How Should the Exchange Adjust Risk?

William Dow, a professor of health economics at UC-Berkeley, said the idea is relatively simple.

“In theory, each individual patient comes with a dollar amount representing their gain or loss to the insurance company,” Dow said at a recent forum in Sacramento. “And that means every enrollee should have the same profit amount.”

If higher risk patients, such as those with diabetes, pay a slightly higher premium, Dow said, that balances the risk that companies take in insuring them.

“That way, the insurance carriers would have predictable losses,” Dow said. “So the goals are first, efficiency, and second, not running away from the sickest patients, but to compete on an equal footing on quality and price. The idea is to ensure stability and avoid insurance rate spirals.”

Dow spoke as part of a panel discussion in Sacramento in a forum put on by the Center for Health Improvement.

Panelist Sandra Hunt of PricewaterhouseCoopers said the state’s 13-year experience with the Health Insurance Plan of California (HIPC, also known as PacAdvantage) was one of the first operational risk adjustment organizations in the country.

“No state that has started risk adjustment has stopped using it,” Hunt said. “So I think they’re pretty satisfied with it.”

According to Edwin Park of the Center on Budget and Policy Priorities, the state’s exchange has to make sure it applies the same rules inside and outside of the exchange, but that risk adjustment can be applied using the gold, silver and bronze levels of coverage.

“Within the exchange, a person with greater health needs tends to be drawn to the gold tier,” Park said. “Since the exchange is required to look at plan benefit designs, that limits the ability of certain plans to get a healthier-than-average pool of enrollees.”

To put the details of a specific risk-adjustment plan into place will take some time, Dow said.

“I really want to convey a sense of urgency here,” Dow said. “In order to price policies in 2014, they need to know the methodologies by 2013. Which means we need to develop those methodologies starting in 2012. So we’re really talking about this legislative year to talk about California-specific risk adjustment.”

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