The HHS-HCC risk adjustment model for individual and small group markets under the Affordable Care Act

Beginning in 2014, individuals and small businesses are able to purchase private health insurance through competitive Marketplaces. The Affordable Care Act (ACA) provides for a program of risk adjustment in the individual and small group markets in 2014 as Marketplaces are implemented and new market reforms take effect. The purpose of risk adjustment is to lessen or eliminate the influence of risk selection on the premiums that plans charge. The risk adjustment methodology includes the risk adjustment model and the risk transfer formula. This article is the second of three in this issue of the Review that describe the Department of Health and Human Services (HHS) risk adjustment methodology and focuses on the risk adjustment model. In our first companion article, we discuss the key issues and choices in developing the methodology. In this article, we present the risk adjustment model, which is named the HHS-Hierarchical Condition Categories (HHS-HCC) risk adjustment model. We first summarize the HHS-HCC diagnostic classification, which is the key element of the risk adjustment model. Then the data and methods, results, and evaluation of the risk adjustment model are presented. Fifteen separate models are developed. For each age group (adult, child, and infant), a model is developed for each cost sharing level (platinum, gold, silver, and bronze metal levels, as well as catastrophic plans). Evaluation of the risk adjustment models shows good predictive accuracy, both for individuals and for groups. Lastly, this article provides examples of how the model output is used to calculate risk scores, which are an input into the risk transfer formula. Our third companion paper describes the risk transfer formula.

The HHS-HCC risk adjustment model for individual and small group markets under the Affordable Care Act

Beginning in 2014, individuals and small businesses are able to purchase private health insurance through competitive Marketplaces. The Affordable Care Act (ACA) provides for a program of risk adjustment in the individual and small group markets in 2014 as Marketplaces are implemented and new market reforms take effect. The purpose of risk adjustment is to lessen or eliminate the influence of risk selection on the premiums that plans charge. The risk adjustment methodology includes the risk adjustment model and the risk transfer formula. This article is the second of three in this issue of the Review that describe the Department of Health and Human Services (HHS) risk adjustment methodology and focuses on the risk adjustment model. In our first companion article, we discuss the key issues and choices in developing the methodology. In this article, we present the risk adjustment model, which is named the HHS-Hierarchical Condition Categories (HHS-HCC) risk adjustment model. We first summarize the HHS-HCC diagnostic classification, which is the key element of the risk adjustment model. Then the data and methods, results, and evaluation of the risk adjustment model are presented. Fifteen separate models are developed. For each age group (adult, child, and infant), a model is developed for each cost sharing level (platinum, gold, silver, and bronze metal levels, as well as catastrophic plans). Evaluation of the risk adjustment models shows good predictive accuracy, both for individuals and for groups. Lastly, this article provides examples of how the model output is used to calculate risk scores, which are an input into the risk transfer formula. Our third companion paper describes the risk transfer formula.

Truly inefficient or providing better quality of care? Analysing the relationship between risk-adjusted hospital costs and patients' health outcomes

Observed variation in hospital costs may be attributable to differences in patients' health outcomes. Previous studies have resorted to inherently incomplete outcome measures such as mortality or re-admission rates to assess this claim. This study makes use of a novel dataset of routinely collected patient-reported outcome measures (PROMs) linked to inpatient records to (i) access the degree to which cost variation is associated with variation in patients' health gain and (ii) explore how far judgement about hospital cost performance changes when health outcomes are accounted for. We use multilevel modelling to address the clustering of patients in providers and isolate unexplained cost variation. We find some evidence of a U-shaped relationship between risk-adjusted costs and outcomes for hip replacement surgery. For three other procedures (knee replacement, varicose vein and groin hernia surgery), the estimated relationship is sensitive to the choice of PROM instrument. We do not observe substantial changes in cost performance estimates when outcomes are explicitly accounted for.

Favorable selection, risk adjustment, and the Medicare Advantage program

OBJECTIVES

To examine the effects of changes in payment and risk adjustment on (1) the annual enrollment and switching behavior of Medicare Advantage (MA) beneficiaries, and (2) the relative costliness of MA enrollees and disenrollees.

DATA

From 1999 through 2008 national Medicare claims data from the 5 percent longitudinal sample of Parts A and B expenditures.

STUDY DESIGN

Retrospective, fixed effects regression analysis of July enrollment and year-long switching into and out of MA. Similar regression analysis of the costliness of those switching into (out of) MA in the 6 months prior to enrollment (after disenrollment) relative to nonswitchers in the same county over the same period.

FINDINGS

Payment generosity and more sophisticated risk adjustment were associated with substantial increases in MA enrollment and decreases in disenrollment. Claims experience of those newly switching into MA was not affected by any of the policy reforms, but disenrollment became increasingly concentrated among high-cost beneficiaries.

CONCLUSIONS

Enrollment is very sensitive to payment levels. The use of more sophisticated risk adjustment did not alter favorable selection into MA, but it did affect the costliness of disenrollees.

New risk-adjustment system was associated with reduced favorable selection in medicare advantage

Health plans participating in the Medicare managed care program, called Medicare Advantage since 2003, have historically attracted healthier enrollees than has the traditional fee-for-service program. Medicare Advantage plans have gained financially from this favorable risk selection since their payments have traditionally been adjusted only minimally for clinical characteristics of enrollees, causing overpayment for healthier enrollees and underpayment for sicker ones. As a result, a new risk-adjustment system was phased in from 2004 to 2007, and a lock-in provision instituted to limit midyear disenrollment by enrollees experiencing health declines whose exodus could benefit plans financially. To determine whether these reforms were associated with intended reductions in risk selection, we compared differences in self-reported health care use and health between Medicare Advantage and traditional Medicare beneficiaries before versus after these reforms were implemented. We similarly compared differences between those who switched into or out of Medicare Advantage and nonswitchers. Most differences in 2001-03 were substantially narrowed by 2006-07, suggesting reduced selection. Similar risk-adjustment methods may help reduce incentives for plans competing in health insurance exchanges and accountable care organizations to select patients with favorable clinical risks.

Steps to reduce favorable risk selection in medicare advantage largely succeeded, boding well for health insurance exchanges

Within Medicare, the Medicare Advantage program has historically attracted better risks-healthier, lower-cost patients-than has traditional Medicare. The disproportionate enrollment of lower-cost patients and avoidance of higher-cost ones during the 1990s-known as favorable selection-resulted in Medicare's spending more per beneficiary who enrolled in Medicare Advantage than if the enrollee had remained in traditional Medicare. We looked at two measures that can indicate whether favorable selection is taking place-predicted spending on beneficiaries and mortality-and studied whether policies that Medicare implemented in the past decade succeeded in reducing favorable selection in Medicare Advantage. We found that these policies-an improved risk adjustment formula and a prohibition on monthly disenrollment by beneficiaries-largely succeeded. Differences in predicted spending between those switching from traditional Medicare to Medicare Advantage relative to those who remained in traditional Medicare markedly narrowed, as did adjusted mortality rates. Because insurance exchanges set up under the Affordable Care Act will employ similar policies to combat risk selection, our results give reason for optimism about managing competition among health plans.

Risk adjustment in health insurance exchanges for individuals with mental illness

OBJECTIVE

In 2014, an estimated 15 million individuals who currently do not have health insurance, including many with chronic mental illness, are expected to obtain coverage through state insurance exchanges. The authors examined how two mechanisms in the Affordable Care Act (ACA), namely, risk adjustment and reinsurance, might perform to ensure the financial solvency of health plans that have a disproportionate share of enrollees with mental health conditions. Risk adjustment is an ACA provision requiring that a federal or state exchange move funds from insurance plans with healthier enrollees to plans with sicker enrollees. Reinsurance is a provision in which all plans in the state contribute to an overall pool of money that is used to reimburse costs to individual market plans for expenditures of any individual enrollee that exceed a high predetermined level.

METHOD

Using 2006--2007 claims data from a sample of private and public health plans, the authors compared expected health plan compensation under diagnosis-based risk adjustment with actual health care expenditures, under different assumptions for chronic mental health and medical conditions. Analyses were conducted with and without the addition of $100,000 reinsurance.

RESULTS

Risk adjustment performed well for most plans. For some plans with a high share of enrollees with mental health conditions, underpayment was substantial enough to raise concern. Reinsurance appeared to be helpful in addressing the most serious underpayment problems remaining after risk adjustment. Risk adjustment performed similarly for health plan cohorts that had a disproportionate share of enrollees with chronic mental health and medical conditions.

CONCLUSIONS

Cost models indicate that the regulatory provisions in the ACA requiring risk adjustment and reinsurance can help protect health plans covering treatment for mentally ill individuals against risk selection. This model analysis may be useful for advocates for individuals with mental illness in considering their own state's insurance exchange.

Estimates of patient costs related with population morbidity: can indirect costs affect the results?

A number of health economics studies require patient cost estimates as basic information input. However, the accuracy of cost estimates remains generally unspecified. We propose to investigate how the allocation of indirect costs or overheads can affect the estimation of patient costs and lead to improvements in the analysis of patient cost estimates. Instead of focussing on the costing method, this paper will highlight observed changes in variation explained by a methodology choice. We compare four overhead allocation methods for a specific Spanish population adjusted using the Clinical Risk Groups model. Our main conclusion is that the amount of global variation explained by the risk adjustment model depends mainly on direct costs, regardless of the cost allocation methodology used. Furthermore, the variation explained can be slightly increased, depending on the cost allocation methodology, and is independent of the level of aggregation in the classification system.

The structure of risk adjustment for private plans in Medicare

Medicare bases its risk adjustment method for Medicare Advantage plan payment on the relative costs of treating various diagnoses in traditional Medicare. However, there are many reasons to doubt that the relative cost of treating different diagnoses is similar between Medicare Advantage plans and traditional Medicare, including the varying applicability of care management methods to different diagnoses and the varying degrees of market power among suppliers of services to plans. We use internal cost data from a large health plan to compare its cost of treating various diagnoses with Medicare's reimbursement. We find substantial variability across diagnoses, implying that the current risk adjustment system creates incentives for Medicare Advantage plans to favor beneficiaries with certain diagnoses, but find no consistent relationship between the costliness of the diagnosis and the difference between reimbursement and cost.

Risk adjustment under the Affordable Care Act: a guide for federal and state regulators

To achieve the aims of the Affordable Care Act, state and federal regulators must construct an effective system of risk adjustment, one that protects health insurers that attract a disproportionate share of patients with poor health risks. This brief, which summarizes a Commonwealth Fund–supported conference of leading risk adjustment experts, explores the challenges regulators will face, considers the consequences of the law's risk adjustment provisions, and analyzes the merits of different risk adjustment strategies. Among other recommendations, the brief suggests that regulators use diagnostic rather than only demographic risk measures, that they allow states some but limited flexibility to tailor risk adjustment methods to local circumstances, and that they phase in the use of risk transfer payments to give insurers more time to predict and understand the full effects of risk adjustment.

Who pays for obesity?

Adult obesity is a growing problem. From 1962 to 2006, obesity prevalence nearly tripled to 35.1 percent of adults. The rising prevalence of obesity is not limited to a particular socioeconomic group and is not unique to the United States. Should this widespread obesity epidemic be a cause for alarm? From a personal health perspective, the answer is an emphatic "yes." But when it comes to justifications of public policy for reducing obesity, the analysis becomes more complex. A common starting point is the assertion that those who are obese impose higher health costs on the rest of the population—a statement which is then taken to justify public policy interventions. But the question of who pays for obesity is an empirical one, and it involves analysis of how obese people fare in labor markets and health insurance markets. We will argue that the existing literature on these topics suggests that obese people on average do bear the costs and benefits of their eating and exercise habits. We begin by estimating the lifetime costs of obesity. We then discuss the extent to which private health insurance pools together obese and thin, whether health insurance causes obesity, and whether being fat might actually cause positive externalities for those who are not obese. If public policy to reduce obesity is not justified on the grounds of external costs imposed on others, then the remaining potential justification would need to be on the basis of helping people to address problems of ignorance or self-control that lead to obesity. In the conclusion, we offer a few thoughts about some complexities of such a justification.

[Haemophilia in the German risk adjustment scheme]

Haemophilia presents a challenge to every risk adjustment scheme even if it uses diagnostical or pharmaceutical data. The German adjustment scheme developed by the Bundesversicherungsamt realizes fairly cost homogenous groups for many expensive diseases. It does not regard haemophilia. This holds true for the original classification system (grouper) from 2009 and for the improved classification procedure in 2010. The extreme peak costs that can originate from haemophilia cases can present a existential risk for small health plans. The chances to form cost-homogeneous subgroups of the haemophilia disease by more specific coding or other measures seem low because of the small number of cases affected by this disease. The complementary (re-)installation of a expenditure-oriented risk sharing is regarded as suited for improvement of the performance of the German risk adjustment scheme. This also corresponds to international experience and practice.

Economic burden of epilepsy among the privately insured in the US

BACKGROUND

The direct cost burden of epilepsy in the US from a third-party payer perspective has not been evaluated. Furthermore, no study has quantified the indirect (work-loss) cost burden of epilepsy from an employer perspective in the US.

OBJECTIVE

To assess the annual direct costs for privately insured US patients diagnosed with epilepsy, and indirect costs for a subset of employees from an employer perspective.

METHODS

A retrospective analysis of a claims database for the privately insured, including employee disability claims from 1999 through 2005 and comprising 17 US companies, was conducted. A total of 4323 patients aged 16-64 years (including 1886 employees) with at least one epilepsy diagnosis (International Classification of Diseases, 9th edition, Clinical Modification [ICD-9-CM] code 345.x) over the period 1999-2004 were included. The control group was a demographically matched cohort of randomly chosen beneficiaries without an epilepsy diagnosis. All had continuous health coverage during 2004 (baseline) and 2005 (study period). Main outcome measures included annual direct (medical and pharmaceutical) costs and, for employees, indirect (disability and medically related absenteeism) and total costs for the study period. Wilcoxon rank-sum tests were used for univariate comparisons of annual direct costs, indirect costs (costs for the subset of employees with these data), and total (direct and indirect) costs during the study period. Two-part multivariate models that adjusted for patient characteristics were also used to compare costs between the study and control groups.

RESULTS

Patients with epilepsy were an average age of 43 years and 57% were female. They had more co-morbidities than controls. On average, direct annual costs were significantly higher per patient with epilepsy than per control ($US10 258 vs $US3862, respectively; p < 0.0001) [year 2005 values], with an annual per-patient difference of $US6396. Epilepsy-related costs ($US2057) accounted for 20% of direct costs for patients with epilepsy. Annual indirect costs were significantly higher for employees with epilepsy than for employed controls ($US3192 vs $US1242, respectively; p < 0.0001), with a difference of $US1950. Total direct plus indirect costs for employees with epilepsy were also higher than those for employed controls ($US13 595 vs $US5338, respectively; p < 0.0001), with a difference of $US8257.

CONCLUSIONS

Epilepsy was associated with significant economic burden. The excess direct costs in patients with epilepsy are underestimated when only epilepsy-related costs are considered.

Medicare Advantage reforms: comparing House and Senate bills

The Medicare Advantage (MA) program, which enables Medicare beneficiaries to enjoy private health plan coverage, is a major element of the current health care reform discussion on Capitol Hill--in large part because payments to MA plans in 2009 are expected to run at least $11 billion more than traditional Medicare would have cost. While the pending Senate and House bills both endeavor to reduce these extra MA payments, their approaches are different. The bills also differ on other aspects of reforming the MA program, such as plans' allowable geographic areas, their risk-adjustment systems and reporting requirements, their potential bonuses for achieving high-quality care and providing good management, and their beneficiary protections. This issue brief compares the above and other provisions in the House and Senate bills, which have a common overall goal to improve the value that Medicare obtains for the dollars it spends

Hybrid risk adjustment for pharmaceutical benefits

This paper analyses the application of hybrid risk adjustment versus either prospective or concurrent risk adjustment formulae in the context of funding pharmaceutical benefits for the population of an integrated healthcare delivery organisation in Catalonia during years 2002 and 2003. We apply a mixed formula and find that, compared to prospective only models, a hybrid risk adjustment model increases incentives for efficiency in the provision for low risk individuals in health organisations, not only as a whole but also within each internal department, by reducing within-group variation of drug expenditures.

Shifted deductibles for high risks: more effective in reducing moral hazard than traditional deductibles

In health insurance, a traditional deductible (i.e. with a deductible range [0,d]) is in theory not effective in reducing moral hazard for individuals who know (ex-ante) that their expenditures will exceed the deductible amount d, e.g. those with a chronic disease. To increase the effectiveness, this paper proposes to shift the deductible range to [s(i),s(i)+d], with starting point s(i) depending on relevant risk characteristics of individual i. In an empirical illustration we assume the optimal shift to be such that the variance in out-of-pocket expenditures is maximized. Results indicate that for the 10-percent highest risks in our data the optimal starting point of a euro1000-deductible is to be found (far) beyond euro1200, which corresponds with a deductible range of [1200,2200] or further. We conclude that, compared to traditional deductibles, shifted deductibles with a risk-adjusted starting point lower out-of-pocket expenditures and may further reduce moral hazard.

Asset retirement obligations: a reporting concern for healthcare facilities

FASB statements and SEC guidelines give direction as to how healthcare organizations should account for their asset retirement obligations (AROs) where environmental issues are concerned. A key consideration is that current costs associated with environmental problems, such as encapsulating asbestos, are to be accounted for as part of an asset's cost and depreciated over the asset's remaining life.

Supply-side risk adjustment and outlier payment policy

In most health care systems where a prospective payment system is implemented, an outlier payment is used to cover the hospitals' unusually high costs. When the hospital chooses its cost reduction effort before observing a patient's severity, we show that the best outlier payment is based on the realized cost when the hospital exerts the first best level of effort, for any level of severity.