Risk Adjustment in Health Insurance

Insurance market reforms under the Affordable Care Act (ACA) are designed to increase the number of Americans with insurance—and to shed the current system in which health plans have an incentive to enroll healthier people while avoiding the sick. One of the arrangements that will make the new system workable is risk adjustment—a process by which health insurance plans will be compensated based on the underlying health status of the people they enroll, and therefore protected against losing money by covering people with high cost conditions.

But implementing risk adjustment could prove challenging. The statistical methods used in risk adjustment are technically complex. There are questions about the ability of the states, which have to carry out the risk adjustment, to collect accurate data and implement methodologies that result in fair payments to plans.

This policy brief explains what risk adjustment is and how it works, and it examines policy issues involved in implementation.