“Risk Adjustment” Update
“Risk Adjustment” Update
by Christoper E. Condeluci, Principal and sole shareholder of CC Law & Policy PLLC in Washington, D.C.
- As you may recall, the New Mexico District Court ruled that the regulations implementing the ACA’s “risk adjustment” program were invalid. The basis for invalidating the regulations was because HHS did NOT properly explain why the Department is operating the risk adjustment program on a “budget neutral” basis.
- Analysis: To cure this “process foul” – and to make sure that the 2017 risk adjustment “pay-outs” and “pay-ins” could move forward in the Fall – HHS swiftly issued an Interim Final Rule (IFR), explaining why the Department is operating the risk adjustment program on a “budget neutral” basis. To “save” the 2018 risk adjustment “pay-outs” and “pay-ins,” HHS needed to issue another set of regulations with a similar explanation. But this time, HHS decided to issue proposed regulations to cure the “process foul,” instead of doing it through an IFR. Soooo, we now have proposed regulations on the 2018 risk adjustment “pay-outs” and “pay-ins” to which the public can submit comments that HHS will consider before the regulations are finalized. Interestingly, we know what the New Mexico CO-OP’s public comments to the proposed regulations are going to be. How do we know? Because the New Mexico CO-OP just filed a brand new lawsuit against HHS, arguing that the Department’s recently released IFR violated the Administrative Procedures Act (APA) because the Department “rushed out a rule without following a legal requirement to receive public comments and input first.” The New Mexico CO-OP also argues that “the risk adjustment formula continues to disadvantage small, new, and lower-priced health plans in favor of their larger, more expensive competitors.” The CO-OP further contends that “The formula penalizes any type of plan that is trying to be innovative…If we have improved medical management or health outcomes, that should then lower premiums…Instead, the formula really hurts the consumers we serve because it is so unpredictable and because it does inflate the members’ premiums.” BTW, these latter arguments – (1) that the risk adjustment program unfairly disadvantages small carriers and new entrants to the market and (2) the risk adjustment program artificially increases premiums – are arguments that are more appropriately included in public comments to regulations, not a legal compliant. But, I understand the CO-OP’s frustration with the risk adjustment program. I also agree with the CO-OP’s belief that the risk adjustment program actually increases premiums for consumers. Why? Because (1) insurance carriers are “defensively” pricing their premiums and building in an additional “load” for unexpected risk adjustment “charges” and (2) insurance carriers are avoiding younger/healthier lives (because insuring healthier lives results in a risk adjustment “charge”). But again, these arguments are “policy” arguments. In my opinion, they are NOT legal in nature, and therefore, are unlikely to sway a court of law. When it comes the CO-OP’s argument that the recent IFR violated the APA, this at least presents a legal question for a court to rule on, one way or another. What I mean is this: While I am not a student of the APA, I do know that Federal Departments are permitted to by-pass the APA’s normal notice-and-comment requirement if the Department can show there is a compelling reason to issue the Rule in the absence of public input. In this case, the Federal Department must prove that it is in the public’s best interest to get a binding rule on the books immediately, because by waiting and going through the normal notice-and-comment process, the public may be unduly harmed without the Rule being put into place. Whether HHS met this standard when the Department issued the IFR to kick-start the 2017 risk adjustment “pay-outs” and “pay-ins” is indeed an “open” question. BTW, I believe a compelling argument can be made that the IFR was needed immediately (without public input). But, I can also see a court finding that making on-time risk adjustment “pay-outs” to insurance carriers is not a “compelling reason” or “good cause” for issuing a Rule without first considering public comments. We will obviously have to wait to see what the District Court has to say. Stay tuned.
- Following on the approval of Wisconsin’s (WI) and Maine’s (ME) 1332 Waiver request to establish a State-based reinsurance program, HHS recently approved New Jersey’s (NJ) 1332 Waiver to establish their own State-based reinsurance program.
- Analysis: Similar to WI, NJ’s reinsurance program will resemble the ACA’s “transitional reinsurance” program. Remember, ME will be re-starting their “invisible high-risk pool.” Unlike WI and ME, NJ will fund a portion of its State-based reinsurance program through the revenue the State collects from its “individual mandate” penalty tax. As I reported to you in the Spring, NJ enacted its own State-based individual mandate penalty tax, which mirrors the structure of the Federal individual mandate penalty tax (which as you know, will go to $0 come Jan. 1, 2019). Additional funding sources for NJ’s reinsurance program will include the Federal “pass-through” funding (i.e., the ACA’s premium subsidy amounts that would be spent but for the reinsurance program), along with appropriations from NJ’s General Fund. In my opinion, I do NOT think NJ’s individual mandate penalty tax is going to throw off a lot of tax revenue. So, I could see NJ needing to dip into its own State Budget at some point. Alternatively, NJ could try to raise funds from other sources, like self-insured employers. But – in my opinion – it is too early to speculate what funding sources NJ might go after in the event of a funding shortfall for its new reinsurance program. NJ’s reinsurance program is projected to reduce premiums by 15% for 2019. That is a pretty dramatic reduction, and welcome news to NJ consumers, insurance carriers, and Republicans running for elected office.
“Value-Based Care” Update
- Last year, and for the early part of this year, I worked on a project called The DRIVE Health Initiative. The purpose of the Initiative was to educate Congress and the Administration about the innovative value-based care strategies employers are adopting, and to encourage the Federal government to incorporate these innovations into our nation’s public health programs (e.g., Medicare, Medicaid, VA). Our main argument: “The entire health care system needs to move away from fee-for-service, and move toward a value-based care health care system. Employers have been making the shift to value-based care over the past number of years, and if the Federal government followed suit (and adopted some of the value-based care strategies that have worked in the private-sector), the savings that could be achieved could mitigate the looming government spending crisis that we are all going to face come the 2030 time frame.” See the attached Word document to get a sense what we were trying to do with DRIVE.
- Analysis: In my opinion, we have 2 paths to consider when it comes to the future of our health care system: (1) A value-based health care system or (2) A single-payer system (or at least some sort of “shade” of single-payer). Maybe we end up with a combination of the 2 systems, but it is too early to tell which path we as a country want to take (or will be forced to take, depending on the circumstances). I think you know where I lean. Which is why I felt privileged to be able to work on The DRIVE Health Initiative, because personally, I believed in what we were advocating for. As you have heard me explain in prior updates, employers are continuing to move forward with incorporating value-based care strategies into their benefit offerings. A recent study from Duke’s Health Policy Center confirms this (see the report in the embedded link above). For example, employers are continuing to look for “high-value” local providers that are willing to adhere to specific “quality metrics” and meet certain performance standards on health outcomes. Employers often times enter into a “bundled payment” agreement with a provider, where the employer and provider negotiate a set fee that covers the cost of a particular medical episode from start to finish. If the provider spends less on the negotiated fee, the provider wins. If the provider’s cost exceed the agreed-upon fee, the employer is NOT on the hook for the excess costs. Employers are also contracting directly with a provider (i.e., a provider-direct-to-employer contract) for multiple services and coordinated care. These shared-risk agreements often times include various “bundled payment” programs, a set negotiated fee for primary care visits, and other negotiated arrangements (like an employer-run ACO) for treating employees with chronic conditions. It was recently reported that General Motors (GM) entered into a provider-direct-to-employer contract with the Henry Ford Health System. As this article explains, “advantages to direct contracts include giving an employer more control over health benefit design and the potential to lower costs of care. The health provider also has more flexibility to order the tests or deliver specialty care they believe is necessary for a patient’s treatment without having to negotiate through insurance company red tape, also called prior authorization.” The article also provides some details on how GM has structured its direct contract with Henry Ford. For example, it appears that GM and Henry Ford will set a base-line of annual total spending per member per month, modified by an expected inflation rate. Henry Ford will then be required to meet 19 “quality,” “cost,” and “utilization” metrics. Some of the specific 19 metrics include targets for readmission rates, hospital-acquired infections, complications, blood pressure, colon cancer screening and diabetic control. One of the main goals of this coordinated care arrangement is to track utilization, including emergency room visits and hospital admissions, in hopes of reducing unnecessary hospital stays and improving overall health outcomes (to cut down on hospital readmissions). But – according to Duke Health Policy Center’s study – the move toward value-based care is NOT trickling down to small and mid-sized employers. Instead, small and mid-sized employers remain stuck in a fully-insured market that does not provide a lot of flexibility to innovate by, for example, allowing these employers to change their provider networks, develop benefit packages to encourage utilization of high-value services, and to change how these employers pay providers (for “value” instead on “volume”). As a result, small- and mid-sized employers – unlike larger, self-insured employers – are typically restrained in their attempt to contain costs and improve the value of care their employees receive. As discussed more fully below, this where I see the value of “association health plans” (AHPs). What I mean is, AHPs will allow small and mid-sized employers to come together to form a much larger risk pool. In this case – similar to larger, self-insured employers – AHPs will be in a much better position to negotiate with providers, which will allow AHPs to innovate and to change their provider networks, their benefit packages, and how they pay providers. With these levers, AHPs – like larger, self-insured employers – may find new ways to contain costs and improve the value of care AHP plan participants receive, and by doing so, accelerate innovation across the health care system. Duke Health Policy Center’s study also re-emphasizes a point that I – and others – have been making regarding high-deductible health plans (HDHPs). Specifically, in prior updates, I have explained that employees are reaching a breaking point when it comes to shouldering increased cost-sharing for health care (i.e., the health care costs that are continually being shifted to employees are becoming unsustainable for employees). Many employers are finally coming around to this realization. As a result, employers are lowering deductibles and looking to other cost-containment strategies. However, cost-containment strategies like wellness programs – while increasing productivity and presenteeism – may not produce material cost reductions when measured against the investment made in these programs. Tele-medicine offerings can also help, although we have seen some instances where high fees and over-utilization limits overall savings. BUT, by adding in value-based care strategies like direct contracting, bundled payments, shared-risk models, reference-based pricing, etc., savings may add up so employers do not have to continue exposing their employees to higher costs.
Why Can’t Association Health Plans (AHPs) Engage In Provider-Direct-to-Employer Contracting?
- One of the main reasons why we only see large companies like GM enter into a direct contract with a health system is because a health care provider is not really interested in contracting with an employer unless the provider knows that the employer is going to send a whole-heck-of-a-lot of lives through the health system’s doors. This means that if you are a small employer – or even a mid-sized employer – health systems are NOT going to enter into a shared-risk contract with you. The health system needs to know that you are going to bring thousands – if not tens-of-thousands of lives – to them.
- Analysis: Well, when we are talking about AHPs – especially those AHPs that will likely be established due to the DOL final AHP regulations – we WILL be seeing health care arrangements covering tens-of-thousands of lives. For example, organizations like national trade associations, along with corporations with a very large franchisees-base, intend to offer health coverage to their members/franchisees through an AHP, which in most cases will add up to a whole-heck-of-a-lot of lives being covered by the respective organization or franchisees-base. But, here’s the rub. For large nationwide employers out there, provider-direct-to-employer contracting often times does NOT work. Why? Because a large nationwide employer may not have a big enough concentration of employees in a particular geographic location. What? The point that I was trying to make above about health systems only wanting to contract with employers with tens-of-thousands of lives is because the health system wants to know that there are going to be people coming through their door. So, for the health system to be open to entering into a shared-risk contract with an employer, there needs to be tens-of-thousands of lives concentrated in the geographic location that the health system serves. Take GM, for example. As we all know, GM’s largest concentration of employees is in Michigan, which means there are a lot of GM employees in this particular geographic location. As a result, GM is a prime candidate for provider-direct-to-employer contracting because there are tens-of-thousands of lives that a health system serving the specific parts of Michigan can capture. BUT, a good number of large nationwide employers are NOT made up like GM. That is, many of these large nationwide employees do NOT have tens-of-thousands of employees concentrated in a particular geographic location. No big concentration of employees = No provider-direct-to-employer contracting. The same issue crops up for many organizations offering AHP health coverage to their members. For example, a good number of national trade associations will NOT have tens-of-thousands of member-participants in their AHP concentrated in one particular geographic location. So, No big concentration of members-participants = No provider-direct-to-employer contracting. However, some national trade associations may have a large concentration of member-participants in a particular metropolitan area. In this case, it would make sense for a health system to consider a shared-risk contract with these particular national trade associations to capture the tens-of-thousands of member-participants. Same is true of a corporation with a large franchisees-base. In my opinion, the BEST candidates for direct-contracting are Local Chambers of Commerce. What I mean is, Local Chambers of Commerce will more-likely-than-not have a large number of member-participants in their AHP concentrated in one particular geographic location. I think there are some real opportunities here for both providers and the Local Chamber AHPs.
Value-Base Care and Fully-Insured vs. Self-Insured Plans
- In many cases, provider-direct-to-employer contracting only works in the self-insured context. What I mean is, employers sponsoring fully-insured plans are not entering into direct-contracting with providers. Instead, provider contracting is done at the insurance carrier level, not the employer level.
- Analysis: Most if not all of the AHPs established by national trade associations are going to be fully-insured in the first few years of the new DOL AHP regulations. There are a number of reasons for this (which we will discuss in greater detail in another update), but that is reality, at least for now. So, national trade associations and their AHPs may not be able to harness significant savings like large, self-insured employers often times can through value-based contracting, at least in the early years. BUT, Local Chambers could self-insure their AHP, and enter into a shared-risk contract with a local health system. And the experience of Local Chambers – and the savings that they will likely see through some form of provider-direct-to-AHP contracting – will be helpful to national trade association who, after a couple of years, will likely want their AHP to be self-insured. Above, I explained that provider-direct-to-employer contracting only occurs if an employer – or an AHP – is self-insured. This makes sense because if the employer or AHP is fully-insured, the provider contract is being executed by the insurance carrier underwriting the coverage, not the employer or the AHP. Importantly, more and more insurance carriers are starting to develop value-based care contracting models with providers, which – as I understand it – allows the insurance carrier to offer an employer or an AHP a fully-insured health plan design that is built around value-based care strategies like “bundled payments,” negotiated primary care access fees, and reduced cost-sharing for plan participants with chronic conditions, provided these participants adhere to a specific treatment regime or they schedule – and attend – their required, routine doctor visits. If I am understanding this carrier-provider-contracting correctly, I think there are some great opportunities for fully-insured employers, and especially fully-insured AHPs. The bottom-line is this: I believe there are opportunities for greater take-up of value-based care strategies like provider-direct-to-employer contracting in the context of AHPs. And for this reason, instead of trying to tear-down AHPs, I think more people should start thinking of how they can leverage AHPs to better produce savings for our health care system generally, and to produce better health outcomes for plan participants specifically.