-participating health benefits plans of premiums collected for such plans that takes into account (in a manner specified by the Commissioner) the differences in the risk characteristics of individuals and employees enrolled under the different Exchange-participating health benefits plans offered by such entities so as to minimize the impact of adverse selection of enrollees among the plans offered by such entities. For purposes of the previous sentence, the Commissioner may utilize data regarding enrollee demographics, inpatient and outpatient diagnoses (in a similar manner as such data are used under parts C and D of title XVIII of the Social Security Act), and such other information as the Secretary determines may be necessary, such as the actual medical costs of enrollees during the previous year.

Thanks in a large part to Sen. Kent Conrad, the risk adjustment mechanisms in the Senate bill (page 226 - 238) are slightly better. He wanted to protect his co-ops idea, so he made sure the bill had a temporary, three-year re-insurance and risk corridors program for the new exchanges, in addition to a risk adjustment mechanism similar to the House bill. This transitional reinsurance program should provide some improvement temporarily, but adverse selection and risk adjustment are long-term problems that need a long term solution. There is no reason the transitional problem should not be extended indefinitely. For example, the Dutch market-based health care system uses a similar but much larger fund as part of their risk adjustment strategy.

If it were up to me, I would completely redesign the risk adjustment mechanisms in both bills. The CBO and CMS say neither bill's regulations will be strong enough, and that could easily endanger the success of health care reform. At the very least, I strongly urge the House conference members fully adopt Conrad's temporary re-insurance program.