51 thoughts on “What Is Risk Adjustment?”

1. In effect, insurers will compete by marketing in ways that attract the healthy and hide from the sick, instead of competing to offer better health care at lower cost.

   That’s an interesting variation on the normal place of advertising in monopoly finance capitalism. The part about not competing on cost and quality of product is the same, but using advertising to compete for market share is used to maximize quality of customers rather than quantity.

   As for risk adjustment, by now I can only roll my eyes at the ever more absurd Rube Goldberg devices this insane country keeps trying to come up with for no other reason than to maintain a criminal racket in existence.

   It’s impracticable and morally repulsive.

   America simply doesn’t work anymore.

2. It’s an obvious way to average risk without creating a national pool up front. It can easily be done with uniform data sharing requirements and uniform billing/payment practices.

   However it bothers me that we are apparently setting up a situation similar to banking regulation that will allow money to disappear in innovative ways before it hits the regulation mechanism.

   A data mechanism that is rigid and mandatory could help keep this from happening.

3. Risk adjustment is long-standing (30 odd years) issue in health services research just now entering public limelight. An ideal risk adjustment system would average risk as if there were a national pool, as Mr. Calder suggests, but no existing or likely system is ideal. There is still room for gaming the system, one of which is by manipulating the data that goes into a risk adjustment system. A well known response when risk adjustment is implemented is to see providers coding more and more for every little diagnosis to game the algorithms.

4. Nothing against Ezra Klein, I am sure he is a fine journalist and maybe the guy you want to read to know what is happening in the Senate and House of Representatives (to know the laws as they are currently being debated).

   But Ezra Klein is not the “go-to guy” on healthcare issues. Uwe Reinhardt is the BEST man on healthcare. Hands down the best.

   Here are 2 recent articles written by Professor Reinhardt over at The New York Times. One thing it discusses is marketing costs for health insurance companies. Marketing costs of health insurance companies are probably something you have never heard Senator Baucus talk about ONCE (please correct me if I’m wrong). Many people were asking after we bailed out AIG why they had huge and expensive advertisements at Yankee Stadium. Reinhardt says that sometimes a large part of individuals’ premiums go to non-medical items. Of course MARKETING is one of those non-medical items.

   I highly recommend James Kwak and anyone who has the time to read these 2 articles by Uwe Reinhardt at the New York Times.
   http://economix.blogs.nytimes.com/2009/09/25/how-much-money-do-insurance-companies-make-a-primer/

   http://economix.blogs.nytimes.com/2009/10/02/what-portion-of-premiums-should-insurers-pay-out-in-benefits/

5. Well it works for some, but not for all. The top 1% control 95% of the wealth in this country. Take a survey of how well America works among them.

6. Thanks Ted. I had given up on anyone writing anything sensible about the how and why.

   I am not amazed that a couple of the “Blues” can put together an operation that runs on an expense ratio of just under 15%, but that they can compete effectively with such low marketing expenses says good things.

   The high expense ratio of the individual and small business marketplace is emblematic of real survival mode marketing that deforms perception of the insurance marketplace in that and other lines of insurance.

   To give some of the readers perspective, their car insurance premiums carry a 40 to 50 percent operating expense ratio.

   AIG did some amazingly odd things and stadium advertising was the least of it.

7. The more risk pools there are the harder to make the risk transfers without the risk transfer premiums being eaten up or diluted by the intermediaries. If you want to keep some sense of social solidarity you cannot afford too many risk-pools to prosper. Like risk-pools where genetically mapped persons who are satisfied with the results can negotiate better terms for themselves and leave the others to their own.

   But, whatever you do, do not let the health insurance system fall into the hands of regulators like those in Basel as they would slap higher capital requirements on those that seem to be more risky and allow for less capital requirements to those who are perceived as more healthy and thereby widening the gap even more.

8. There is marketing and there is benefits to the corporate executives. Early on I was an auditor for a major CPA firm in NYC and worked on the audit of an international corporation. Executives have their own dinig rooms, can’t eat with the common folks. Executives have corporate jets. Their offices are on seperate floors from the ordinary employees. The business pays for trips with their other corporate friends. I know the IRS has subsequently tried to tax them for this but I sincerely doubt much is done in this way. The IRS budget is not nearly high enough.

   I don’t think all of this is unnecessary, but when the high cost of running a business is passed on to the consumer in the form of higher product costs, I don’t understand why some of these costs are not cut back. Does a business really need skyboxes at sporting events? Does it need designer waste baskets?

   Years ago I bought stock in Ben &n Jerrys because they would only take three times the salary of the lowest paid worker for the executive compensation.

   As far as risk management instead of grouping people into healthy and unhealthy catagories, why not just tax unhealthy foods as we do for alcohol and tobacco products. Give people a tax credit for working out. Eventually the fast food restaurants will be selling veggie burgers on whole wheat and maybe the consumer would enjoy it. Let’s work toward making people healthy rather than penalizing us for it.

9. Every line in the Baucus bill is addressed to preserving and justifying an industrial racket which marks up medical costs by 30% and passes along the bill to a nation of sheep who lack the guts to stand up and scream F^&* THIS; I’M NOT PAYING!

   The idea that anyone but a stooge would waste five minutes ANALYZING this legislation is insane. What the country needs is men with pitchforks and raw courage descending upon the Senate Office Building. Does anyone have the address?

10. “insurers that are actually good at making people more healthy”

    Holy cow! Are there such insurers? If so who are they?

11. “If you’re a profit-maximizing insurer, what do you do? You try to cherry-pick the healthy, since the revenues will be the same as for the sick and the costs will be lower. If you can do this successfully — say, by only advertising in gyms and in Runner’s World, or maybe by offering additional benefits that only the healthy will want — then you can dump the sick on someone else. That someone else will eventually (after all the private insurers get smart or go out of business) be the public option or the non-profit cooperative, whichever we end up with, which will end up losing money; the net effect is a transfer from taxpayers to private insurers.”

    It is important to note that this happens already on a massive scale. The population which uses the most health care (the elderly) are already being covered by the public via Medicare; hence the insurance industry risk pool is significantly lower than the risk pool of the total population. The insurance industry tries to cover for this inequity by saying that they generally pay more for the same services than the government (i.e. – Medicare) because they have to negotiate payments to their network, while Medicare can simply set their reimbursement rates unilaterally. While this is true, the numbers work out to the favor of the insurance industry in the billions. The fact that the insurance industry tries to further lower the risk of this pool by refusing coverage to the remaining high risk population is so amazingly seedy.

12. There is a CBC current affairs story on Americans Medical Exiles in Canada.

    One woman cannot move back to California because her six year old son has a rare condition that would cost $45,000 to $165,000 for — six months — of care. She lives in British Columbia and her family premium is $108 a month. Another woman has a rare condition that requires a drug that costs $60,000 per dose, she had four or five doses while hospitalized.

    These are — American citizens — who cannot move back to the United States because they cannot get health insurance due to a “pre-existing condition.” They say the cost of their medical care has never been raised by the Canadian system. This speaks to the value placed on human life and social solidarity. I don’t begrudge these Americans who have found the care they need in Canada. In fact, I am happy they found the medical care they need.

    But Canada appears to be a kind of “dumping ground” for very ill Americans that U.S. health insurers refuse to accept. In effect, American health insurers are increasing their profits by placing an additional burden on Canadian taxpayers.

    The US has ten times more people than Canada so there are economies of scale that if utilized should lower the costs. The US is also a wealthier country with a higher median income than Canada.

    There is no logistical reason why America cannot provide a health care system that is at least as good as Canada.

    Here are the links:

    http://sn.im/s5ewx
    http://sn.im/s5esw

13. There is no logistical reason why America cannot provide a health care system that is at least as good as Canada

    Maybe there is: we’re not as homogeneous.

14. While I am sure that insurance companies would like to cherry-pick their customer, I do not think there is much opportunity. Most folk get their health insurance through their employer, so far as I can tell. Employers insure their employees as a group.

15. Uncle Billy, what do you mean by homogenous?

    The US has ten times more people than Canada so there are economies of scale that if utilized should lower medical costs. The US is also a wealthier country with a higher median income than Canada.

16. I agree, Reinhardt is great. However, I found this summer that his columns don’t keep up much with the policy debates, so I turn to Klein when I want to find out what’s going on. But for depth I like Reinhardt.

17. The cherry-picking problem will be acute for the exchanges because those are for individuals and for small businesses; you can certainly cherry-pick among small businesses.

18. I hope that I am expressing this correctly but in NYS we had “community based” health rates up until seven or eight years ago. Then someone came up with the “experience rated” premium which is a variation of the “cherry picking” but is not done by the health plan but by the employer. Now most of NYS is probably “”experience rated” and it is in the financial interests of the employer to hire younger and healthier employees who will not contribute to the medical costs that are the basis of their premium. As more and more of the employers and their employees found lower premiums in the “experience rated” plans they have withdrawn from the community rated plans thus raising the ratio of unhealthy to healthy members and therefore raising the premiums of the “community rated” by an adverse non-selection process. In this process the healthcare plan cannot be accused of “cherry picking.”

19. “social solidarity”, now there’s a term I haven’t heard applied to American’s lately.

20. That which binds a nation together and stops it from being split up in two extreme pieces.

21. “Cunctator” means one who fights a delaying action.

    In the context of this debate, the naming convention and the knowledge of Latin positions him as a “skeptic” inveighing for the status quo.

    Risk homogeneity is simply not an issue when you are talking about numbers larger than a few hundred unless there is adverse selection. That’s a silly premise under the circumstances which you kindly didn’t explicitly acknowledge tippy.

22. What makes homogeneity advantageous?
    How does Canada rate as more homogeneous than the US?
    Regardless, the size and wealth of population do both favor the US over Canada.
    Unfortunately, the US has Republicans.

23. Homogeneity is only needful when you are cherry picking. In general terms, if something that is being insured is similar to the rest of the group being insured, the premium charged will be “fair.”

    If we are talking about a group of randomly chosen humans over a certain number, then it will generate predictable losses. A younger or healthier group will have lower losses. Hence, the fear that risk selection will eventually create an imbalance.

    Risk adjustment is designed to counter this on the back end by means of some kind of charge to the insuror.

24. Employers with more than a couple of thousand employees have self-insured (this includes some insurance internally) and have charged themselves using so-called experience rating systems for many years. When you are over a certain size, adjusting costs and reserving policies are what determines choices. Public choice pooling might actually save them money if they provide generous benefits.

    If hiring younger employees is a priority, it has been done five times over after all this time.

    However, of the self-insurors, many are in Bermuda, the Bahamas or the Caymans and are designed to suck money invisibly out of public corporations in the form of board and consulting positions. I imagine that insurance brokers and companies who manage these mini cash cows are shoveling money into delaying tactics along with the Aetnas of the world.

25. If you want a potential model of how Risk-Adjustment might work in Healthcare may I suggest “The California Experiment” by Ronald Brownstein in the October Atlantic, in particular the description of decoupling and decoupling-plus agreements between the State of California and the Utility Companies.

    It’s as fine an example of practical socialism I’ve ever heard of. Resources are conserved and companies keep making profits. Tell me an agreement like this wouldn’t have insurance companies tripping over each other to come up with unique ways to make their covered populations healthier.

26. Also the U.S. has democrats who bargain themselves down better than the republicans could.

27. Also, businesses do the cherry-picking for the insurers looking for clues about their employees health, and firing people who become too expensive due to their poor health.

28. Once again, it’s back to single payer as the only truly logical solution, other than being like the Netherlands and completely controlling the activities of insurers. As to homogeneity, I also believe that it is a non issue. All of the developed countries with better outcomes than ours have large percentages of aging populations like us, and those are uniformly the most costly to the HC system.

    I have seen some positive things in the HC legislation, but believe that it is far too complex, and that, in the end, kind of like the IRS Code, the big profit HC oligarchs will hire fleets of lawyers to find the exploitive goldmines which their captured legislators have planted. That is, unless we get them out of business with a single payer system and real tort reform. And do away will any and all HC corporate subsidies to everyone.

29. ” insurers that are actually good at making people more healthy.”

    Since when do insurers make people more healthy?

30. I think you mean that “…since contributions into the fund do not come from insurers with disproportionately healthy customers, you are still better off attracting the” healthy (not the sick).

31. my impression after weeks on this blog is not your lack of homogeneousness it is your fear that solidarity means loss of individuality (which it does) with no compensating gains (and there are plenty of them i.e. somehow the benefits of solidarity in creating homogenity seem not to be on your radar at all

    I repeat myself:
    recently I met a young man who after a car accident that has left almost no part of him undamaged is wheel chair bound. Talking to him knowing for sure that independent of his class*) medical costs are none of his concerns I regard as a luxury that was well worth all those parts of my insurance premium that went into the big pot to make it possible that huge families with a stay at home mum and single men, disabled and the very old would all pay the same monthly premium under what we call and justify by the solidarity principle – and no that was not a socialist invention unless you can come up with a wild theory that turns our iron chancellor Bismarck into a socialist (actually he invented the system to get the socialist out of business!)
    *) a wheel chair bound colleague of mine proudly told us that his health insurance paid model was a better and more advanced type than the German minister of the interior used.

32. thank you, Yakkis
    this is another very good argument why I should cherish our system

    all my life I have participated in the German pastime of complaining about our insurers the weeks on this blog have made it clear to me that with all its shortcomings we have it kind of paradisical

33. our insurers “nudge” people to go to all kinds of Vorsorge=pre-care check-ups
    I am undecided whether this constant reminding really results in better health or just in breeding hypochondriacs who of course are good at increasing demand for health services

34. Most actuaries suggest that at roughly 25,000 lives, it is possible to have a stable risk pool: all other things being equal, you can reasonably predict the growth in expense year to year. With a stable risk pool, it is usually unnecessary to carry stop-loss insurance. Self-insured employers of large size typically do not carry stop-loss coverage. In a large self-insured employer pool, there are zero dollars allocated to risk charges, marketing expense, and commissions. Typically, the self-insurer “rents” a network from an insurer or third party; and pays a fee for medical management and claim services.

    Most large plans don’t have pre-existing condition limitations or medical underwriting but that’s not a concern because the laws of large numbers protect them: a stable, demographically mixed pool behaves predictably. A large employer pool has some “in-bred” characteristics that make it more attractive (from a risk perspective) than the small group or individual markets: all participants are actively at work (therefore less likely to be suffering from a disabling condition); the great majority are between ages 21 and 60; employee contributions are relatively minor and are tax-preferenced via a Section 125 plan (resulting in what is called a high “acceptance rate”); enrollment is typically stable with defined entrance and exit points that favor long-term enrollment (thus insuring a favorable demographic mix in the pool); and, the benefit terms can be modified to achieve a “reasonable” combination of cost/benefits (self-insured plans are not subject to state insurance coverage requirements).

    Many of the benefits of the large group self-insured pool are weakened in the proposed legislation:

    1. Enrollment and disenrollment are not controlled. Pre-existing condition limitations and health underwriting are eliminated. These devices do help insurer profitability but they also mitigate claim volatility: wild swings in expense due to the entrance of enrollees with known, often-times expensive medical conditions. These devices also kept people in the risk pool because they knew that if they left the risk pool they could not return at all or they could only return under limited circumstances. Any risk pool depends on a balance of well and sick people. If people can leave the pool when well and return when sick, the people who are continuously insured will have to pay more to keep coverage in place. When it costs less to be uninsured, the healthy with no assets will quickly figure it out and elect to “buy” the penalty rather than the insurance. What this means practically is that those with assets (homes, retirement accounts, savings) are put at a relative disadvantage: their risk aversion will be used against them to fund the health care expense of the judgment proof (those without assets who can elect bankruptcy and use the medical system for emergency care). This is unsustainable in the mid to long term. (One version of the Baucus bill actually supports disenrollment in September because it waives the “penalty” if the time without coverage was three months or less: a tax-supported Christmas savings account?)
    2. Under the legislation, the plan design requires that no service can be limited on an annual or lifetime basis; no service can be denied for other than reasons of clinical effectiveness; preventive services are covered with no deductible; habilitative services are covered; and, out of pocket expense must be limited based on income. These same rules will apply to employer plans after a grandfather period. While this design is very attractive from the perspective of the consumer of health care services, it will cost more than most existing benefit designs. Wages and benefits are zero-sum companions: as the cost of health care rises wages are suppressed or take home pay is suppressed (higher co-pays and deductibles) to account for the increase in expense. We have never answered the question: Does free or near free health care make people healthy or does it free them to be sick?
    3. We continue to confuse risk management and medical certainty. “Medical certainty” means that a known medical condition requires significant amounts of medical services, drugs or devices or the patient will die or lose all quality of life. In these circumstances, risk management is immaterial. On the other hand, less significant disease states are subject to risk management: Patient education, best practices care management, and behavior change can reduce, prevent worsening or eliminate the disease state. Insuring all disease states through a for-profit model is absurd. If an insurer “buys” $20 million of RH factor for the treatment of hemophiliac patients, and has a medical loss ratio of 80%, then it “costs” policy holders $25 million to cover this known, non-optional expense. A $5 million transaction cost for this purchase is unconscionable. A national risk pool with consolidated purchasing for such expenses and for best practices management of care is a far better alternative than directing incremental marginal income to insurers. It would also allow us to provide a more compassionate and supportive environment for patients: If a child has hemophilia, does it really make sense that the parents pay deductibles and co-pays for those expenses? If such expenses were paid with a payroll based deduction for both employers and employees, it would avoid issues related to adverse selection (all would pay) and it would substantially reduce the cost of insurance (now a true risk management device).

35. “Most large plans don’t have pre-existing condition limitations or medical underwriting but that’s not a concern because the laws of large numbers protect them: a stable, demographically mixed pool behaves predictably.”

    weren’t the laws of large numbers supposed to protect the mortgages also?

    25.000 does not seem really a lot to me when it comes to medical mishaps

    what about epidemics? what about outbreaks of anything due to some kind of hitherto unimagined pollution incident ? what about earth quakes and what about …

    much larger solidarity groups than 25.000 start to wobble under such events

36. According to media reports, not only Canada; but the Netherlands, France, Japan and other countries have Americans who cannot return home because US health insurers will not accept them.

    On top of this, taxpayers in Canada and other countries are dealing with huge deficit budgets, directly related to the 2008 financial system meltdown and bank bailouts. (Eg, Canada has a $60 billion budget deficit this fiscal year. The first deficit budget in more than a decade. GGGRRRrrrrr…)

    This is — shameless corporate welfare — on an international scale by Zombie banks and the American health insurance business.

37. Twenty five thousand people is a lot. I have only dealt with employers having a few thousand insured and who purchase stop loss coverage. I find Barb’s estimates very comfortable.

    An epidemic of ordinary scale, influenza, happens continuously. A more scary potential loss would be represented by a hemorrhagic fever getting into a headquarters building. However, at some point these risks should be borne by the public.

38. WOAH! Silke’s comment brought up the issue of on the job injuries.

    What happened to the idea of using worker’s compensation funds (?) by extending coverage for 24 hours a day on the job coverage. One would need it for the odd work related gigantic explosion proposed by Silke.

39. “However, at some point these risks should be borne by the public.”

    Ach ja? why not by the community of all insured first?

40. Bob,
    I don’t understand what you mean?
    I can’t relate it to anything I know in our system

41. Answer to first comment: The public has to bear the costs of the large-ish disasters like wars. At some point (I’m not saying when) it has to happen.

    Second comment: The US has evolved what we call “Workers Compensation” (no apostrophe) to pay for injuries, loss of income, and rehabilitation arising from accidents that happen while you are engaging in the ordinary duties of your employment. The original issue was employer’s liability arising from working conditions.

    All employers have to provide protection whether through 3rd parties or self-insured. It represents a potential pool of money to government health managers. The risk is tightly managed because the cost rose at incredible rates for many years in most states and legislative bodies reacted in divers ways.

    When people model social health protection, they need to think about whether the systems they compare against provide coverage for these risks because it represents a nice chunk of money.

    Failing to debate this would be a huge mistake, but it is possible that the people who need it left alone got to the politicians before the health insurors. In the State of Florida, the retail worker’s compensation fund is of the best funded lobbies.

42. thank you Bob
    – this sounds like similar to our Berufsgenossenschaft, membership in which is statewise mandatory for employers at the cost of last time I looked 1 % of wages. They will pay, tightly managed, only for work related injuries of workers (way to and from work included detours nul coverage)
    – they run the best of all hospitals for treatment of injuries and they scare the hell out of employers, because whenever a worker has an accident the employer gets scrutinised and if they find him in violation of anything they’ll sue him for all their costs, life long comparatively generous pension for the worker etc. included.

    Our government has since the wall fell loved to dip its greedy fingers into the pots of our social security funds but they have never managed to fiddle anything with that outfit

    btw. until it is decided whether an accident is a legitimate Berufsunfall the injured is of course covered by his health insurance which clears the costs later on with the Berufsgenossenschaft – the first doctor he sees will report the injury so the employer has no say in it whether the injury will be reported or not. Actually I think it is about the best scheme we currently have, to keep employers honest

43. What’s the scope for offering low cost health insurance plans that cut you off once you’re sick and expensive? Can individuals join the public option whenever they feel like it?

    Admittedly, the above would nonetheless be an improvement over the status quo, since the healthy would nonetheless be kicking *some* money into the health care system.

44. Barb writes: “Any risk pool depends on a balance of well and sick people. If people can leave the pool when well and return when sick, the people who are continuously insured will have to pay more to keep coverage in place.”

    In Canada our single payer system is taxpayer funded. This means everyone is in the risk pool their entire lives. Everyone is covered. No one gets to opt out. The risk pool is 33 million people.

    One could argue, a single payer system is open to abuses. But for every $1.00 spent on health care in Canada, the United States spends $1.60

    Kathleen Kelly’s youtube video speaks to the strength of a single payer system. I would estimate the life time cost of her son’s care could well exceed a million dollars. In fact, there is no dollar limit on the care he can receive. With a risk pool of 33 million people it’s not a big issue.

    The focus in Canada is on providing the best quality of care. The — cost of care — never comes between a patient and their doctor. Yet our health care system seems to work better than the American one.

45. tippygolden: That is exactly the issue, you either have one big single risk-pool that breads abuses or you have many risk-pools that bread differences. In terms of health and nation building I would absolutely settle for the first. There are many many other better areas around which one can (and should) build competitive advantages through differentiation than health.

46. oops sorry of course I do not refer to bread but to breeding
    cheers
    per

47. Let me phrase it this way…. In a family you might very well award prizes to those of your kids that exercise the most or eat the healthiest, but, unless you are totally insane, you would never give a price to any of your kids because he is the healthiest.

48. Well I am happy for this child he has the care he needs.

49. Don’t mistake a single payor system with a single pool system. For instance Japan has a multiple payor system and they have low cost per citizen and very good outcomes. Our own flood insurance system has a single central fund but any insurance company that wants to sell it can do so.

    At one time, Ross Perot’s company EDS did processing for the entire US and it was a huge mess. Horrid.

    If you think about how he got the contract to service the flood insurance for the entire US, you get an idea of how easily manipulated our politicians are.

50. Bob, we may be comparing apples to oranges here.

    For every $1.00 spent on health care in Canada — the United States spends $1.60. — This suggests a single payer system spends health care dollars more efficiently.

    As for Ross Perot, EDS and flood insurance. It seems to me a private company created the “huge mess”. In other words, it wasn’t the government that did it.

    From what I understand, in Canada, each provincial health ministry is comparable to a large health insurer. While medical care is delivered by doctors and specialists in private practice. Hospitals are government-owned or not-for-profit.

    The population in British Columbia, where I live, is over 4.1 million. So perhaps the insured risk pool is 4.1 million. Still very substantial.

51. Great article! We love CA and its eco friendly ways: http://fashionableearth.org/blog/2009/10/18/the-california-experiment/

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