Two of the most notable payer venture funds, Optum Ventures and Cigna Ventures, just headed up a $30 million dollar Series A funding round for Flume Health, a startup that basically builds “challenger” health plans. How did this go down? Cédric Kovacs-Johnson CEO & Founder of Flume introduces us to his company which offers providers, digital health co’s, brokers, reinsurers, and just about any other healthcare org a tech stack for creating their own hyper-niche, super personalized health plans.

The suite of services to “build-a-plan” includes things like claim processing, payments, enrollment management, digital health point solutions integration, and other API functionality – replacing the traditional TPA with tech and the one-size-fits-all plan with a new opportunity for nichey-ness that can customize coverage for patient populations based on health conditions, location, employer, and so on.

Cédric talks us through the benefit to his target client – the care provider – who, while taking on more risk anyway, may consider building their own plan to capture more premium dollars and gain better control over the end-to-end patient experience. Wait a minute – is all this “Challenger Health Plan” talk just a re-brand of value-based care? I ask point-blank and get a new buzz phrase in return; welcome to the lexicon, “Commercial Advantage.” Lots to unpack in this one including Flume’s rev-gen model and plans for growth – they’re already onboarding one new challenger plan per month!

Episode 12 of “The THCB Gang” was live-streamed on Friday, June 5th from 1PM PT to 4PM ET. If you didn’t have a chance to tune in, you can watch it below or on our YouTube Channel.

Editor-in-Chief, Zoya Khan (@zoyak1594), ran the show! She spoke to economist Jane Sarasohn-Kahn (@healthythinker), executive & mentor Andre Blackman (@mindofandre), writer Kim Bellard (@kimbbellard), MD-turned entrepreneur Jean-Luc Neptune (@jeanlucneptune), and patient advocate Grace Cordovano (@GraceCordovano). The conversation focused on health disparities seen in POC communities across the nation and ideas on how the system can make impactful changes across the industry, starting with executive leadership and new hires. It was an informative and action-oriented conversation packed with bursts of great facts and figures.

If you’d rather listen, the “audio only” version it is preserved as a weekly podcast available on our iTunes & Spotify channels a day or so after the episode — Matthew Holt

By CECI CONNOLLY and MATT DOBIAS

When it comes to money back guarantees in health care, it’s often less about the money and more about the guarantee.

That’s the biggest takeaway shared by two organizations—Geisinger Health System and Group Health Cooperative of South Central Wisconsin (GHCSCW)—that separately rolled out closely-watched campaigns to refund patients their out-of-pocket costs for health care experiences that fell short of expectations.

Both programs started as a way to inject a basic level of consumerism into a process long bereft of one. In fact, as consumer frustration over medical costs rise, a money back guarantee has the potential to win back a dissatisfied public.

But like many experiments in health care, the effort produced some unexpected results as well. Instead of a rush on refunds, executives from both systems said their money-back pledge served even better as a continuous-improvement tool, with patients providing almost instantaneous feedback to staff who felt newly empowered to address problems.

Call it a welcomed surprise for executives who saw the value in providing a guarantee between patients and the clinicians who treat them, and medical and legal staff who were at first leery of the idea before gradually warming to it.

“People just want an avenue to give us advice,” said Allan Wearing, chief insurance services officer at GHCSCW. “What members want is an ability to tell you in an easy way that their experience was not the best and [the system] needs to fix what’s wrong.”

“We’re doing it.”

Both Geisinger and GHCSCW are sharing what they’ve learned with an industry that is seen as overtly protective of every dollar that flows in-and-out of their systems, and that guards against federal and state policies that may reduce revenue.

In 2015, Geisinger debuted its ProvenExperience program under then-Chief Executive David Feinberg in a very public way—in front of 500 executives at a client conference hosted by surveying giant Press Ganey. For many procedures, a patient can simply tap on the Geisinger app and receive a refund of anywhere from $1 to the full out-of-pocket charge—no questions asked.

“In the beginning, I talked to other health system CEOs and industry leaders about ProvenExperience and they all said, ‘Don’t do it.’ I felt really dejected,” Feinberg, who is now an executive with Google Health, said at the time. “Then I thought about Kodak executives discussing digital photography. And Blockbuster talking about online video options. Were they also told ‘Don’t do it?’ That’s when I said to myself, we’re doing it.”

A few years later, after seeing Feinberg present at the Alliance of Community Health Plans (ACHP), GHCSCW unveiled its own Experience Guarantee, which was patterned after Geisinger’s but with its own local spin.

“It was clear to us that healthcare has become deaf to the voice of the consumer,” GHCSCW President and Chief Executive Officer Mark Huth said. “Patients have complaints about delays, poor communication, dropped balls, and the response is ‘Oh, sorry. That happens sometimes.’ You would never tolerate that in your favorite coffee shop or restaurant—they would make it right or refund your money.”

Huth added: “We knew we had to be better. We had to give patients a voice and we had to have financial skin in the game.”

Most complaints, Wearing said, focus on communication lapses. Perhaps a patient waited 30 minutes for a physician who never showed, or frontline staff miscommunicated the timing of an appointment. Medical errors, for instance, are not included in the guarantees, and both Geisinger and GHCSCW have implemented policies that protect against patient-gaming. Available refunds typically reflect what the patient would have paid out of pocket.

Unlike other quality reporting mechanisms, feedback is immediate. Complaints go to unit managers and ultimately land on the desk of Chief Executive Mark Huth, a physician himself. Staff have two days to address the issue.

Refunds total less than 0.02 percent of revenue

Geisinger and GHCSCW share some of the same DNA—both integrate the health plan with care delivery for a coordinated approach with aligned financial incentives. And both are rooted in their communities with long histories of patient-centered care. So it’s not surprising that both organizations shared similar results, including that the number of actual refund requests per patient encounter is low, as is the average refunded amount.

At Geisinger, about 30 to 50 patients each month request a refund. For perspective, Geisinger counts about 1.7 million outpatient visits per year. Simply by sheer size and scale Geisinger’s numbers are higher than GHCSCW. Through 2018, Geisinger has provided refunds of more than $585,000, or less than 0.02 percent based on systemwide revenue of about $3.3 billion, according to its audited 2019 financial statements. It’s also telling that Geisinger consistently ranks in the Top 10 percent in Press Ganey patient experience scores.

At GHCSCW, 255 total refund submissions were made over a one-year period, from September 2018 to September 2019, which breaks down to about 1 in 1,000 patient encounters. GHCSCW, largely centered around Madison, Wis., provides specialty and primary care to about 80,000 members. The average refund was $46.02, which is in line with the average copay. All told, GHCSCW has refunded patients about $5,000 since the program’s launch in 2018, or roughly about 0.5 percent of money collected through copays and other out-of-pocket costs.

Importantly, Geisinger and GHCSCW launched these programs at a time when public outcry over health care costs is rising. Americans continue to cite concerns over the cost of care even as elected officials and policy makers at the federal and state level are at odds on how to tame rising costs.

While health care costs continue to be top of mind, the quality of care patients receive tracks a close second. Increasingly health plans and provider groups are putting a premium on patient experience measures, which can now count as much as 25 percent of a physician’s overall performance score.

An opportunity for near real-time feedback

“What started as ‘skin in the game’ has become a rallying cry,” Huth said. “We believe so much in our ability to provide an exceptional patient experience that we offer an Experience Guarantee.  It has really united our staff.”

While the process to stand up money-back guarantee programs is not painless, the resulting data should allay  concerns typically raised by chief financial officers, physician leaders and compliance executives who may worry about  promoting a program that can  impact the  bottom line.

“The whole process is one of learning,” Burke said. “We’re trying to get everyone on board to see things through the patient’s eyes. The refund, more or less, is just putting some skin in the game.”

Four key lessons to keep front-and-center when offering a money-back guarantee

• Buy-in from top executives is key. The impetus to move forward at both GHCSCW and Geisinger was driven by the top bosses themselves. In Geisinger’s case, the program remained even after Feinberg’s exit. Executive leadership is critical to keep momentum from lapsing. Dr. Jaewon Ryu, Geisinger’s former chief medical officer who was named the system’s new chief executive in 2019, touted the program in an interview with Modern Healthcare. “We’ve heard tremendous feedback,” he said, adding that it “changes culture because now all of a sudden you’ve put a guarantee out there, and I think the staff are all laser-focused on making sure that the experience is a good one.”

• Expect pushback from all the usual places. At GHCSCW, leaders had to overcome concerns from physicians, financial officers and, expectedly, compliance. “We spent months trying to get terms and conditions right,” Wearing said.

• Put an experienced project manager on the job. The idea of a money-back guarantee in health care is novel enough. Successfully anticipating what it would actually mean in practice proved even more daunting. The team at GHCSCW identified 84 items on its project task list that it had to work through before it could launch its program.

• Technology can be revealing. GHCSCW created its MySmartCare app, which serves as a portal for members to file and process complaints. “On that app it says, if there’s something with your experience at GHCSCW, just tap the app and tell us what your issue was,” Wearing said. The key: When someone files an issue, it goes to GHCSCW’s member services and—importantly—is seen by Huth, the CEO, and other senior leaders. Member services has two days to report back how the issue was resolved.

Where to next?

Since the launch of these consumer-friendly programs, few other health systems have followed suit in such high-profile ways. But that could change, especially as health plans begin to warm to more tools designed with the consumer in mind, such as cost-estimator applications that make spending more predictable and “shoppable.”

Both Geisinger and GHCSCW say that the goodwill and trust built among plan members—and the public broadly—outweigh what they returned in monetary refunds. That, too, could begin to tip the competitive advantage to those organizations that follow a similar path, providing a keen differentiator in the market.

Standing up a money-back guarantee has its challenges, but with a clear nod to making health care more consumer-friendly, it may be worth the risk.

Ceci Connolly is president and CEO of the nonprofit Alliance of Community Health Plans, a national consortium of 25 nonprofit health organizations, and a former national health correspondent for The Washington Post.

Matt DoBias is Associate Director, External Affairs of ACHP and a former health care reporter for Politico and Modern Healthcare.

By JEFFREY HOGAN and BRIAN KLEPPER

Among its less appreciated but more worrisome impacts, COVID-19 threatens to destabilize America’s health care provider infrastructure. Patients have largely been relegated to sheltering at home and, to avoid infection, are avoiding in-person clinical visits. The revenues associated with traditional physician office visits have been curtailed. Telehealth capabilities are gradually coming online, but are often still immature. The concern is that many practices will be financially unable to keep the doors open, compromising access and healthy physician-patient relationships.

Health plans have become health care’s bankers, controlling the funding that fuels larger care processes. Health insurance companies and health plan administrators rely on networks of doctors and hospitals to deliver health care services. They also rely on premium payments from employers to administer and pay for health care. In conventional fee-for-service, pay as you go arrangements, providers are paid after they have delivered care services. The stability of this approach, of course, assumes an unhindered flow of patients receiving care.

When the stability of that flow is disrupted, as it has been with COVID-19, physician practices become vulnerable. Solving that vulnerability would give members access to critical services – primary care, specialty care, urgent care and pharmacy coordination – during this epidemic. Without these resources, members will be forced to turn to overburdened hospitals, where they risk increased COVID-19 exposure.

To keep health care services readily available through this crisis and beyond, we need health plans to provide bridge financing, advancing operating funding for 120 days and paying for telemedicine at the same rate as in-person visits. Health payers can easily estimate payments to providers and simply front that estimated payment now. Payers wouldn’t exist without providers. Most important, members need access to these providers to get health services in their homes. Stable revenue flow is clearly an all-around win, in the interests of patients, providers, payers and employers. 

Many health plans have already been pro-active in helping health care providers through the COVID-19 crisis. For example, United Health Care and Anthem have waived patient co-pays for care associated with COVID-19, a move that will provide considerable relief to employees and their families already under considerable financial stress. 

Both Aetna and Anthem have announced that they now pay for telemedicine services at the same rate as in-person services. This is a huge step forward that encourages telemedicine as a first line of defense, limiting potential COVID-19 exposure in physician offices. Many innovative telemedicine companies have now found ways to facilitate services directly with a patient’s own primary care physician (PCP). Further, there are services that allow PCPs caring for patients with comorbidities access to specialists and pharmacists.   

Blue Cross of Idaho has gone farther still, by committing to advance 3 months of payment to keep independent primary care physicians financially viable. We need to see more progressive arrangements like this.

If you’re an employer, write or CALL the payer President in your market. Make this personal and encourage your colleagues to do the same. We’re in a crisis, and employees and their families need these better services now. Feel free to copy and paste any of the language included here. 

Let’s give our providers the resources they need to treat members remotely, to take providers off the sidelines and to reduce the tremendous pressures on our heroic frontline hospital workers.

Jeffrey Hogan leads Upside Health Advisors, a health care consulting firm in Farmington, CT. Brian Klepper leads Worksite Health Advisors, based in Charlotte, NC.

By MICHAEL MILLENSON

At kitchen tables everywhere, ordinary Americans have been grappling with the arcane language of deductibles and co-pays as they’ve struggled to select a health insurance plan during “open enrollment” season.

Unfortunately, critical information that could literally spell the difference between life and death is conspicuously absent from the glossy brochures and eye-catching websites.

Which plan will arrange a consultation with top-tier oncologists if I’m diagnosed with a complex cancer? Which might alert my doctor that I urgently need heart bypass surgery? And which plan will tell me important information such as doctor-specific breast cancer screening rates?

According to Matt Eyles, president and chief executive officer of America’s Health Insurance Plans (AHIP), insurers over the last decade have made a “dramatic shift” to focus more on consumers.  That shift, however, has yet to include giving members the kind of detailed information available to corporate human resources managers and benefits consultants (one of my past jobs).

What’s at stake could be seen at a recent AHIP-sponsored meeting in Chicago on consumerism. Rajeev Ronaki, chief digital officer for Anthem, Inc., explained how the giant insurer is using artificial intelligence to predict a long list of medical conditions, including the need for heart bypass surgery. Information on individual patients is passed on to clinicians.

“The future of care delivery will see physicians, scientists and consumers alike empowered with the most accurate clinical information in real time,” Ronaki declared.

That may be the future, but it’s not the present for the one in eight Americans that Anthem serves today in its various plans, most affiliated with Blue Cross and Blue Shield. Anthem members have to rely on the limited information available in a new mobile app with the gender-vague name of “Sydney” that’s blandly touted as “smart” and “personal.”

As for obtaining a sophisticated cancer consult, an oncologist working with 2nd.MD, which contracts with the top 20 cancer centers in America for virtual consults, related how a man who was diagnosed with advanced cancer had a grim diagnosis offering perhaps a few months to live. But after the consultant, Dr. Charles Balch, directed him to an advanced cancer center, the man showed “an almost complete response” to immunotherapy, Balch said.

Do you know if your health plan offers that kind of service? Who would even think to ask before enrolling?

Meanwhile, as a consultant I’ve seen the detailed information about individual hospitals and doctors that’s available to some insurers. While a few plans do a good job of sharing meaningful data, most settle for limited information posted in a dusty corner of their website. 

Given health insurers’ negative image – in one national poll, just 16 percent of respondents believed insurers put people over profits –why don’t health plans highlight these kinds of valuable services? Here’s where consumerism confronts unpleasant realities.

Take cancer consults. While a world-class second opinion may save money in the long run, if everyone who thinks they’re a cancer risk joins your plan, that “adverse selection” among the enrolled population could boost medical expenses. 

When it comes to publicizing the use of algorithms to predict illness, the adverse selection problem is complicated by the additional issue of public trust. Even though early intervention can save money, will members believe that a company that gained national notoriety for denying claims for emergency room visits – as Anthem did – has their best interests at heart when it comes to their heart? Other plans have similar trust issues.

And speaking of trust, can members trust that their health plan will risk the ire of doctors and hospitals by publicizing usable data showing that some perform much better than others? 

The way to overcome these issues, I believe, is for powerful national employer groups such as the Federal Employees Health Benefit Program to demand detailed disclosures by health plans to consumers. That puts all plans on an equal footing. Plans should answer carefully defined questions in three areas: What will you do to keep me well? What information will you give me about doctors and hospitals? And what resources do you offer in case of serious illness?

It’s important that insurers’ pay members’ bills without bogus bureaucratic barriers. But it’s even more important to give prospective plan members full and complete information about services that might one day save their life.

Michael L. Millenson is president of Health Quality Advisors LLC and adjunct associate professor of medicine at Northwestern University Feinberg School of Medicine. This article originally appeared on Forbes here.

Ali Diab, CEO & Co-Founder of Collective Health, wants to talk about healthcare affordability and the fact that consumerism doesn’t really exist when it comes to healthcare because we don’t really have a functioning market. The “Real” buyers — from the federal government to large employers — have no idea what things cost in traditional health plans and are making healthcare purchases for their constituents without full price transparency. So, what has he and Collective Health learned now that they’re 6 years into trying to offer these buyers an alternative to that traditional health plan experience? Nothing is more complex than health insurance innovation, but Collective Health is making significant headway and, according to Ali, has made it past the “homicide phase” of being a digital health startup.

Filmed at HLTH 2019 in Las Vegas, October 2019.

Jessica DaMassa is the host of the WTF Health show & stars in Health in 2 Point 00 with Matthew Holt.

Get a glimpse of the future of healthcare by meeting the people who are going to change it. Find more WTF Health interviews here or check out www.wtf.health. 

Today THCB is spotlighting Lumeris which creates a platform to help set-up and develop health plans and manage care delivery for patients. Working with its associated medical group Essence, Lumeris has been creating actionable steps to reduce Medical Cost Rates (MCRs) and is now taking that process to other health systems that want to set up Medicare Advantage plans. Lumeris is working with 12 health systems and is growing rapidly. Recently, Lumeris partnered with Cerner to bring their product to market.

Matthew Holt interviewed Matt Cox, Chief Marketing Officer at Lumeris to find out the details.

A number of years ago, a family doc friend of mine took me on a tour of his small group practice.   He proudly showed me the exam rooms, his medical equipment, and other parts of the facility that related to patient care.  Then we came to a large room with a bunch of desks piled high with paper.  He explained, bitterly, that this part of his office was for the people he had to keep on the payroll to do nothing but deal with insurers.  This administrative expense was cutting his margins to the bone and did not help him take better care of his patients.  He eventually left practice, to pursue a second career as a physician executive – a job that was, for him, more remunerative and more satisfying.

Part of the problem is that physicians in the US have to deal with multiple health plans – each with its own set of managed care rules, formularies (or list of approved drugs), requirements for prior authorization, rules for billing, submission of claims, and adjudication.  Until recently, almost all of this administrative work was done by phone or fax.  Picture this:  rooms full of practice-based nurses talking to insurance company nurses about the details of a case that may or may not lead to payment for medical care.

So, just how much is our multi-payer system costing us?  Researchers at the University of Toronto, Weill Cornell Medical College and the Medical Group Management Association collaborated to help shed light on this important question.  They decided to compare how much time (and money) is being spent interacting with payers (private and public plans) in the US vs Canada, a country with a single payer system.  The results were published in an article in the August 2011 issue of Health Affairs.

The researchers designed survey instruments for physicians and business managers to assess the time spent in minutes on such issues as formularies, billing, credentialing, and prior authorizations (the latter two issues are relevant only to the US practices as the Ontario, Canada single payer system examined in this study does not credential physicians or require prior authorizations.)

Here is what they found:

• Physicians in the US spent 3.4 hours per week interacting with multiple payers compared to Ontario physicians who spent only 2.2 hours per week interacting with the single-payer system – most of the difference was related to time spent obtaining prior authorizations – an agreement by the insurance company that the service meets criteria for payment
• US nursing staff (including medical assistants) spent 20.6 per physician in the practice per week interacting with payers – almost ten times the amount of time spent by Ontario nurses (2.5 hours) – again, a lot of it (13.1 hours per physician per week) was related to prior auths
• Clerical staff in the US spent 53.1 hours per physician per week compared to 15.9 hours in Ontario – most of the difference relating to billing issues and obtaining prior authorizations

When this time is translated into US dollars (adjusting for salary rates and specialty mix), Ontario practices spend $22,205 per year per physician compared to – are you ready for this?? – $82,975 in the US.  That is a difference of $60,770 per physician.  The authors calculate that if US physicians had administrative costs similar to Ontario physicians the total savings would be  $27.6 billion per year!  You could insure a lot of people and/or pay for a lot of health care with that type of dough.

The authors are careful to point out that we really don’t know the value of the benefits that may be reaped by these insurance company interactions.  For example, how much inappropriate care is avoided by prior authorizations and how much innovation is stimulated by competition between the various payers?  I have raised the former issue with health plans I have worked with, however to date, there really aren’t good studies that take into account the costs of doing the prior auths, the savings related to denial of inappropriate care, and the value of any “sentinel effect” related to just having the “watchdog” process in place.  It would clearly be helpful if our friends in the health services research community could help answer some of these important questions.

Meanwhile, I do think this study should stimulate a vigorous discussion, perhaps during the Presidential debates, about how much we are willing to pay for “choice” of insurer … perhaps, we might find that $27.6 billion a year is way too much.

Patricia Salber is a board certified internist and emergency physician. She is currently principal at Zia Healthcare Consultants, a consultancy focused on helping organizations get ready for the post-health care reform. You can follow her at The Doctor Weighs In where this post first appeared.

By JONATHAN HALVORSON

Risk adjustment in health insurance is at first glance, and second, among the driest and most arcane of subjects. And yet, like the fine print on a variable-rate mortgage, it can matter enormously. It may make the difference between a healthy market and a sick one.

The market for individual health insurance has had major challenges both before and after the Affordable Care Act’s (ACA’s) risk adjustment program came along. Given recent changes from Washington, like the removal of the individual mandate, the market now needs all the help it can get. Unfortunately, risk adjustment under the ACA has been an example of a well-meaning regulation that has had destructive impacts directly contrary to its intent. It has caused insurer collapses and market exits that reduced competition. It has also led to upstarts, small plans and unprofitable ones paying billions of dollars to larger, more established and profitable insurers.

Many of these transfers since the ACA rules took effect in 2014 have gone from locally-based non-profit health plans to multi-state for-profit organizations. The payments have hampered competition not just in the individual market, which has never worked very well in the U.S., but in the small group market, which arguably didn’t need “help” from risk adjustment in many states.

The sense of urgency to fix these problems may be dissipating now that the initial rush for market share under the ACA is over and plans have enough actuarial data to predict costs better. There has been an overall shift to profitability. But it would be a serious mistake to think that just because fewer plans are under water, the current approach to risk adjustment isn’t distorting markets and harming competition.

The Needle and the Damage Done

Numerous problems have been reported and discussed since 2016 when the damage became widely evident, but despite a few tweaks to the model in the right direction, little has changed until now. With the latest CMS guidance, states have two new openings to reduce the harm from the federal risk adjustment process. I’ll describe them below, but first I want to be clear that these criticisms are not intended to do away with attempts to create a fairer marketplace.

The principle of risk adjustment is great in theory: make plans compete on providing the best, most efficient service rather than by “cherry-picking,” or deliberately enrolling the lowest risk members (in other words, the healthiest ones). Cherry-picking doesn’t improve the quality of care and insurers who do it focus on appealing to the healthy at the expense of the sick. Under the ACA, the idea is to remove this problem by having insurers whose enrollees are sicker get subsidized by insurers whose enrollees are healthier.

The reality of risk adjustment has been mixed. In Medicare Advantage (MA) the formula is similar, but it has not precipitated a crisis among insurers because it is not a zero-sum game in which money from one plan is handed to its competitors. Instead, plans are measured against a benchmark and the risk adjustment payments to plans with higher risk populations come from the federal government.

Both ACA and MA plans have an incentive to identify all the risk factors they can for both clinical (to help identify their enrollees’ conditions) and financial reasons. Risk is typically measured by the diagnoses included on medical claims, but active measures can be taken to find risks that haven’t appeared on claims. The insurers that are more aggressive than average at recording risks get an advantage in higher payments. CMS has long recognized that MA plans will report more health conditions than doctors report for a comparable traditional Medicare population, and so CMS deflates the risk adjustment payments for MA plans by a few percentage points every year (5.9% in 2018).

However, there is a difference for an insurer between failing to keep up with a national risk inflation factor (the MA approach) and having to give 5% or 10% or more of the premium it earned to its local competitors (the ACA approach). The latter is inherently more volatile and allows aggressive coding to become a competitive weapon. This weapon can be wielded more effectively by large, well-funded organizations that have sophisticated data systems to analyze potential missing diagnoses, a large field operation to seek out and confirm diagnoses, and a member population that has been with the plan for a long time so that there is a rich claims history to mine. In short, it tends to favor incumbents. This problem could be greatly reduced by using multi-payer claims databases so that a person’s risk score truly reflects all the data and doesn’t change when a person moves from one plan to the next, but that approach runs into legal, regulatory and competitive barriers that are not easy to bridge.

The problems of risk adjustment in the ACA have been more profound and damaging to competition than this data-capture dynamic alone, however. To start, the risk adjustment model makes a small allowance for what’s called induced demand, or the fact that when people pay less out of pocket for their health benefits they tend to use more services, and in the process more diagnoses become known to the system. The model assumes this greater use of care has nothing to do with the underlying population being sicker.

We know, however, that different plan designs attract different people even if the insurers are not trying to cherry-pick healthier populations. A small network plan with less doctor choice is likely to attract healthier and less wealthy people who are more sensitive to premium price differences. Do we want to penalize these plans and the people in them? Insurers must increase premiums to compensate for the money they will lose in risk adjustment. In doing so, we are penalizing one of the main cost control vehicles plans have available to exclude the most expensive providers, as well as an important method of aligning a plan’s network with value-based contract models, and one of the best methods new upstart plans have of breaking into a market and increasing competition.

In general, the model doesn’t distinguish between disruptive innovation and old-fashioned cherry picking. This is no easy matter and I don’t claim to have a solution for how to do it, but the absence of a competition-sensitive distinction should reduce the magnitude of the adjustment amounts out of modesty. Another marker of competition is profitability, which the current model fails to account for. Why are smaller plans that are struggling to survive paying larger plans that are already profitable? Or even if both plans are unprofitable prior to risk adjustment (as occurred frequently in the early years of the ACA), some sensitivity of the potential for risk adjustment to drive an insurer into insolvency should be included in the transfer calculation, as long as the insurer isn’t cherry-picking.

There are many other concerns with the model, but the last I will mention is that it fails to account for policy differences between states. New York, for example, allows multiple children as dependents on a single contract, while the federal risk adjustment formula allows only one dependent in the member count. The higher premium for the entire family is included in the risk adjustment process, so it inflates the premium per allowed member and increases the size of the transfers from one plan to another. This amplifies any advantages a plan may have in risk coding.

These technical issues have real consequences. To stick with New York, two major departures of new entrants were caused in part by risk adjustment. CareConnect conducted a tactical exit by its parent, Northwell Health. Previously, Health Republic, one of the largest co-ops formed in response to the ACA, entered bankruptcy. At the time they left the market, they had grown rapidly and provided serious competition to giant incumbents in the state, including Blue Cross Blue Shield plans and United Healthcare. Both cited past and ongoing losses from risk adjustment as reasons for leaving, having paid hundreds of millions to their largest competitors, and over 20% of their entire revenue in some years. Health insurance is an industry that typically sees only a 3-5% profit margin, so paying out 15-20% or more to risk adjustment in multiple years is a catastrophic loss for plans that are not deliberately cherry-picking the healthiest enrollees and are pricing aggressively to grow market share.

After a great deal of unnecessary harm to the markets, CMS has come to recognize many of these issues and is giving states leeway to modify what plans pay each other as a result of risk adjustment. States have always had the ability to apply for approval from CMS to conduct their own risk adjustment programs but given the numerous constraints and expenses in doing so, only Massachusetts attempted it. And after a couple of years it gave up. New less costly or more immediately accessible options from CMS are welcome.

Option 1: Federally-Managed Risk Adjustment with a State-Specific Discount

In April 2018, CMS created an approach for “state flexibility” in which a state may apply to CMS for a modification to the federal risk adjustment model. On this approach, a state would present its case for why the federal model results in inaccurate and harmful payments between plans, and estimate a percentage by which the federal model’s results should be reduced for the state. The reasoning could refer to unique regulations in the state that distort the model’s measurements and other factors like those mentioned above.

CMS also now recognizes that the individual and small group markets may not need the same sort of risk adjustment. The small group market may have differences in plan design and competitive dynamics that mitigate the need for risk adjustment every time differences in measured risk appear, and so CMS will allow reductions of transfers in the small group market of up to 50%. CMS is making a striking claim here. It is essentially acknowledging that there may be self-correcting features of the market that accommodate differences in the health of members across plans while maintaining vigorous competition, so that these differences don’t all need to be transferred away through risk adjustment.

To paint a picture of how this could work: a small group plan with a very wide network and rich benefits may be attractive to firms with older than average employees who have established doctor relationships over a metropolitan region and who place high priority on being able to keep seeing their docs (older almost always means sicker), but that same insurance product may also attract firms that employ relatively healthy well-paid professionals who can afford to pay the premium for a high-end product, thereby mitigating the increased risk and cost, and creating a stable risk pool and a product that can profitably attract business in the small group market. This product could compete against a smaller network product with higher out of pocket costs at a lower price point, which tends to attract different types of firms with different priorities on cost and access. Employees in the second set of firms could on average be younger (healthier) and poorer than those in the other product, with a risk pool that is also stable, and a slightly lower average risk than the high-end type of product. Why shouldn’t this situation be allowed to persist, rather than effectively have one set of small employers (who have chosen to provide a less costly insurance product insurance out of necessity or priority) subsidize the richer insurance selection of another set of firms? This is a philosophical point as much as it is a point about the health of markets.

Allowing states to apply for a modification to the formula is a good step in the right direction, but any such changes approved by CMS under this option will not to take effect until 2020. While many new entrants and underdogs have become insolvent or left the individual and small group markets, many still remain, and this wait will ensure that they continue to subsidize their competitors in 2018 and 2019. Combined with the instability created by the loss of the individual mandate, more may leave.

Option 2: State Implementation of Supplemental Risk Adjustment

After I first wrote about this in 2016, New York became the only state to take matters into its own hands to stabilize its small group and individual community-rated health insurance markets. It created its own risk adjustment pool, designed in reference to the federal program. The purpose of the pool was to reduce the size of transfers by 30% for the small group market in 2017 and to reduce both small group and individual market transfers by 26% in 2018.  New York referenced some of the issues above in justifying these numbers, as well as the fact that up until 2016 administrative costs were fully baked into the average statewide premium that plugged into the risk adjustment model, meaning that large plans with high administrative costs and profit could skew the average premium upward and with it raise risk adjustment payments (because they are pegged to the average state premium). That particular feature of the federal model has largely disappeared, but the rest of the problems remain.

Neither New York nor any other state to my knowledge has announced its own adjustment to stabilize these ACA markets for 2019. In part the lack of follow-through by other states may be because the 2017 and 2018 New York State adjustments resulted in a lawsuit from the insurer with the biggest winnings under the old model. So the question is: can and should New York and other states act on their own to reduce the damage from risk adjustment, at least until the new Federal process take effect?

Encouragingly, the most recent federal guidance appears to confirm that they can. When asked whether New York’s emergency stabilization action was in conflict with the federal risk adjustment program, HHS responded:

States are the primary regulators of their insurance markets, and as such, we encourage States to examine whether any local approaches under State legal authority are warranted to help ease the transition for new participants to the health insurance markets. States that take such actions and make adjustments do not generally need HHS approval as these States are acting under their own State authority and using State resources. However, the flexibility finalized in this rule involves a reduction to the risk adjustment transfers calculated by HHS and will require HHS review as outlined above.

Given a direct invitation to wag its finger and declare that New York should have received HHS approval, instead HHS provided a general statement about state authority to regulate insurance markets. Specifically, states have the authority to set up their own risk adjustment and stabilization measures using their own resources, which is what New York did. The reference to easing the transition for “new participants” is a bit confusing, since state regulatory authority in insurance extends far wider than this. Even if the focus is on new entrants, a state must consider the possibility that yet more companies may seek to enter a market and the State may issue regulations conducive to such entry to improve competition. New York, and other states where risk adjustment continues to be a problem, should take this opportunity to create a bridge fix for another year until the federal process can be improved.

New York is actively considering the use of this authority for 2019. On April 19^th its Department of Financial Services posted instructions to insurers that they “should not include an assumption for a New York market stabilization pool in [developing their] 2019 rates” but did so “solely to assist insurers in using consistent assumptions for upcoming rate submissions for 2019” and retained full discretion to implement market stabilization measures after reviewing the impact of the federal risk adjustment program.

New York’s past corrective actions have contributed to greater market stability in 2018. The scale of payouts to the largest plans was reduced. In the individual market, the state reported modest increases in QHP enrollment during the annual election period despite the turmoil and uncertainty around the ACA. In the small group market one new insurer, Oscar, began offering plans. But without further action the same pattern of the smaller players subsidizing the bigger ones is likely to continue and that does not bode well. Based on all the evidence, New York should take the steps within its authority to correct for the adverse effects of federal risk adjustment in 2019 for the sake of the health and continued viability of their ACA markets.

Other states should take heart from the CMS comments and New York’s experience, and seriously consider whether circumstances in their individual or small group markets warrant similar temporary actions in 2019 before the formal remediation option begins in 2020.

Jonathan Halvorson is with the Sachs Policy Group and was formerly a New York State health plan regulator