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11 Cards in this Set

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INTRODUCTION
Risk Adjustment is the process of adjusting payments to reflect the riskiness of the insureds.

Uses of Risk Adjustment:
 Provider Reimbursement
 Provider Profiling
 Transferring money between insurance companies
 ins cpys with safe enrollees must pay money to ins cpys with risky enrollees.
 Premium setting for Medicare+Choice HMO’s
 Underwriting / Reunderwriting

A risk adjuster (risk assessment formula) is a formula which outputs a number representing the riskiness (expected medical claim cost) of a group.
REASONS WHY RISK ADJUSTMENT IS NEEDED (THE GOALS OF RISK ADJUSTMENT)
 To protect ins cpys from Guaranteed Issue and Community Rating regulations
 To protect ins cpys’ solvency
 To discourage screening and avoidance of bad risks
 To encourage competition on the basis of efficiency
 To encourage competition in the small group and individual markets
 To facilitate comparison shopping by consumers
 To protect ins cpys from antiselection

See numerical example in chapter notes
THE STEPS IN RISK ADJUSTMENT
The two steps in Risk Adjustment are:
1. Risk assessment
1A. Risk Classification (dividing the insureds into classes)
1B. Risk Measurement (quantifying the claim cost level for each class)

2. Payment adjustment (based on the differences in risk, as measured in Step 1)
1. Risk assessment
1A. Risk Classification
 Demographics
 Claim / Utilization levels while insured
 Medical history
 Diagnosis codes
 prescription drug use
 Perceived health status (self-reported)
 Lifestyle / Behavior

1B. Risk Measurement
Relative Risk Factors by Class
Avg CC for the class
relative risk factor = ———————————
Avg CC for the carrier
 Can be used for ratesetting, but cannot be used for risk adjustment

Relative Risk Factors by Carrier

Avg CC for the carrier
relative risk factor for a carrier = ————————————
Avg CC for the market
 A carrier whose risks are average for the market would have a risk factor of 1.0.
2. Payment Adjustment
Companies with risk factors < 1 must pay companies with risk factors > 1.
CHARACTERISTICS OF A GOOD RISK ASSESSMENT METHOD
A risk adjuster (risk-assessment method) must [be]:
 Accurate in predicting claim costs
 Simple and Cheap to administer
 Use data that is routinely available
 Equitable
 Have industry support
 Mandatory to participate in
 Protect patient’s confidentiality
 Compensate insurers for risks, not innefficiency or poor contracting.
 Not subjective or discretionary.
 Cannot be gamed
POSSIBLE RISK ASSESSMENT METHODS, AND CRITIQUES
Assessment Method Advantages Disadvantages

Demographics alone (age, sex, location)  Objective
 Data available
 Simple  Poor predictor of claim costs.
Insurer’s claim costs  Good predictor of future costs
 useful for large groups  Could be inefficiency
 Subject to gaming
 New ins cpys have no data
Pharmacy data  Good predictor
 Data available  drug use is influenced by physician practice
Specified Medical Diagnoses; medical info  A useful addition to other systems  difficult to collect data
 loss of confidentiality
Perceived health status or lifestyle factors This cell was
intentionally
left blank  subjective
 can be gamed (by form of the survey)
 expensive to collect data (only good for small groups)
A Combination  More accurate than a single method  Complicated / Expensive.
MEASURING PREDICTIVE ACCURACY
(Testing the validity of a risk-assessment formula)
Standard R-squared:
Advantages:
 a single number
 standardized to between 0 to 1, so can compare different studies

Disadvantages:
 Overly sensitive to large claims
Mean Absolute Prediction Error
= AVERAGE{ |A – E| }
Advantages:
 a single number
 not overly sensitive to large claims

Disadvantages:
 not scaled to between 0 and 1.
Cumming’s Prediction Measure
Mean Absolute Prediction Error
Cumming’s Measure = 1 – ———————————————————
Mean Absolute Deviation from Average

where
Mean Absolute Deviation from Average = AVERAGE{ |E – | }


Advantages of Cumming’s Measure:
 All three.
Disadvantages:
 None.
Group Level Measures
 Predictive Ratio = Egroup / Agroup.
 close to 1 means the risk adjuster works well.

 The group studied can be:
 randomly chosen individuals
 a non-random group
 an employer group.


Done.