January 2001

Grant Results

National Program

Changes in Health Care Financing and Organization

SUMMARY

In 1995 and 1996, the California Managed Risk Medical Insurance Board, Sacramento, Calif., developed a risk-adjustment mechanism that was applied to small employer group health insurance purchasers in the Health Insurance Plan of California (HIPC), the first statewide health insurance purchasing cooperative for small employers (three to 50 employees).

This project was part of the Robert Wood Johnson Foundation (RWJF) national program Changes in Health Care Financing and Organization (HCFO) (for more information see Grant Results).

To identify high-risk and high-cost health conditions, the researchers examined inpatient data over a one-year period for diagnoses with higher than average costs (more than $15,000) and predictability. When an insurer's aggregate risk varied more that 5 percent from the average, then risk within HIPC was considered maldistributed and the risk-adjustment process kicked in.

Key Results

  • The risk-adjustment mechanism was adopted by the California Managed Risk Medical Insurance Board and used by HIPC in its 1996 and 1997 rate negotiations with participating health plans.

Funding
RWJF supported the project with a grant of $485,017 between January 1995 and November 1996.

 See Grant Detail & Contact Information
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THE PROBLEM

Adverse selection occurs when less healthy and higher-cost individuals disproportionately enroll in particular health plans. Insurers have adopted a two-step approach to dealing with adverse selection, know as risk adjustment. The first step, risk assessment, involves calculating the risk of enrollees in a health plan by predicting the deviations of individual expected health care costs from the costs of the average enrollee. The second step is to adjust for uneven risk within health plans by compensating insurers for the amount of actual risk they assume.

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THE PROJECT

The researcher developed a risk-adjustment mechanism that was applied to small employer group health insurance purchasers in the Health Insurance Plan of California (HIPC), the first statewide health insurance purchasing cooperative for small employers (three to 50 employees). HIPC has been in operation since July 1, 1993 and now includes 24 different participating health plans in the state with approximately 80,000 enrollees. During the two-year grant period, HIPC representatives worked with the actuarial firm Coopers and Lybrand to develop a risk adjustment mechanism based on demographic information, as well as some higher-cost diagnoses.

The demographic information included in the risk assessment model were gender, family size, health condition, and age. To identify high-risk and high-cost health conditions, the researchers examined inpatient data over a one-year period for diagnoses with higher than average costs (more than $15,000) and predictability. Normal maternity cases, mental health, chemical dependency cases, and trauma cases were excluded.

When an insurer's aggregate risk varied more that 5 percent from the average, then risk within HIPC was considered maldistributed and the risk adjustment process kicked in. The amount of funds needed to move those plans with risk assessment scores outside the threshold, to within the threshold, was calculated. Funds were collected from the lowest risk plans until the high-end outliers had been fully compensated. The goal was to compensate plans equitably for any adverse selection, in order to minimize the incentives for plans to avoid risk and the treatment of specific disease.

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RESULTS

The risk-adjustment mechanism was adopted by the California Managed Risk Medical Insurance Board and used by HIPC in its 1996 and 1997 rate negotiations with participating health plans. (The risk adjustment methodology was first tested through two simulations.) Plans were apprised of the level of money transfers before each new premium cycle. According to the researchers, the plans independently decided whether and how to take risk adjustment into account in their premium rates.

Communications

HIPC released three reports on the results of the risk adjustment simulation in May, September, and December 1995.

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GRANT DETAILS & CONTACT INFORMATION

Project

Development of a Health Risk-Adjustment Method for the Health Insurance Plan of California

Grantee

California Managed Risk Medical Insurance Board (Sacramento,  CA)

  • Amount: $ 485,017
    Dates: January 1995 to November 1996
    ID#:  026226

Contact

Project Director: Sandra Shewery
(916) 324-4695

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BIBLIOGRAPHY

(Current as of date of this report; as provided by grantee organization; not verified by RWJF; items not available from RWJF.)

Publications

Methods for Calculating and Applying Risk Assessment and Risk Adjustment Measure: Results of Simulation #1. Health Insurance Plan of California, May 25, 1995.

Methods for Calculating and Applying Risk Assessment and Risk Adjustment Measure: Results of Simulation #2. Health Insurance Plan of California, September 8, 1995.

Risk Assessment and Risk Adjustment Calculations: Results for 1996/97 Contract Year, Health Insurance Plan of California, December 20, 1995.

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Report prepared by: Karin Gillespie
Reviewed by: Marian Bass
Reviewed by: Molly McKaughan
Program Officer: Nancy L. Barrand

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