Risk Adjustment Key to Competition Within Health Insurance Exchanges

Health plans that have long been incented to compete on risk selection—vying for healthy enrollees and eschewing the sick—are bracing for new rules that will turn their offerings into commodities with buying decisions hinging on price above all else.

The patient Protection and Affordable care Act (PPACA) calls for the creation of exchanges where small employers and individuals may purchase qualified health plans.

Exchanges are intended to make purchasing health insurance easier by providing eligible consumers and businesses with "one-stop-shopping," a place to compare various offerings for policies. The Obama Administration expects that exchanges will give consumers and purchasers greater flexibility and information about health insurance policies before they buy.

Last week U.S. Health and Human Services Secretary Kathleen Sebelius announced $51 million in federal grants to help states set up insurance exchanges.

But where does that leave payers? Exchanges pool all comers together: the healthy, the worried well, the sick, and the sicker. Under PPACA, exchanges will prohibit payers from selecting applicants on the basis of health, and they will be restricted in their abilities to vary premiums with regard to health status.

With the current practice of mitigating costs by practicing risk selection no longer an option, payers will have to rely on their wits. They'll need to dive into the data with the best analytical tools they can get their hands on and start practicing risk adjustment rather than risk selection.

Risk adjustment means applying analytics and predictive modeling to the data presented by a group of enrollees in order to forecast its future wellness and calculate appropriate pricing.