Objective 4 - Risk Adjustment Flashcards
Reasons for reinsuring accident and health products (3; GHRM-113-23)
1) To transfer risk (the primary reason)
2) To enable an insurer to offer products in a specific market in which it lacks expertise. This allows the insurer to provide a broad range of products.
3) To share the financial load. This is sometimes done for products that require large amounts of capital, such as individual LTC.
Proportional reinsurance methods (4; GHRM-113-23)
1) Coinsurance - the reinsurer accepts the ceding company’s reinsurance premium and pays its share of benefits. The reinsurer pays a ceding allowance to cover a portion of the ceding company’s commission and expenses. Approaches for establishing risk sharing are:
a) Fixed or excess share - the ceding company retains a fixed, level amount of risk (making this a non-proportional method)
b) Quota share - the ceding company retains a fixed percentage of each risk
2) Modified coinsurance - works just like coinsurance, except the assets backing the reserves are held by the ceding company
3) Funds withheld coinsurance - ceding company keeps assets and reinsurer gets credit on accounting books for the receivable
4) Risk premium reinsurance - annual premium is based on anticipated claim cost for given issue age, policy duration, and underwriting class
Nonproportional reinsurance methods (5; GHRM-113-23)
1) Extended wait (aka extended elimination period or extended deductible) - reinsurance benefits begin only after the claims have reached a specified duration or amount
2) Excess reinsurance or stop loss reinsurance - provides coverage for claims in excess of a defined level
a) Individual excess or specific stop loss - provides payment if the total benefits on a single individual exceed a specified attachment point or deductible
b) Aggregate stop loss - provides a benefit if total retained claims on the entire group or portfolio exceed a specified attachment point, typically defined as a percentage (such as 125%) of expected claims
3) Specified benefits or carve out benefits - for medical insurance, certain benefits may be carved out, such as premature births, organ transplants, and trauma. Disability income policies occasionally carve out accidental benefits.
4) Claim takeover reinsurance and runoff blocks - the reinsurer assumes the risk (and control) on future runoff of a known block of claims
5) Catastrophe covers - provide coverage in the event of a catastrophe
Decisions to make when setting retention limits for disability income insurance (2; GHRM-113-23)
1) The method of determining the retention - the insurer may retain a maximum amount per month or it may set a limit on the total benefit paid for the entire benefit period
2) The amount of the maximum claim - the insurer might set limits for disability income that would produce present values of benefits approximately the same as the maximum retention for life insurance
Purchasers of medical reinsurance (4; GHRM-113-23)
1) Traditional insurers offering both first dollar insurance and excess of loss coverage
2) Employers providing self-insured benefits to employees
3) HMOs providing services
4) Certain providers that offer prepaid benefit plans
Approaches for defining coverage periods for health reinsurance (2; GHRM-113-23)
1) Losses Occurring Basis - claims are only covered if they occur during the agreement year, regardless of the effective date of the risks accepted by the insurer. Is used most commonly for excess arrangements.
2) Risk Attaching Basis - reinsurance period for underlying risk coincides with the insurer’s policy year. Commonly used for proportional reinsurance.
Primary approaches for reinsurance of major medical policies (5; GHRM-113-23)
Note: Coinsurance is rarely used today, but stop loss is very common
1) Quota share coinsurance - fixed percentage of all policies is reinsured
2) Specific stop loss (or excess) - ceding company retains all claims below the attachment point
3) Aggregate stop loss (or excess) - Usually not for 100% of excess claims, since ceding company required to keep portion of risk to ensure appropriate claims handling
4) Combined specific and aggregate stop loss - can be combined into a single package, where the cost of one impacts the other
5) Carve out coverages - usually covers 100% of cost of benefit
Key questions regarding the source of business for medical reinsurance (6; GHRM-113-23)
1) Is it coming from an HMO?
2) Does the plan include PPO networks?
3) How do benefits vary inside and outside the network?
4) How are reasonable and customary limits applied?
5) What employer groups are targeted and how are occupational hazards handled?
6) What amounts are self-insured employer groups required to retain?
Distinct markets of medical reinsurance (4; GHRM-113-23)
1) Smaller insurers - reinsurer provides expertise and oversight
2) Large writers - more sophisticated and get coverage for high deductible amounts; decision of reinsurer made mostly on price
3) Self-funded employers - reinsurers need strong underwriting staff, must understand TPA claim practices, admin. capabilities, and reputation
4) HMOs - requires special expertise
Uses of reinsurance for medical coverages other than major medical (7; GHRM-113-23)
1) Fixed benefits medical and surgical products - reinsurance is rarely purchased for claims protection, but quota share coinsurance may be purchased to support growth
2) Specific or dread disease products - provide payment upon diagnosis; reinsurance is rarely used since most insurers retain all the risk on these policies
3) Accident and AD&D coverages - except for very large coverages, reinsurance is rarely used. Some reinsurers offer coverage for accidents on a portfolio basis, similar to catastrophe reinsurance.
4) Medicare Supplement - reinsurance is attractive for an insurer that no longer wants to retain the risk or manage the product. Quota share coinsurance is sometimes used because the product is relatively capital intensive. Fronting is popular - marketing org. sells product through another insurer (front) and most or all business is ceded to the first insurer for a fee.
5) Critical illness - coinsurance has been used, with the reinsurers providing expertise and product design advice
6) Dental and vision coverages - many group insurance plans offer these coverages and then use coinsurance to transfer the risk to reinsurers that specialize in these coverages
7) Other uses of reinsurance include captive reinsurers for employee benefits, stop loss for providers, securitizations of health insurance, and capital relief provided by a portfolio reinsurance agreement
Impacts of the ACA on the reinsurance market (5; GHRM-113-23)
1) The requirement for unlimited benefits and the inclusion of certain mandatory benefits led to cost adjustments
2) Reinsurance of limited benefit medical policies is now seldom needed
3) Reinsurance has been provided to plans on the ACA exchanges
4) There has been little effect on the reinsurance of medical benefits, other than to increase demand
5) Annual and lifetime benefit limits for major medical plans were removed. Reinsurance solutions to this are:
a) An insurer may purchase separate layers of stop loss reinsurance. Each layer other than the top layer would have limits.
b) The insurer could retain the excess risk (have no unlimited layer)
c) A reinsurer may accept the unlimited risk, but then purchase unlimited retrocession coverage.
Steps for implementing risk adjustment into a Medicaid managed care program (9; Duncan 13)
1) Decide which risk adjustment system will be used - there are various commercially available models. Should choose a system based on the data used and the ability to customize it.
2) Decide what types of data should be used in the risk adjustment system - includes demographic information and claims and pharmacy data.
3) Decide which Medicaid eligibility groups will be risk-adjusted and which sub-populations may be excluded
4) Decide whether the risk adjustment system should be prospective (use experience period data to estimate future morbidity) or concurrent (use data from the current period to estimate morbidity for that period)
5) Decide whether to base the risk adjustment factors on the individuals enrolled during the rating period or during the experience period
6) Decide whether to customize the risk weights inherent in the risk adjustment model - may be needed due to differences in the state program as compared to the population used to develop the model
7) Decide on criteria for including individuals in the risk adjustment calculations - many states require at least six months of eligibility exposure
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 corridors will be used
Goals of risk adjustment for the Arizona Medicaid program (5; Duncan 13)
1) Align payment with the relative health risk of members at each health plan
2) Be accurate (relatively high correlation between the projected cost of the population and actual cost) and unbiased (methodology should not overcompensate for some risk factors at the expense of others)
3) Be as simple as possible while accomplishing other goals
4) Minimize the administrative burden of developing and implementing the methodology
5) Be budget neutral
Methodology used to develop the Arizona Medicaid risk adjustment model (11; Duncan 13)
1) Model selected - Symmetry’s Episode Risk Groups (ERG) model
2) Type of data used - diagnosis codes and procedural information from medical data and National Drug Codes from pharmacy data
3) Data timing - three months of claim run-out was used
4) Eligibility groups - risk adjustment was applied to prospective, non-reconciled groups
5) Model calibration - the model was recalibrated by developing risk weights through a linear regression model based on Arizona Medicaid data, and then credibility weighting those rates with the model’s original risk 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. This will accurately reflect movement of individuals between health plans.
8) Risk factors are updated once per year
9) Risk factors for new members - members with at least six months of enrollment (“long” cohort) during the experience period will be given a claims-based risk factor. Other members (“short” cohort) will be given a risk factor that is the average of an age-gender factor and an adjusted plan factor. Adjusted plan factor = (average ERG risk score of long cohort / pure age-gender factor of long cohort) * pure age-gender factor of short cohort
10) Phase-in - risk adjustment is being phased in such that only 80% of the 2009 rate is risk adjusted
11) Risk factors for newborns - a different approach is needed because newborns do not have prior year claims from which to develop condition-based risk scores. Claims of the prior cohort of newborns in the experience period are used to project newborn experience in the rating period.
Formulas for calculating an MCO’s risk score for the Arizona Medicaid program (5; Duncan 13)
1) Average ERG risk score for long cohort
a) An unadjusted risk score is calculated as the sum over all risk factors and demographics of the risk weights multiplied by frequencies. The frequencies are the portion of the cohort with each risk factor or demographic.
b) For the Transitional Aid to Needy Families group, the final risk score equals the unadjusted risk score divided by a scaling factor
2) Total average risk score = % of members in long cohort * average ERG risk score for long cohort + % of members in short cohort * risk factor for short cohort
a) Risk factor for short cohort = 50% * adjusted plan factor for short cohort + 50% * pure age-gender factor of short cohort
3) The above formulas are calculated for the given MCO and for all MCOs in total. The MCO’s relative risk score = MCO total average risk score / average risk score for all MCOs
4) Relative risk score with phase-in = 80% * relative risk score + 20% * 1.00
5) A budget neutrality adjustment may also be applied to get the final relative risk score
Formulas for calculating final capitation rates for the Arizona Medicaid program (3; Duncan 13)
1) Capitation rate to be risk adjusted - base capitation rate - bid risk contingency - bid admin cost - 2% premium tax
2) Risk-adjusted capitation rate (before retention) = capitation rate to be risk adjusted * risk adjustment factor (relative risk score)
3) Final risk-adjusted capitation rate = risk-adjusted capitation rate (before retention) + bid contingency + bid admin cost + 2% premium tax
Common hypotheses for the member selection patterns observed in Medicare Advantage plans versus traditional Medicare FFS (2; Duncan 14)
Those enrolling in Medicare Advantage plans have been observed to be materially healthier. Theories for why include:
1) Healthy enrollees are less reluctant to change benefit plans, so they are more likely to sign on with Medicare Advantage
2) Managed care organizations restrict access to certain network health care providers. Since less healthy Medicare enrollees generally have established provider relationships, they are more reluctant to leave traditional Medicare and risk losing access to their preferred providers.
Impacts of Medicare risk adjustment on Medicare Advantage Organizations (MAOs) (5; Duncan 14)
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 (RADV) 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 population health, and controlling per capita cost
Methodology for calculating member risk scores for Medicare Advantage Part C (6; Duncan 14)
1) A member’s risk score is the sum of weights that reflect that member’s characteristics, including an age/gender score and a health condition score based on the coefficients attached to 79 different health hierarchical condition categories (HCCs)
2) A member may have multiple HCCs and weights are included for each applicable HCC
3) There are also several weights that result from interactions between HCCs
4) Weights are applied hierarchically. If a member has multiple HCCs in the same hierarchy, only the weight for the most severe HCC is counted. The weights of the less-severe HCCs are “trumped”.
5) Condition scores are prospective factors. Diagnoses in the prior year are used to predict Medicare health claim costs in the current year.
6) For members that are new to Medicare, CMS provides only age/gender factors. These factors are higher than those for ongoing beneficiaries because the full responsibility for predicting future cost is assigned to only the age/gender factors.
Categories of Medicare Advantage members (11; Duncan 14)
Members are split into these different categories for determining Part C risk scores. Each category has its own age/gender and HCC factors.
Categories for ongoing members:
1) Community, Non-dual eligible, Aged
2) Community, Non-dual eligible, Disabled
3) Community, Dual eligible, Full benefits, Aged
4) Community, Dual eligible, Full benefits, Disabled
5) Community, Dual eligible, Partial benefits, Aged
6) Community, Dual eligible, Partial benefits, Disabled
Categories for new enrollees:
8) Non-Medicaid and not originally disabled
9) Medicaid and not originally disabled
10) Non-Medicaid and originally disabled
11) Medicaid and originally disabled
Experience items included in the Medicare Bid Pricing Tool (BPT) (6; Duncan 14)
The BPT is an Excel workbook pricing form for each of Part C and D, which CMS requires Medicare Advantage plans to use. The following past experience items are projected forward two years from the base year to the contract year.
1) Average population risk score
2) Enrollment level (in member months)
5) Non-benefit expense
CMS requirements for projected risk scores in the BPT (6; Duncan 14)
The formula for projecting risk scores is established by CMS, but each Medicare Advantage Organization is allowed to develop its own trend rate to use in that projection. The projected risk scores must:
1) Be based on the methodology for calculating the risk scores as discussed in the Rate Announcement
2) Be calculated using the CMS-HCC risk adjustment model
3) Reflect the expected risk score trend at the bid level
4) Be appropriate for the expected population
5) Be adjusted for FFS normalization
6) Include the appropriate Medicare Advantage coding adjustment
Considerations for projecting risk scores in the BPT, other than those prescribed by CMS (5; Duncan 14)
1) The expected trend in risk scores from changes such as better diagnosis coding - risk scores tend to drift upwards over time due to improved and more complete coding
2) The 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 (average mortality ~5%, claims from these members nearly 1/3 of total)
5) Most MAOs perform longitudinal analysis on their membership stratified into “stayers”, “leavers”, and “joiners”