The Rewards of Risk Adjustment

Posted by Grace-Marie Turner in Health Care, Insurance Regulation on Aug 11th, 2008 | no responses

Risk adjustment can improve the functioning of consumer-centered health insurance markets, writes Heritage Foundation senior fellow Edmund F. Haislmaier in a July 28 backgrounder:

(W)ell-designed risk-adjustment mechanisms give health plans the right incentives to provide better value to both healthier and sicker enrolleesm.

…The purpose of risk adjustment is to correct for any natural tendencies toward risk segmentation that produce a skewed distribution of risks among competing insurers in a market while still preserving the benefits of insurer innovation in coverage design and consumer choice of coverage. Rather than attempting to limit risk selection by imposing standardized benefit packages or restricting consumer coverage choices, risk-adjustment mechanisms accept the reality of selection effects in the insurance market and manage them in ways that accommodate the needs of both insurers and consumers."

…While policymakers can design and implement risk-adjustment mechanisms that work either prospectively or retrospectively, retrospective approaches, such as risk-transfer pools for health insurers, are somewhat easier to design, can be implemented in a shorter time, and are less likely to develop significant operational problems over time."