McGowan Discusses Affordable Care Act's Risk Adjustment Component in Bloomberg BNA

News / September 18, 2012

The Affordable Care Act’s (ACA) key component, risk adjustment, is intended to prevent health insurance plans from attracting too many sick patients when they are required to offer coverage to everyone, regardless of medical problems, according to Bloomberg BNA’s BNA Pension & Benefits Reporter (“Risk Adjustment New Challenge for Health Plans Under Reform Law”).

Risk adjustment is needed to accomplish ACA’s guaranteed issue and community rating requirements, which state that, starting in 2014, health plans must offer coverage to all applicants without charging more to people who have medical problems.

While risk adjustment is clearly needed to allow for the guaranteed issue, care will have to be taken to ensure that the new system does not create perverse incentives for health insurers, Employee Benefits Partner John McGowan said in the September 18 article.

Some insurers could engage in “very aggressive pricing” because of the risk adjustment safety net, he said. “If I price aggressively and I get more than my fair share of bad risks, so what? I’m going to be eating the other guy’s lunch, and he’s helping to pay for it. He’s being assessed too. There’s a certain moral hazard quality to these risk reinsurance rules,” he noted.

That could come into play as carriers try to enlarge their market share to entice more providers to contract with them, McGowan added. “If I’m a [company like] WellPoint and I don’t have a lot of foot traffic in northern Indiana and that is preventing me from getting really good pricing from the major hospital systems up there, this is my opportunity to drive up my foot traffic and put myself in position to enter into more advantageous provider contracts with better discounts, and I’m not paying for it,” McGowan said. “Right now, there’s a great sorting out of markets.”