Risky Adjustments

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A study examining risk adjustment in health insurance marketplaces in three countries- the United States, the Netherlands, and Germany- has found that inadequate adjustment may lead to incorrect payments for some enrollees.

The study, published in The European Journal of Health Economics by professor of health care policy Thomas G. McGuire, PhD, researcher at the Institute for Health Care Management and Research at the University of Duisburg-Essen Sonja Schillo, PhD, and associate professor at the Institute of Health Policy and Management of the Erasmus University Rotterdam Richard C. van Kleef, PhD, investigated risk adjustments used to calculate the insurance premiums for individual enrollees. They found that in United States exchanges, one in 1,000 enrollees were underpaid by more than $190,000 and one in 1,000 enrollees were overpaid by at least $95,000 in 2017.

Enrollees were persistently overpaid or underpaid in all three countries, and a large portion of the variance in spending was caused by the most underpaid enrollees. The study found that reinsurance that limits insurers’ current-year losses for the 1% of enrollees who were most underpaid in the prior year substantially improved overall risk-adjusted payment accuracy by redistributing payments from the most overpaid to the most underpaid enrollees.

The authors state that because these reinsurance payments affect only a very small portion of total spending and enrollees, an improvement in payment accuracy can be achieved without weakening insurers’ incentives to control health care costs for their enrollees.

This study was funded by the National Institute for Health Care Management.