7 In the presence of age rating variation, if a plan obtains higher revenues by charging its older enrollees more,

it should not also be fully compensated for age variations through risk transfers. Age predicts medical expenditures selleck chemicals llc and is typically included in risk adjustment models. How should the allowed premium rating for age be netted out of risk transfers? Geographic rating area is the fourth source of allowed rating variation. ACA individual and small group markets are established within states. But states may elect to define multiple intra-state rating areas across which plans can vary premiums.8 Given that risk pools are defined within states, how should risk transfers differ when the “base” level of premiums and costs differs across rating areas? More generally, how can a methodology be established that is flexible enough to potentially be applied

to all 50 states, with their different cost levels? Balanced Risk Transfers Among Plans versus Risk-Adjusted Payment to Plans Determining how to calculate balanced risk transfers among plans while preserving permissible premium differences was a central task we faced in developing the HHS risk adjustment methodology. In the ACA-defined individual and small group markets, risk adjustment determines risk transfers among health insurance plans. Lower risk plans are charged to fund payments to higher risk plans. The payments and charges are balanced (i.e., the transfers sum to zero). ACA risk adjustment reallocates aggregate premium revenue among plans, whether premiums are paid by individual enrollees or the government through income-based premium subsidies. In contrast, there are no explicit risk transfers among Medicare plans, and risk adjustment is not inherently budget neutral. In Medicare Advantage and Part D, enrollee risk scores directly determine government payments to health plans. In Medicare Advantage, a county “base rate” linked to Medicare

county fee-for-service costs is multiplied by an enrollee’s risk score to largely determine the Medicare plan payment (Medicare Payment Advisory Comission, Carfilzomib 2012a). In Part D, a plan’s bid to provide standard Part D benefits to an enrollee of average risk, multiplied by an enrollee’s risk score, determines a large portion of Medicare plan payments (Medicare Payment Advisory Commission, 2012b). Affordable Care Act Risk Adjustment Development: Approach The risk adjustment methodology includes a risk adjustment model and a transfer formula that together address the key goal and issues discussed above. The risk adjustment model estimates differences in health risks taking into account the new population and generosity of coverage (actuarial value level). The transfer formula calculates balanced transfers that are intended to account for health risk differences while preserving permissible premium differences.