ian duncan: controversial issues in risk adjustment

Controversial Issues in Risk Adjustment

June 29, 2011

Nuffield Trust Conference

| Presentation Agenda

• Introductions.

• Creaming, Skimming and Dumping.

• “My population is more risky.”

• How accurate are risk adjusters?

• Coding Creep.

• Provider Patient Management.

• Prospective or Concurrent?

• Discussion.

SCIOinspire Corp Proprietary & confidential. Copyright 2011 3

Introductions

Oxford University (B.Phil. 1976); Fellow of the Institute of Actuaries .

Founder of Solucia Consulting, a Healthcare Actuarial Consulting firm (1998). A leader in managed care, disease management/predictive modeling applications and Value-based product design.

Acquired by SCIOinspire Corporation in April 2008.

4 healthcare actuaries; 4 PhDs; healthcare analytics team.

Primary business segments

1. Disease and Care Management consulting (operations; ROI; outcomes; predictive modelling);

2. Actuarial consulting; state Medicaid plans; healthcare reform (Massachusetts); specialization in risk-adjustment applications and underwriting;

3. Care management support services (Analytics, data management, risk assessment, operational improvement and ROI); and

4. Software Support applications.

Strong research and publication foundation. Adjunct Professor at Georgetown Dept. of Health Admin. and UC Santa Barbara Dept. of Statistics.

Public policy: board member, Massachusetts Health Insurance Connector Authority.


IntroductionsAuthor of several books and peer-reviewed studies in healthcare management and predictive modeling.

Published 2008 Published 2011


Controversial Issues in Risk Adjustment

In no particular order:

1. “Creaming, skimming and dumping.”2. “My population is more risky.”3. Coding creep.4. Provider patient management. 5. Concurrent or Prospective?6. Risk adjustment is not the only risk management tool.


Remember this chart from this morning?

Condition-Based Vs. Standardized Costs

Member Age Sex ConditionActual Cost

(Annual)

Standardized Cost

(age/sex)

Condition-Based Cost/ Standardized

Cost (%)1 25 M None $863 $1,311 66%2 55 F None $2,864 $4,842 59%3 45 M Diabetes $5,024 $2,547 197%4 55 F Diabetes $6,991 $4,842 144%

5 40 MDiabetes and Heart conditions

$23,479 $2,547 922%

6 40 M Heart condition $18,185 $2,547 714%

7 40 FBreast Cancer and other conditions

$28,904 $3,641 794%

8 60 FBreast Cancer and other conditions

$15,935 $6,346 251%

9 50 MLung Cancer and other conditions

$41,709 $4,368 955%

“Creaming, skimming and dumping”

Cream Dump“Manage”


“Creaming, skimming and dumping”To actuaries, this is simply the insurance system at work (underwriting!)

In the U.S. it is more difficult to do this than in the past because of more stringent regulation. In my opinion C S &D is more an issue of pre-existing conditions, which tend to be acute, rather than the types of chronic conditions that risk adjustment operates on.

While there are cases of C S &D identifiable in insured populations, reputable insurers have other techniques to manage risk:

• Reinsurance: stop-loss reinsurance addresses catastrophic acute cases. We apply mandatory stop-loss pooling in the Massachusetts Connector, for example. This works for individual cases but not groups.

• Gain-sharing: in the Massachusetts Connector program, the state shares gains and losses within a corridor around the expected cost. This mechanism operates at the group level.

• Patient and provider management is clearly the most effective way to manage risk.


“Creaming, skimming and dumping”

For health plans and providers who are concerned about the risks that they attract, risk adjustment can be a positive force. HOWEVER:

• Typically, health plans use risk management tools such as:• Limitation of coverage for pre-existing conditions;• Limitation of providers to narrow networks;• Pre-authorization of certain services; or • Rescission in the case of fraudulent application.

• Regulation has tended to eliminate or restrict these risk management tools in favor of “moving dollars around.” These restrictions also reduce patient self-management incentives.

• For plans and providers who are active risk managers and who anticipate making a profit on reducing over-utilization by high risk patients, risk adjustment removes a degree of freedom.


“My population is more risky”

The Lake Woebegone effect: All the men are strong, all the women are good-looking and all the children are above average.

Providers are always convinced that their panels are higher risk than average. Risk Adjustment models are becoming more mainstream with providers, and they are more accepting of the results. In my experience providers tend to pick up on technical issues (a couple of which follow) that can sometimes reduce the credibility of results and provider buy-in.


How accurate are risk adjusters?

Risk Adjuster accuracy has been growing since the SOA did its first evaluation nearly 20 years ago. But at its best for concurrent models, R2 is only 30% to 40%. The fit is poorer at the extremes (low risk and high risk members).

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0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Risk Score

Cos

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“Coding Creep”

In the U.S. Medicare Advantage plans are reimbursed based on the relative risk of their patient population. This has led to the growth of a new industry of coding consultants whose function is to advise health plans on the identification (and coding) of co-morbid conditions. (e.g. CAD when the patient has a diagnosis of Diabetes).

This has led to “coding creep” in which the average risk score of the population has tended to increase 1%-2% annually.

Early-adopters tend to benefit. Because Medicare Advantage is a zero-sum game, all plans are ultimately forced to adopt this approach.


Provider patient management

Because risk scores are driven by diagnosis codes (which as we saw this morning are reflective of not only disease but the severity of that disease) risk adjustment actually gives providers a disincentive to manage the member’s condition. Here is an example:

How the Intervention Impacts the Risk Score

Scenario

Risk Score

(Year 1)

Risk Score

(Year 2)Cost

(Year 1)Cost

(Year 2)

Risk-adjusted Cost

(Year 1)

Risk-adjusted

Cost (Year 2)

1 1.00 1.25 $500.00 $625.00 $500.00 $500.00

2 1.00 1.25 $500.00 $595.00 $500.00 $476.00

3 1.00 1.10 $500.00 $595.00 $500.00 $540.91


Provider patient management (2)

In scenario 1, the provider panel costs the same (on a risk-adjusted basis) in both years. In a typical gain-sharing arrangement, the providers would experience no gains. In Scenario 2, risk has increased more than costs, leading to gains. In Scenario 3, risk is moderated. Costs are the same as in Scenario 2, but on a risk-adjusted basis there are no longer gains.

How the Intervention Impacts the Risk Score

Scenario

Risk Score

(Year 1)

Risk Score

(Year 2)Cost

(Year 1)Cost

(Year 2)

Risk-adjusted

Cost (Year 1)

Risk-adjusted

Cost (Year 2) Gains

1 1.00 1.25 $500.00 $625.00 $500.00 $500.00 $0

2 1.00 1.25 $500.00 $595.00 $500.00 $476.00 $24

3 1.00 1.10 $500.00 $595.00 $500.00 $540.91 -$40.91


Prospective or Concurrent?

Concurrent Risk Scores have the advantage of reflecting actual conditions in a population. The disadvantage is that the effect of good patient management and patient risk reduction are adjusted away.

Prospective Risk Scores have the advantage of increasing the certainty of reimbursement . The disadvantage is that they do not reflect emerging conditions.

In the U.S. Medicare Advantage uses concurrent scores; in Massachusetts we use prospective scores.

A related issue is the treatment of members with limited exposure and claims experience.


Discussion


Solucia Consulting, Contact

Ian Duncan, FSA FIA FCIA MAAAConsultant(Cell) 860-614-3295Email: [email protected]

www.soluciaconsulting.com

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