4 - risk adjustment

Question 1

reasons for reinsuring accident and health products

Answer 1

1. to transfer risk
2. enable an insurer to offer products in a specific market in which it lacks expertise (offer broad range)
3. share financial load. sometimes done for products that require large amounts of capital, like individual LTC

Question 2

proportional reinsurance methods

Answer 2

1. coinsurance
   – fixed or excess share
   – quota share
2. modified coinsurance: reserves held by ceding company
3. funds withheld coinsurane
4. risk premium insurance

Question 3

nonproportional reinsurance methods

Answer 3

1. extended wait: elimination period/extended deductible. reinsurance benefits begin after claims reach duration or amount
2. excess reinsurance or stop loss insurance
   – individual excess or specific stop loss
   – aggregate stop loss
3. specified benefits or carve out benefits
4. claim takeover reinsurance and runoff blocks
5. catastrophe covers

Question 4

decisions to make when setting retention limits for disability income insurance

Answer 4

1. method of determining the retention: insurer may retain a maximum amount per month or set limit on total benefit paid for period
2. amount of the maximum claim: insurer might set limits for disability income that would produce present values of benefits approximately the same as maximum retention for life insurance

Question 5

purchasers of medical reinsurance

Answer 5

1. traditional insurers offering both first dollar insurance and excess of loss coverage
2. employers providing self insured benefits to employees
3. HMOs providing certain services
4. certain providers that offer prepaid benefit plans

Question 6

approaches for defining coverage periods for health reinsurance

Answer 6

1. loss occurring: claims covered if occur during agreement year, regardless of effective date of risks accepted by insurer
2. risk attaching: reinsurance period for each underlying risk coincides with insurers policy year

Question 7

primary approaches for reinsurance of major medical policies

Answer 7

1. quota share coinsurance
2. specific stop loss or excess
3. aggregate stop loss or excess
4. agg-spec
5. carve out coverages

Question 8

uses of reinsurance for medical coverages other than major medical

Answer 8

1. fixed benefits medical and surgical products: quota share to support growth
2. specific or dread disease products: reinsurance rare
3. accident and AD&D: reinsurance rare
4. medicare supplement
5. critical illness
6. dental and vision: group insurance may offer then transfer risk to reinsurers who specialize
7. other:
   – captive reinsurers for employee benefits
   – stop loss for providers
   – securitizations of health insurance
   – capital relief provided by a portfolio reinsurance agreement

Question 9

impacts of the ACA on the reinsurance market

Answer 9

1. annual and lifetime benefit limits for major medical plans were removed.
2. requirement for unlimited benefits and required benefits led to cost adjustments
3. reinsurance of limited benefit medical policies is now seldom needed
4. reinsurance has been provided to plans on ACA exchanges
5. there has been little effect on the reinsurance of medical benefits, other than to increase demand

Question 10

steps for implementing risk adjustment into a medicaid managed care program

Answer 10

1. decide which risk adjustment system will be used. choose based on data used and ability to customize
2. decide what types of data should be used in the risk adjustment system: demographic, med, rx
3. decide which eligibility groups will be risk adjusted which subpopulations may be excluded
4. decide whether the risk adjustment system should be prospective or concurrent
5. decide whether to base risk adjustment factors on individuals enrolled during rating period or during experience period
6. decide whether to customize the risk weights inherent in risk adjustment model
7. decide on criteria for including individuals in the risk adjustment calculations
8. develop criteria for claims records to be included in the risk adjustment model
9. determine the phase-in schedule and whether or not risk corridor will be used

Question 11

goals of risk adjustment for the arizona medicaid program

Answer 11

1. align payment with the relative health risk of members at each health plan
2. be accurate and unbiased
   – accurate: high correlation between proj cost and actual cost
   – unbiased: not overcompensate for some risk factors
3. be as simple as possible while accomplishing other goals
4. minimize administrative burden of developing and implementing the methodology
5. be budget neutral

Question 12

methodology used to develop the Arizona Medicaid risk adjustment model

Answer 12

1. model selected: Symmetry’s Episode Risk Groups (ERG) model
2. type of data used: diagnosis codes and proc info from medical data, NDCs from rx data
3. data timing: 3 months runout
4. eligibility groups: applied to prospective, non-reconciled risk groups
5. model calibration: recalibrated by developing risk weights through a linear regression model based on AZ Medicaid data, then credibility weighting w/ original weights
6. geographic issues: risk adjustment will take place at the geographical service area and risk group level
7. individual approach: risk scores calculated during the experience period will follow the individual during the rating period, reflecting movement between plans
8. risk factors are updated once per year
9. risk factors for new members:
   – at least 6 months of enrollment (long cohort): claims based
   – other (short cohort) based on a/g factor and an adjusted plan factor
   —- adjusted plan factor = avg ERG risk score of long cohort / long a/g factor * short a/g factor
   —- short final risk factor = 50/50 plan factor and pure a/g
10. phase in: 80% in 2009
11. risk factors for newborns: use prior cohort to project experience

Question 13

formulas for calculating an MCO’s risk score for the AZ Medicaid program

Answer 13

1. Average ERG risk score for long cohort
2. total average risk score = long / short blend
3. MCO relative risk score = MCO / all MCOs
4. relative risk score with phase-in = 80% * relative rs + .2 * 1
5. budget neutrality adjustment may be applied

Question 14

formulas for calculating final capitation rates for the AZ Medicaid program

Answer 14

1. Capitation rate to be risk adjusted = base capitation rate - bid risk contingency - bid admin cost - 2% premium tax
2. risk adjusted capitation rate = #1 * risk factor
3. final risk adjusted cap rate = #2 + risk contingency + admin + 2% premium tax

Question 15

common hypotheses for the member selection patterns observed in Medicare Advantage plans versus traditional Medicare FFS

Answer 15

MA usually healthier
1. healthy mems less reluctant to switch plans, so more likely to enroll
2. managed care organizations restrict access to certain network health care providers. sicker people have established relationships, less likely to switch

Question 16

impacts of Medicare risk adjustment on Medicare Advantage Organizations

Answer 16

1. MAOs are responsible for capturing complete and accurate diagnoses for their members’ health conditions
2. MAOs must validate their risk adjustment data for audits conducted by CMS, referred to as Risk Adjustment Data Validation audits
3. Medicare risk model changes can have a greater impact on a MAO than it does on a national basis. MAOs need to conduct their own new model vs old model analysis to estimate the differences
4. Medicare risk adjustment is a complicated process involving a large amount of operational complexity for MAOs
5. MAOs do not compete on selecting members who are better risks. To be successful, MAOs focus on better outcomes, improved pop health, controlling per capita cost

Question 17

Methodology for calculating member risk scores for Medicare Advantage Part C

Answer 17

1. members risk score is the sum of weights that reflect that member’s characteristics. This includes: a/g; health condition score from 79 HCCs
2. member may have multiple HCCs, weights included for each
3. Interaction HCCs
4. Weights applied hierarchically. So if a member has multiple HCCs in the same hierarchy, only the weight for the most severe HCC is counted
5. Condition scores are prospective factors. Diags in prior year used for cost in current year
6. New to Medicare based on a/g factors only

Question 18

Categories of Medicare Advantage members (PC Risk Adj)

Answer 18

Members split into these different categories for determining Part C risk scores. Each category has its own a/g and HCC factors

Ongoing:
1 - community, nondual, aged
2 - community, nondual, disabled
3 - community, full dual, aged
4 - community, full dual, disabled
5 - community, partial dual, aged
6 - community, partial dual, disabled
7 - institutional

New:
1 - non-medicaid, not originally disabled
2 - medicaid, not originally disabled
3 - non-medicaid, originally disabled
4 - medicaid, originally disabled

Question 19

experience items included in the Medicare BPT

Answer 19

1. avg pop risk score
2. enrollment
3. revenue
4. claims
5. non benefit expense
6. profit

Question 20

CMS requirements for projected risk scores in the BPT

Answer 20

1. based on methodology for calculating risk scores as discussed in Rate Announcement
2. calculated using the CMS-HCC risk adjustment model
3. reflect expected risk score trend at bid level
4. be appropriate for the expected population
5. be adjusted for FFS normalization
6. include appropriate MA coding factor

Question 21

Considerations for projecting risk scores in the BPT, other than those prescribed by CMS

Answer 21

1. the expected trend in risk scores from changes such as better diagnosis coding
2. risk scores of new entrants
3. population change must be estimated
4. a mortality factor should be considered, as claims of deceased patients are heavily skewed
5. most MAOs perform longitudinal analysis on their membership stratified into stayers/leavers/joiners

Question 22

reasons the ACA was enacted / goals of ACA

Answer 22

1. increase the quality and affordability of health insurance
2. lower the uninsured rate by expanding public and private insurance coverage
3. reduce the costs of healthcare for individuals and the government

Question 23

ways in which the ACA addresses the antiselection and instability created by the guaranteed issue requirement

Answer 23

1. subsidies are available for applicants with limited incomes
2. employers are required to provide insurance. and all residents ineligible for employer coverage must purchase individual coverage, of pay a penalty
3. a risk adjustment mechanism transfers revenue from plans with relatively low risk populations to relatively high risk pop. Risk corridors also transferred revenue from profitable to unprofitable

Question 24

Rating factors allowed by the ACA

Answer 24

1. Age (3:1 limit)
2. geographic location
3. family size
4. tobacco use (up to 50% increase)

Question 25

reasons why the ACA uses a concurrent risk adjustment model

Answer 25

1. for the first year of ACA, most exchange participants were expected to be previously uninsured - no historical data available
2. prospective less accurate than concurrent, per SOA studies
3. churn rate is high so plans still may not have claims data on members

Question 26

ACA risk transfer formula

Answer 26

T = [PLRS * IDF * GCF / sum(s * PLRS * IDF * GCF) - AV * ARF * IDF * GCF / sum(s * AV * ARF * IDF * GCF) ] * P

P = market wide premium

top of each is plan specific. bottom is sum over all plans

Question 27

practical issues with applying risk adjustment models

Answer 27

1. risk transfer models generally assume that risk and cost are correlated, so a 1% increase in risk is assumed to increase costs by 1%. but not all cost-risk relationships are linear. as a result the models overcompensate some plans and undercomp others
2. Medicare Payment Advisory Commission (MedPAC) identified the following issues related to Medicare HCCs:
   – 189 HCCs, only 70 used for scoring
   – considerable variation within HCCs in terms of patient severity and experience
   – certain racial groups and income levels likely to be higher consumers, not reflected
   – only uses one year of data, may omit some conditions
   – standard model does not include a factor for the number of conditions
3. several issues exist in ACA risk adjustment

Question 28

problems with Massachusetts risk adjustment model

Answer 28

1. risk adjustments applies to the gross premium, not the cost of insurance or pure premium. so transfers include part of expense margin
2. bias against zero condition members
3. bias against limited network and lower cost plans. risk transfers have been observed to exceed net income for some of these plans
4. risk adjustment operates at the states, rather than regional, level. creates bias

Question 29

issues and potential improvements for the national ACA risk adjustment model

Answer 29

1. the model is not accurate for adults with partial year enrollment
2. lack of historical data - one year only
3. only a fraction of members trigger conditions
4. risk scores to not track costs well at extremes. high risk mems not accounted for appropriately
5. prospective vs concurrent - sticking with concurrent
6. small market share + premium that is very different from average are likely to see revenue transfers that are unrelated to their own premiums

Question 30

options for improving the HHS-HCC risk adjustment methodology

Answer 30

1. improve the accuracy of the model for partial year enrollees
   – length of enrollment could be included as indicator variable
   – separate models could be produced for different enrollment period groups
   – second approach more accurate but may have false precision and is more complex
2. use rx utilization
3. pool high cost enrollees
4. evaluating concurrent and prospective risk adjustment models

Question 31

benefits of adding prescription drug utilization to the HHS-HCC risk adjustment model

Answer 31

1. impute missing diagnoses
2. severity indicator
3. more timely standardized data - complete fast, no coding issues
4. mitigates financial disincentive to prescribe expensive medications

Question 32

concerns about adding prescription drug utilization to the HHS-HCC risk adjustment model

Answer 32

1. risk adjustment models that use drug info are not as common as medical only, less well understood/accepted
2. gaming, perverse incentives, discretionary prescribing
3. sensitivity of risk adjustment to variations in prescription drug utilization
4. added administrative burden, complexity, cost of implementation/operation
5. availability of outpatient drug data only
6. multiple indications for many drugs. off label uses

Question 33

factors other than health status that affect drug utilization

Answer 33

1. plan and physician prescribing patterns
2. cost sharing features
3. drug utilization management features
4. proclivities of providers for using drug versus non drug treatments for a medical condition
5. income level of enrollees

Question 34

criteria for evaluating hybrid risk adjustment models

Answer 34

1. clinical face validity
2. empirical / predictive accuracy
3. incentives for utilization
4. sensitivity to variations in utilization
5. incentives for diagnosis reporting

Question 35

approaches for adding prescription drug utilization to a risk adjustment model

Answer 35

1. statistical predictive power approach: purely based on statistical grounds
   – advantage: allows for linkage between a drug and poor health in general
   – disadvantage: omitting clinical considerations makes interpretation of coefficients difficult and less face validity
2. conceptual approaches for adding drug utilization to a diagnosis model to create a hybrid model
   – imputation: assign missing conditions, same factors for conditions no matter how assigned
   – severity: drug only modifies condition
   – rx dominant: drug users assumed more severely ill than those who only have diag
   – flexible, generalized empirical framework: diag + drug + interaction

Question 36

criteria for selecting drug-diagnosis pairs for a hybrid model

Answer 36

1. select drugs with patterns of non-discriminatory prescribing
2. avoid drugs where there are incentives for over-prescribing
3. avoid drugs where there are variations in prescribing across providers, practices, and areas
4. carefully consider selection of high cost drugs - including could reduce incentives for efficiency
5. avoid drugs with multiple indications
6. avoid drugs with indications for diags not in HHS-HCC model
7. carefully consider selection of drugs in an area exhibiting a rapid rate of tech change

Question 37

HHS considerations when selecting drug-diagnosis pairs to include in a hybrid HHS-HCC model

Answer 37

1. empirical considerations: exploratory data analysis. stepwise regression to choose drug classes with most predictive power
2. clinical considerations: doctors and pharmacists consulted about links between drugs and conditions
3. others
   – imposing model restrictions based on days supply or number of prescriptions
   – whether to split certain drug classes or restrict a drug diagnosis interaction to certain drugs within a class
   – HHS examined different models that include imputation-only vs imputation and severity approaches
   – prophylactic use of drugs
   – multiple indications for drugs

Question 38

market forces that led to a stable and sustainable individual insurance market

Answer 38

stable and sustainable market forces:
1. individual enrollment at sufficient levels and a balanced risk pool
2. stable regulatory environment that facilitates fair competition
3. sufficient insurer participation and plan offerings to provider insurer competition and consumer choice
4. slow spending growth and high quality of care

unstable and unsustainable market forces
1. uninsured rates too high, with not enough young and healthy enrollees
2. issuers leaving market
3. consumers have fewer choices for richer and wider network plans

Question 39

key factors for a healthy balanced risk pool with limited market selection

Answer 39

1. risk stabilization programs (3 Rs)
   – risk adjustment
   – reinsurance
   – risk corridors
2. outreach and advertising: especially effective for individuals eligible for subsidies
3. medicaid expansion: lower individual premiums per study
4. ability to develop adequate rates: stable reg. environment and data/knowledge of risk pool

encourage young and health enrollment
5. individual insurance mandate
6. subsidies for individuals
7. an open enrollment period and limited special enrollment periods

Question 40

results from the 2015 individual market study

Answer 40

1. lean metal level plans were profitable and rich plans were not
2. richer silver cost sharing reduction plans were profitable
3. PPO plans less profitable than HMO plans
4. after risk adjustment, sicker patients not necessarily driving losses
5. after risk adjustment, younger demographics tend to be less profitable
6. partial year enrollees and SEP enrollees are relatively less profitable than full year enrollees [improved in 2017 methodology changes]
7. results were different by market, with small group showing profitability in the richer metal level plans

Question 41

changes made to the risk adjustment program

Answer 41

1. durational impact: 2017 change for partial year enrollees
2. administrative load: 2018 change to exclude 14% admin load from risk adjustment transfer
3. inclusion of pharmacy data: 2018 change to include rx
4. updated weights: more accurately reflect costs
5. claims pooling: 2018 change - 60% share above $1M

Question 42

impacts on insurers from ACA risk adjustment changes over time

Answer 42

Model impacts: model changes over time, fixed population
– condition component of risk score increasing proportion of total
– composite risk scores are decreasing

Market impacts: impacts include annual model changes as well as enrollment changes
– risk adjustment represents a large portion of ACA premium
– variability of risk adjustment as a % of premium has remained high in both ind and small markets
– risk adjustment shows some stability at market level, issuer specific
– many insurers experience large swings in aca transfers, hard to set rates
– risk adjustment transfer payment approach is sensitive to both enrollment count and change in enrollment counts

Question 43

ideas for future ACA risk adjustment model improvement

Answer 43

1. further developing coefficients, reflecting larger portions EDGE data and recent market changes
2. changing HCC/RxC values and categorizations to leverage the precision of ICD 10 codes
3. refreshing CSR IU factors
4. introducing nonlinear model to calibration process
5. reflecting additional factors in the transfer calculation, including issuer network characteristics or issuer premium levels
6. incorporating other factors with predictive power, such as social determinants of health or other socioeconomic data
7. updating governance procedures to allow either the incorporation of more up to date information or more time for issuers to understand a model change
8. enhancing risk adjustment data validation to better align ultimate risk transfers with program goals and/or to minimize disruptive effects

Question 44

actuarial standards for the use of data

Answer 44

1. data that is comprehensive accurate, appropriate, and comprehensive is frequently not available, so the actuary should use available data that allows the actuary to perform the analysis
2. considerations in selecting data
3. review of data - actuary should review the data for reasonableness, unless such a review is not necessary or practical
4. actuary should use appropriate data
5. reliance on data and other info supplied by others must be disclosed
6. confidentiality
7. limitation of the actuary’s responsibility. not required to auditor determine if data supplied intentionally misleading

Question 45

considerations in selecting data to use in an actuarial analysis

Answer 45

1. the scope of the assignment and intended use of analysis
2. desired data elements and possible alternative data elements
3. whether data is appropriate and sufficiently current
4. whether data is internally consistent
5. whether data is reasonable given relevant external information that is readily available
6. degree to which data is sufficient for the analysis
7. any known limitations of data
8. availability of alternative data, benefit and practicality of obtaining data
9. sampling methods if used

Question 46

categories of appropriateness of data used in an actuarial analysis

Answer 46

1. data is of acceptable quality to perform the analysis
2. data requires enhancement before the analysis can be performed, and it is practical to obtain additional or corrected data
3. judgmental adjustments or assumptions can be applied to the data, or the analysis results, to allow the actuary to perform the analysis
4. data is likely to have significant defects
5. data is so inadequate that it cannot be used to satisfy the purpose of the assignment

Question 47

required documentation related to data quality

Answer 47

1. source of data
2. limitations on use of actuarial work product due to uncertainty about data quality
3. whether actuary reviewed data, limitations due to data not reviewed
4. summary of unresolved concerns the actuary may have about questionable data values
5. summary of any significant steps the actuary has taken to improve the data
6. a summary of significant judgmental adjustments or assumptions the actuary has applied to the data or to the results
7. the existence of results that are highly uncertain or potentially biased due to quality of the data
8. extent of the actuary’s reliance on data and other info supplied by others
9. disclosures in accordance with ASOP 41 if
   – assumption prescribed by law
   – actuary relies on other sources and disclaims responsibility
   – actuary otherwise deviated from ASOP

Question 48

recommended practices for actuarial communications

Answer 48

1. actuarial communications requirements:
   – form and content is appropriate for circumstances
   – communication is clear
   – issued within reasonable time period
   – responsible actuary/ies identified
2. complete actuarial report if findings intended to be relied upon by intended user
3. some circumstance may constrain content of actuarial report. actuary should follow guidance to extent reasonably possible
4. actuary should recognize risk of unintended users misusing an actuarial document and take reasonable steps to ensure it is clear, presented fairly

Question 49

disclosures required in an actuarial report

Answer 49

report contains: findings, methods, procedure, assumptions, data

disclosures:
1. intended users
2. scope and intended purpose
3. acknowledgement of qualification
4. cautions about risk/uncertainty
5. limitations or constraints on use or applicability of findings
6. conflict of interest
7. any information on which actuary relied that has a material impact on findings and for which actuary does not assume responsibility
8. information date
9. subsequent events
10. documents comprising actuarial report, if appropriate

Question 50

disclose requirements for assumptions and methods used in actuarial report

Answer 50

1. identify party responsible for material assumptions
2. if assumption prescribed by law
3. if assumption selected by another party:
   – if actuary agrees, nothing needed
   – if actuary disagrees, must state
   – if actuary unable to evaluate, must state

Question 51

considerations when selecting a risk adjustment model

Answer 51

1. intended use
2. impact on program
3. model version
4. population and program
5. timing of data collection, measurement, and estimation
6. transparency
7. predictive ability
8. reliance on experts
9. practical considerations