Risk Adjustment in Health Reform

There is a very good brief on the topic now available at Health Affairs. As they explain,

Insurance market reforms under the Affordable Care Act are designed to . . . shed the current system in which health plans have an incentive to enroll healthier people while avoiding the sick. One of the arrangements that will make the new system workable is risk adjustment—-a process by which health insurance plans will be compensated based on the underlying health status of the people they enroll, and therefore protected against losing money by covering people with highcost conditions.

But implementing risk adjustment could prove challenging. The statistical methods used in risk adjustment are technically complex. There are questions about the ability of the states, which have to carry out the risk adjustment, to collect accurate data and implement methodologies that result in fair payments to plans.

Perhaps redundant Wall Street quants could step into these roles? The brief notes that "Health insurance plans having costs at least 3 percent more than target projections will receive payments that have been assessed from plans having costs at least 3 percent less than projections." The program is one more step toward a utility model for insurers--a welcome change that should be considered throughout the financial sector. [FP]