Debunking an Obamacare Myth — and Fixing the System

As congressional Republicans continue to work on a bill intended to replace the Affordable Care Act, we can expect a lot of rhetoric and commentary about Obamacare’s imminent demise, fueled by news reports about insurers withdrawing from state ACA exchanges. And I’ll wager that much of that conversation will center on the premise that insurers are pulling out because they’ve been unable to enroll enough young, affluent Americans — the so-called “healthy wealthies”— to offset the costs of covering older, sicker populations.

The problem is, that’s not true.

In fact, the insurers that quickly signed up legions of vigorous millennials have been among the biggest losers on ACA exchanges, thanks to a complex risk-adjustment program that required insurers with the healthiest customers to subsidize those with the sickliest. The idea was to level the playing field and thereby stimulate competition. Instead, the RA program conferred enormous advantages on the carriers with the most sophisticated technology — and left their less advanced competitors in the dust.

Blame hierarchical condition category (HCC) scores. Originally designed to calibrate Medicare reimbursements, under the ACA the HCC scoring is used to determine the overall sickness of a carrier’s customer population. Getting accurate HCC scores required insurers to quickly ingest patient health data like diagnoses and prescriptions, organize that data and report it to the Centers for Medicare and Medicaid Services, which administers the RA program.

Because the RA program is a zero-sum game, some insurers wound up paying massive sums to their competitors. In 2015 for example, Kaiser Foundation Health Plan, Inc. of California paid nearly $170 million in risk adjustments. That’s a bitter pill to swallow, even for a mammoth insurer like Kaiser.

The good news is the RA program is a bug in the system — not a fatal flaw. To fix it, there’s no need to repeal the ACA. Instead, lawmakers should focus on policy changes to the RA program so that it does what it was supposed to do: rejuvenate competition that leads to lower health care costs. Here are three ideas for doing just that.

Fix the problem of “missing” diagnoses

To receive RA payments now, insurers not only have to sign up unhealthy members, but prove it. That penalizes insurers that haven’t or can’t invest in predictive technology. Consider the example of a member who is diagnosed with diabetes in December 2017. If that member switches to a new insurer in January 2017 and fills a prescription for a years’ worth of insulin, the cost is on the new insurer. But the diabetes diagnosis is credited to the old insurer for RA purposes. Now imagine the member switches again in January 2018 and gets a new diagnosis of diabetes. The new insurer also gets credit for RA payments, leaving the one who paid for the insulin out of luck.

Policymakers can address this iniquity by adjusting the law to allow RA credit for members who fit certain patterns, such as filling diabetes prescriptions, regardless of the timing of a diagnosis. Congress could help by allowing insurers to share information, which is currently anonymized under CMS regulations.

Cap the maximum payout/receipt

Insurers now have no way of estimating their liability under the RA program as payouts are based on how insurers’ patient populations compare to the rest of the population — and they have no visibility into their competitors’ data. A simple fix would be capping RA payments as a percentage of premium. Right now, RQA payouts average 10 percent of premium and go as high as 30 percent. Capping them at 5 percent would still be onerous, but at least insurers could plan for it.One of the simplest ways to do this is to agree on a maximum payout as a percentage of premium. Right now, RA payouts average 10 percent of premiums, according to CMS, and go as high as 30 percent. Those are tough hits to take in a business where profit margins typically hover around 3 percent.

Capping payouts at, say, five percent of premiums would still be onerous, but would at least give carriers something to plan around. It might also be possible to tether the cap to profit margins. The real key is to make the magnitude more predictable.

Drastically shorten the cycle

Insurers have to tell states their premium rates for the coming year in April or May, but they don’t know what their RA liability for the previous year will be until the fall. This is unreasonable. No business can logically be expected to commit to prices for the next 12 months if it doesn’t know how much profit it made, if any, in the previous 12.Part of the problem is the insurers themselves. Most don’t have the technology to gather and report HCC scores quickly or very often. But the ACA only requires them to report once a year, so they have little incentive to rectify that.

Congress should pressure CMS to shorten the time it takes to calculate RA payments until it’s being done in near real-time, and well before insurers’ rate filings are due. One way to do this: Give CMS two years to require quarterly HCC reporting from insurers — and to tell payers where they stand based on those reports. Then give it three years to require monthly reporting.

That would give the agency and the insurers ample time to implement the technology and the processes they’ll need to report as they go. Insurers would be able to bake their RA liability into premiums. The business would be healthier and more competitive.

In order to foster healthier competition, and to thereby extend affordable health coverage to more Americans, lawmakers should focus less on systemic changes and more on precise adjustments to the RA program, like the ones I’ve suggested. That would create fairer outcomes. It would also buy time for insurers that haven’t invested in sophisticated data analytics. At some point, the technology will be ubiquitous, and then we’ll see greater competition, cheaper, better coverage, and a healthier population.


Mark Nathan is the CEO and co-founder of Zipari, a consumer experience technology company that exclusively specializes in health insurance and offers a native understanding of the industry.

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