2023 ACA Risk Adjustment Transfer Report - Part 3
This post is a bit of diversion from the 2023 transfer report itself, but as carriers wrap their 2025 rate filings, I thought it would be interesting to share some of the insights that can be found in those filings and why I believe risk adjustment is the cause of and solution to all of life’s problems. Next week, we’ll look at how the 2023 transfers tended to shake down by plan type, but in today’s post we are going to do a deep dive into how risk adjustment can affect the strategy of a carrier, including the kinds of plans they offer.
In the vault?
One of the things that makes being in a regulated industry interesting is that there is a lot of information publicly available about carriers’ products. Aside from the Public Use Files discussed in the prior post, each state also makes available information about the rate filings, since insurance is primarily regulated by the state. The level of detail provided varies by state: some provide almost no useful information, while others make available almost all of the rate filing materials submitted by the carriers without any redactions.
The more detailed filings can provide some meaningful insight into the “why” of a carrier’s strategy, as the details can include such things as actuarial memoranda, detailed explanations and reports in response to regulator objections, or redlined policy documents which give a clear view of what is changing from one year to the next. One of the new requirements for plan year 2025 is that a carrier who wants to offer more than two unique plan designs can only do so if it’s going to benefit individuals with specific chronic conditions. And the carrier can’t just assert that it will have a benefit: if they want to offer one of those plans, the carrier needs to provide an actuarial justification showing how the plan will reduce the cost sharing for those members by at least 25%.
This brings me to some interesting data found in a particular carrier’s 2025 rate filings. Here I will note that I am only inferring what this carrier’s strategy might be based on the publicly available data I discuss here; this carrier is not a client of mine and there may be other considerations that the carrier had that aren’t in the rate filing. Given this, I obscure the identity of the carrier, but all of the information is from a real rate filing for 2025. For the rest of this post, we’ll call the carrier “Vandelay Insurance.”
Vandelay Insurance wants to offer a plan targeted at members with diabetes and certain pulmonary conditions. Let’s call this “The Bubble Boy” Plan. The Bubble Boy plan is a modified version of another plan (which we’ll call the “Serenity Now” Plan – since you may not be able to afford the copay for therapy, your best bet is to repeat the phrase “Serenity now!” when you get angry). The Bubble Boy Plan offers benefits like $0 copays for PCP or specialist visits related to these conditions, $0 behavioral health copays for behavioral health visits related to their condition, and preferential copays for maintenance meds that treat the condition. Everything else (other specialist copays, RX copays, deductible, out of pocket, etc.) is more or less the same between the two plans. Vandelay’s actuaries estimate that a member with one of the targeted conditions would pay about $9,000 less in copays/coinsurance per year on the Bubble Boy Plan than the member would have were they enrolled in the Serenity Now Plan.
Here's where it gets interesting… if the member is paying $9,000 less in copays, then we must assume the plan is paying the difference – so we might imagine that the premium for the Bubble Boy plan is going to be a lot higher than the Serenity Now Plan so they can make up that $9,000 difference. But when I looked at the premiums for the Serenity Plan vs. the Bubble Boy Plan, the Bubble Boy Plan is only about 0.5% more, or less than $3 per month on average. Thus, even if the member is enrolled for a whole year, Vandelay insurance is only getting about $30 more in annual premium. So why is the Bubble Boy plan priced basically the same as the Serenity Now plan? The answer, of course, is risk adjustment!
The Math
Let’s start with some basic math. Remember from our earlier posts that if a health plan has higher than average risk, they pay into the statewide risk pool, whereas if they have lower than average risk, they’ll receive money from the statewide risk pool. This assumes risk adjustment works perfectly, which it doesn’t, but let’s grant this assumption for now. But even though risk adjustment is calculated at the plan level, you can reasonably approximate how much an individual contributes to the transfer by plugging their information into the risk adjustment formula. I won’t bore you with the details, but I’ve done the math using some basic assumptions about statewide risk and the results begin to explain why a carrier might try to attract higher risk members.
The plan I looked at is a silver plan. If we assume that a 40 year old male is eligible for Cost Sharing Reduction subsidies and he has no chronic conditions, then the health plan will receive about $470 per month in premium, but has to pay in about $300 per month into the risk adjustment pool. This means they’re only left with $170 a month to pay administrative costs and cover the member’s claims expenses. Vandelay’s rate filing says they expect to spend about $65 per member, per month (PMPM) in administrative costs, so for a member without an eligible chronic condition, the health plan is left with just $105 PMPM in revenue to pay for medical costs – not much margin to play with if the person has an acute condition like a broken bone come up (which wouldn’t have a risk adjustment value), or even if they get a few preventive services like an annual wellness visit and a flu shot.
But if the member has COPD, that number swings from a $300 risk adjustment payable to a $107 risk adjustment payable, or an improvement for the carrier of $193 PMPM (more than $2,300 per year). In other words, that $100 PMPM they had for medical costs now goes up to $300 PMPM. If they also have major depression, the risk adjustment transfer improves by another $305 per month. And, in many cases, conditions are additive. So if someone has both COPD and depression, the health plan receives $198 PMPM in risk adjustment, compared to paying in additional $307 PMPM in risk adjustment if someone has no chronic conditions – a difference of $6,000 per year. If the member also has diabetes, it’s a difference of more than $10,000 per year.
Of course, someone with chronic conditions is likely to have health care costs that are higher than someone without any chronic conditions, but Vandelay is likely hoping a few things might happen here:
Improved Targeting
Vandelay is likely hoping that it will be easier to figure out who has these chronic conditions and get them documented (since risk adjustment only pays for documented conditions supported by a physician visit). The Bubble Boy plan is clearly the better choice if you have one of the conditions they’re targeting, but if you don’t have one of those conditions, the Bubble Boy plan has a few things that are slightly worse (for example, higher ER coinsurance) than the Serenity Now plan, making it a worse option for people without those conditions. So, buying the Bubble Boy Plan likely is a strong signal that you have one of the conditions that it is designed for.
Why does that matter? One of the hardest things about doing risk adjustment well is figuring out what health conditions someone may have that the health plan may not be aware of. Only about 20-25% of people enrolled in ACA plans have a chronic condition eligible for risk adjustment, and figuring out who those 20-25% of people are is a huge part of any risk adjustment department’s job.
Someone who has well-managed COPD may not be on regular meds for their condition, and perhaps they just had their annual visit with their PCP before enrolling in the Vandelay plan (information Vandelay would likely not be privy to). If the member fills an inhaler at the end of the year, but they hadn’t had another PCP visit since enrolling in the plan, Vandelay doesn’t get credit for that condition and the member’s risk score looks the same as if they had no chronic conditions – meaning Vandelay is losing out on the revenue they would have gotten if they had made sure to get the member in to see a physician and get their condition properly documented. Vandelay had some claims exposure to this risk, but they didn’t get the benefit of the improved risk adjustment transfer.
To try to solve this, Vandelay could try to cast a wide net by getting every one of their members into a physician, but that can be costly, and they may end up generating a bunch of extra claims cost and administrative expense that only yields additional risk adjustment a small percentage of the time, and doesn’t have much of a benefit to the member. There’s also more attention being paid to these kinds of “code fishing” expeditions – see the recent WSJ article about this practice in Medicare Advantage. Even if you disagree with the WSJ’s conclusions, it seems inevitable that regulatory scrutiny might make these approaches less effective in the future.
Rather than the wide net approach criticized by the WSJ (and others), the Bubble Boy Plan might help Vandelay more effectively choose who to target to make sure they get credit for the conditions they’re taking on the risk for. If a person enrolls in the Bubble Boy plan, that’s a strong indicator that they likely have one of the conditions that the plan is targeting, so Vandelay can focus some of its efforts on those members when trying to make sure someone gets connected with a physician, instead of casting a wide net across their whole population.
Financial Barriers to Care and Induced Demand
People are more likely to get care when it’s free. So there’s two kinds of patients that Vandelay may be hoping the Bubble Boy plan might attract. The first is someone who has the chronic condition but it’s poorly managed because they can’t afford to go the doctor or fill their meds. This person might cost Vandelay more in year one than they would have otherwise because suddenly they’re getting lab work, prescriptions, etc. that they weren’t getting before. But in the long run, we would expect (or at least hope) that the person’s overall spending goes down, since they might be less likely to end up in the ER or end up hospitalized with complications that could have been prevented. If Vandelay can retain the member for the long-term, this could be a real win-win situation: the health plan has a long-term, profitable member, and the member has better health outcomes. These kinds of incentives are why I love risk adjustment.
There’s another kind of member that this plan might attract, though. Often, someone with a chronic condition (especially if they’re on a CSR silver variant) is going to meet their out of pocket maximum no matter what – which means part way through the year, all covered care is free to them – even if it’s unrelated to their chronic condition and potentially unnecessary. The MOOP really matters!
With a plan like the Bubble Boy plan, the member can get free care all year-round for stuff that hopefully helps them manage their chronic condition better. Again, the hope is that this ultimately leads to lower costs – and since more stuff is free, they may not meet their out pocket maximum at all, potentially reducing the kinds of unnecessary care that may happen when they meet their out of pocket maximum under the Serenity Now plan.
Other Options: Network Pricing Advantages, Silver Spamming
Another option might be that the health plan has partnered with a specific hospital or physician group with expertise in treating these conditions. The physician group may have agreed to give preferential rates to the carrier in exchange for offering this plan because they know they’ll have less bad debt to chase under this plan design. Although there’s a slight adjustment for geographic cost in the formula, risk adjustment factors don’t vary based on local variations for treating a particular condition, only local variants of the overall costs of care. So, if a carrier is able to lower their costs of treating diabetes by 20%, their risk adjustment still compensates them as if their diabetic costs were the same relative to the national average. This can be just a pure arbitrage play - but if a carrier has some advantages in their contracted network rates against others that favors specific conditions, then the carrier has an incentive to try to attract individuals with those conditions.
There’s one other, more insidious possibility for why a carrier might offer a plan like the Bubble Boy plan: by having another plan option available, they can “silver spam” their competitors to page 2 of HealthCare.gov. Dr. David Anderson explains this very well from a post several years ago over at Balloon Juice so I won’t rehash it. The reason carriers now must provide a justification to add additional plans beyond 2 is because of the problems that silver spamming causes. One fear that I (and others) have is that even with this limitation, there are still too many outs for carriers to get around the plan variant limitation. Offering a variant like this if you are the price leader lets you push competitors off the front page and out of sight of consumers, so the cynic in me wonders if some health plans might be offering these conditions as another angle to try to monopolize the front page. We’ll have to wait a few years to see what the plan level enrollment data shows. However, so far the new rule reducing the plan options available does seem to be having some effect – most 2025 carrier rate filings I’ve looked at are offering fewer pans on exchange than they did in 2024. This isn’t a representative sample, though, so we’ll have to wait for the public use files to come out to really dig in more systematically.
Conclusion
Phew…. If you’ve made it this far: congratulations! You probably now know more about risk adjustment than a lot of health plan executives. But hopefully this demonstrates what I always tell my clients when they ask about what they can do to receive more in risk adjustment: it really starts at the plan design stage. There are things about a plan that are going to attract a higher risk member, and if a plan only starts thinking about risk adjustment several months into the plan year when they’re trying to book financial accruals, they’re almost sure to be behind. Further, the health plan has to be thinking about whether they really want the high risk adjustment receivable. If the health plan wants to sell the Bubble Boy plan but has a bad contract with the pulmonology group, they might be in a world of hurt when the plan enrolls lots of members with respiratory conditions. On the other hand, if a plan wants higher risk members, it takes more than just willing it to be so. Whether it’s network, plan design, distribution, branding, etc., if a plan wants to target a population, they need to understand the member’s needs.
We’ll see this in action next week when we look at some of the trends in who are the receivers and payers of risk adjustment: one consistent trend is that Blues plans are usually receivers. Is it the Blues brand? Is it their network? Is it a common strategy? I have some theories, but what do you think? Let me hear your thoughts in the comments below!
Giddy up!