Article

Navigating the complexities of risk adjustment

A key to competitive advantage in ACA plans

Catherine Woolston Obenauer
AVP – Government Programs,
Citius Healthcare Consulting

Jan - 06

While risk adjustment (RA) processes are often associated with Medicare Advantage products, they also play a crucial role in plans offered in the Affordable Care Act (ACA) marketplace. Payers operating on the exchange must pay close attention to RA settlement processes, as these can significantly impact a plan’s financial performance. Payers who excel in optimizing the ACA RA process gain a competitive edge in the marketplace, unlike those lacking a robust RA program.

Administered by the Centers for Medicare and Medicaid (CMS) for federal exchange plans, the ACA RA program stabilizes premiums and promotes fair competition in individual and small-group markets. This program operates as a permanent, budget-neutral mechanism, redistributing funds among plans based on the health risks of their enrolled members using the concept of regional risk pools.

Risk pools explained

CMS has developed the RA model (actuarial tool) to predict healthcare costs based on the relative actuarial risk of a plan’s enrollees. At the beginning of each benefit year, CMS applies the model to a plan’s population for the individual and small group markets, using disease conditions identified through submitted claims diagnosis codes from the previous benefit year. A ‘risk score’ is calculated for each member to estimate the plan’s potential cost of their healthcare. These member-specific risk scores are then aggregated to the population or plan level.

The plan level risk score determines the amount of money a plan pays into the ‘pool’ for their region or state. At the end of each benefit year, CMS calculates the RA settlement amounts based on the relative risk scores of plans compared to the plans within the region. For each benefit year, funds are transferred within a region from plans with relatively lower-risk membership to those with relatively higher risk. This creates a ‘Zero Sum Game’ in each region, where the total amount of funds collected from payers with lower-risk enrollees is equivalent to the total amount paid by those with higher-risk enrollees.

Analyzing plans performance

Data from CMS settlements between benefit years 2020-2023 reveal that some plans have significant opportunities to reduce their owed settlement amounts. Recent national settlement numbers owed by plans indicate an upward trend in the individual market, while the settlement for group plans remains steady.

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Figure 1 - PY2023 financial settlement

Using PY 2023 as an example, 190 Plans (HIOS IDs) paid an average of $45.5M back to their individual regional pools to offset expenditures by their competitors in the same market.

Of the plans represented in the above chart, 156 Group and 79 Individual plans have owed money at the time of settlement for each plan year (2020 – 2023).

The risks of sub-optimal risk adjustment

The implications of a poorly managed RA program can be significant. Plans may need to increase premiums to offset losses, potentially reducing their competitiveness within their regions. Additionally, unanticipated large payouts can hinder a plan’s ability to expand and/or innovate, necessitating frequent reviews of long-term strategic planning. In extreme cases, continued mismanagement of risk adjustment may lead to insolvency and exit from the marketplace.

Opportunities for improvement

On a positive note, subpar RA performance often stems from multiple contributing factors, providing numerous opportunities for analysis and targeted enhancements. Payers should focus on common issues such as missing or inaccurate diagnosis codes, enhancing patient clinical documentation, and ensuring the accuracy of data submissions.

Historically, these efforts required substantial resources; however, advancements in technologies—such as artificial intelligence (AI) and machine learning (ML) tools—can significantly enhance a plan’s RA program. For example, ML algorithms can identify potential coding gaps and predict future health risks. At the same time, natural language processing can extract relevant information from unstructured clinical notes to support coding accuracy.

Moreover, plans can now broaden their data sources beyond traditional medical charts and electronic health records (EHRs). By integrating data from mobile health technologies and wearable devices, Payers can engage enrollees and gather real-time health information, enhancing the accuracy of risk profiles. This multi-faceted approach, combining cutting-edge technology with diverse data sources, enables health plans to optimize their RA strategies more effectively and efficiently than ever before.

Conclusion

Success in the ACA Exchange is more than attracting and enrolling members. To secure a viable long-term presence on the exchange, plans must navigate the RA process effectively. This process serves as the cornerstone of the financial ecosystem, supporting a sustainable marketplace. By leveraging the newest technologies and focusing on data quality and accuracy, leveraging the latest technologies Payers can translate this complex process into their competitive advantage.

Are you prepared to revolutionize your RA strategies? Citius Healthcare Consulting stands at the forefront of healthcare technology innovation, offering cutting-edge solutions tailored for the complexities of ACA risk adjustment.