Politics Aside, States Should Build Insurance Exchanges that Meet the Needs of their Local Markets

February 15th, 2013 / By Kristine Daynes

In December, states had to let the Department of Health and Human Services know whether they would set up their own state-operated health insurance exchanges. The deadline was not a surprise, although several states protested they didn’t have enough time to consider the issue. The mandate originates with the 2010 Accountable Care Act. What is surprising is the number of states who declined the opportunity to create their own insurance exchanges.

Federal health law requires states to establish health insurance marketplaces to serve individuals and small businesses that need access to affordable health benefits. HHS outlined a federal model, which was intended as a default option, fully expecting most states to choose local control and operation of their exchanges.

However, only 17 states and Washington, D.C., intend to run their own exchanges. Seven states say they will pursue a partnership in which they will share control with the federal government. The other 26 states have either opted for or defaulted to the full federally administered exchange.

There are practical reasons why states should consider a state-operated exchange more seriously. One obvious issue, for example, is the difference between state populations and the federal healthcare population.

HHS has created a federal insurance exchange program from an apparatus that was developed to serve a national Medicare population, a population consisting of the aged and disabled. It is unlikely to be as effective at regulating insurance for working-age populations and families—not to mention healthy individuals—as it is for overseeing a health plan designed to serve older and sicker individuals.

This is reflected in HHS’s choice for a risk adjustment methodology, the mechanism that calculates the amount of risk a health plan assumes in covering sick people. A risk adjustment program compensates health plans that accept sicker members for the additional risk, reducing the incentive for health plans to avoid enrolling members that they think may pose a greater health burden. Risk adjustment also stabilizes premiums across all members within a plan.

HHS proposes to use the same methodology, Hierarchical Condition Categories (HCCs), which was designed for a Medicare population, to measure the health risk of individuals and health plans. Unfortunately, the HCC methodology has several limitations that should concern state health administrators.

Critics of the HCC model claim that it under-predicts costs for members with serious health conditions, which makes the model vulnerable to “overpricing” enrollees (attracting members with high risk scores but relatively low medical costs) and “overcoding” (adding more diagnoses to a case in order to inflate the risk score). Conversely, other studies suggest that HCCs systematically under-predicts costs for patients with the most serious health conditions.

Furthermore, HCCs have not had widespread application within a population similar to the uninsured and underinsured people that will be attracted to the state insurance exchanges.

Fortunately, there are existing risk adjustment methodologies that are better suited to state populations. States aren’t locked into the federal risk adjustment model. They have the option of choosing an alternate methodology for the 2015 enrollment period and beyond. For the sake of affordable health care, let’s hope they evaluate their risk adjustment programs more closely and choose an approach that’s appropriate for their population.

Kristine Daynes is Product Marketing Manager for Payer and Regulatory Markets with 3M Health Information Systems.