A new analytics tool developed to better understand the drivers of financial performance in the Affordable Care Act market reveals that the sickest patients generate the most profit for insurance companies.
That may seem odd, but the ACA’s risk adjustment provisions are the reason why, says Syed Mehmud, principal and senior consulting actuary at Wakely Healthcare Actuaries. An actuary compiles and analyzes statistics and uses them to calculate insurance risks and premiums.
Mehmud and associates created the tool, called “Wakely Risk Insight,” to aid the consulting firm’s clients. The tool digs through vast amounts of 2014 ACA data covering more than 1 million members of 25 insurers, to identify the top drivers of financial performance, finding which segments of a business line are performing well and which are lagging.
The tool actually is an algorithm, a mathematical function of feeding data through a process to get meaningful insights by taking concepts and putting them into a set of rules written in a programming language, Mehmud explains.
Here is why the sickest patients can be the most profitable patients to an ACA insurer: Before ACA, insurers could cherry-pick who received healthcare coverage. But the law opened coverage to the less healthy and used risk adjustments that transferred money between participating insurers.
For example, if there are two ACA insurers in a state and one of them takes on a heavier load of sicker patients, money would be transferred to that payer from the other insurer to compensate it for having members that incur far more in costs than in premium payments. However, there are several caveats to this model, Mehmud says.
These financial allocations among insurers are not set in stone, because there are many models of risk adjustment with payment dependent on the model used, and these models change over time, so the impact can change. Mehmud found the sicker populations made 60 percent to 70 percent of studied health plans most profitable. For the other studied plans, the exact opposite happened, as the healthiest populations made them more profitable. Again, this could all change as risk adjustment provisions change.
Mehmud found that, in general, the richer Platinum and Gold Health plans financially struggled more than the standard Bronze and Silver plans. Claims for the richer plans were higher and payment adjustments were not high enough to offset the difference. Individuals in Platinum and Gold plans were sicker than the average population, were attracted to the richer benefits and could afford such a plan.
Health plan members more than 35 years old generally were more profitable to insurers than younger members. Again, this correlates with the finding that plans serving the sicker get more ACA funding; maybe $70,000 per member over 35, but a negative payment of $50,000 for a younger and healthier member. And if the negative offset is too large for a payer, it might not be profitable.
Mehmud and associates developed the Wakely Risk Insight tool after finding that analysis of vast amounts of date was “incredibly difficult” using commercially available predictive modeling products, so they built their own tool combining predictive analytics with actuarial expertise.
Now, the consultancy is readying work on a new study using 2015 ACA data that should be completed by the end of this year.
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