The document discusses several controversial issues in risk adjustment for healthcare: 1) Plans may try to attract healthier patients ("creaming") and avoid sicker patients ("dumping"), though regulation has reduced this. 2) Providers often believe their patients are riskier than average, but risk adjustment models are becoming more accepted. 3) Risk adjustment models can only explain 30-40% of cost variability. Accuracy is lower for very low- and high-risk patients. 4) Incentives exist for "coding creep" where more conditions are coded to increase risk scores and payments. This has increased average risk scores 1-2% annually. 5) Risk adjustment may discourage providers from

1. Controversial Issues in Risk Adjustment
Nuffield Trust Conference
June 29, 2011

2. | Presentation Agenda
• Introductions.
• Creaming, Skimming and Dumping.
• “My population is more risky.”
• How accurate are risk adjusters?
• Coding Creep.
• Provider Patient Management.
• Prospective or Concurrent?
• Discussion.

3. Introductions
Oxford University (B.Phil. 1976); Fellow of the Institute of Actuaries .
Founder of Solucia Consulting, a Healthcare Actuarial Consulting firm (1998). A
leader in managed care, disease management/predictive modeling applications and
Value-based product design.
Acquired by SCIOinspire Corporation in April 2008.
4 healthcare actuaries; 4 PhDs; healthcare analytics team.
Primary business segments
1. Disease and Care Management consulting (operations; ROI; outcomes; predictive
modelling);
2. Actuarial consulting; state Medicaid plans; healthcare reform (Massachusetts);
specialization in risk-adjustment applications and underwriting;
3. Care management support services (Analytics, data management, risk assessment,
operational improvement and ROI); and
4. Software Support applications.
Strong research and publication foundation. Adjunct Professor at Georgetown Dept.
of Health Admin. and UC Santa Barbara Dept. of Statistics.
Public policy: board member, Massachusetts Health Insurance Connector Authority.
SCIOinspire Corp Proprietary & confidential. Copyright 2011 3

4. Introductions
Author of several books and peer-reviewed studies in healthcare management and
predictive modeling.
Published 2008 Published 2011
4
SCIOinspire Corp Proprietary & confidential. Copyright 2011 4

5. Controversial Issues in Risk Adjustment
In no particular order:
1. “Creaming, skimming and dumping.”
2. “My population is more risky.”
3. Coding creep.
4. Provider patient management.
5. Concurrent or Prospective?
6. Risk adjustment is not the only risk management tool.
SCIOinspire Corp Proprietary & confidential. Copyright 2011 5

6. “Creaming, skimming and dumping”
Remember this chart from this morning? Cream “Manage” Dump
Condition-Based Vs. Standardized Costs
Standardized Condition-Based
Actual Cost Cost Cost/ Standardized
Member Age Sex Condition (Annual) (age/sex) Cost (%)
1 25 M None $863 $1,311 66%
2 55 F None $2,864 $4,842 59%
3 45 M Diabetes $5,024 $2,547 197%
4 55 F Diabetes $6,991 $4,842 144%
Diabetes and Heart
5 40 M $23,479 $2,547 922%
conditions
6 40 M Heart condition $18,185 $2,547 714%
Breast Cancer and
7 40 F $28,904 $3,641 794%
other conditions
Breast Cancer and
8 60 F $15,935 $6,346 251%
other conditions
Lung Cancer and other
9 50 M $41,709 $4,368 955%
conditions
SCIOinspire Corp Proprietary & confidential. Copyright 2011 6

7. “Creaming, skimming and dumping”
To actuaries, this is simply the insurance system at work (underwriting!)
In the U.S. it is more difficult to do this than in the past because of more
stringent regulation. In my opinion C S &D is more an issue of pre-existing
conditions, which tend to be acute, rather than the types of chronic
conditions that risk adjustment operates on.
While there are cases of C S &D identifiable in insured populations,
reputable insurers have other techniques to manage risk:
• Reinsurance: stop-loss reinsurance addresses catastrophic acute cases.
We apply mandatory stop-loss pooling in the Massachusetts Connector,
for example. This works for individual cases but not groups.
• Gain-sharing: in the Massachusetts Connector program, the state shares
gains and losses within a corridor around the expected cost. This
mechanism operates at the group level.
• Patient and provider management is clearly the most effective way to
manage risk.
SCIOinspire Corp Proprietary & confidential. Copyright 2011 7

8. “Creaming, skimming and dumping”
For health plans and providers who are concerned about the risks that they
attract, risk adjustment can be a positive force. HOWEVER:
• Typically, health plans use risk management tools such as:
• Limitation of coverage for pre-existing conditions;
• Limitation of providers to narrow networks;
• Pre-authorization of certain services; or
• Rescission in the case of fraudulent application.
• Regulation has tended to eliminate or restrict these risk management
tools in favor of “moving dollars around.” These restrictions also
reduce patient self-management incentives.
• For plans and providers who are active risk managers and who
anticipate making a profit on reducing over-utilization by high risk
patients, risk adjustment removes a degree of freedom.
SCIOinspire Corp Proprietary & confidential. Copyright 2011 8

9. “My population is more risky”
The Lake Woebegone effect: All the men are strong, all the women are
good-looking and all the children are above average.
Providers are always convinced that their panels are higher risk than
average. Risk Adjustment models are becoming more mainstream with
providers, and they are more accepting of the results. In my experience
providers tend to pick up on technical issues (a couple of which follow) that
can sometimes reduce the credibility of results and provider buy-in.
SCIOinspire Corp Proprietary & confidential. Copyright 2011 9

10. How accurate are risk adjusters?
Risk Adjuster accuracy has been growing since the SOA did its first
evaluation nearly 20 years ago. But at its best for concurrent models, R2 is
only 30% to 40%. The fit is poorer at the extremes (low risk and high risk
members).
$2,000
$1,800
$1,600
$1,400
Cost Per Risk Score
$1,200
$1,000
$800
$600
$400
$200
$-
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26
Risk Score
SCIOinspire Corp Proprietary & confidential. Copyright 2011 10

11. “Coding Creep”
In the U.S. Medicare Advantage plans are reimbursed based on the relative
risk of their patient population. This has led to the growth of a new
industry of coding consultants whose function is to advise health plans on
the identification (and coding) of co-morbid conditions. (e.g. CAD when the
patient has a diagnosis of Diabetes).
This has led to “coding creep” in which the average risk score of the
population has tended to increase 1%-2% annually.
Early-adopters tend to benefit. Because Medicare Advantage is a zero-sum
game, all plans are ultimately forced to adopt this approach.
SCIOinspire Corp Proprietary & confidential. Copyright 2011 11

12. Provider patient management
Because risk scores are driven by diagnosis codes (which as we saw this
morning are reflective of not only disease but the severity of that disease)
risk adjustment actually gives providers a disincentive to manage the
member’s condition. Here is an example:
How the Intervention Impacts the Risk Score
Risk-
Risk Risk Risk-adjusted adjusted
Score Score Cost Cost Cost Cost
Scenario (Year 1) (Year 2) (Year 1) (Year 2) (Year 1) (Year 2)
1 1.00 1.25 $500.00 $625.00 $500.00 $500.00
2 1.00 1.25 $500.00 $595.00 $500.00 $476.00
3 1.00 1.10 $500.00 $595.00 $500.00 $540.91
SCIOinspire Corp Proprietary & confidential. Copyright 2011 12

13. Provider patient management (2)
In scenario 1, the provider panel costs the same (on a risk-adjusted basis) in
both years. In a typical gain-sharing arrangement, the providers would
experience no gains.
In Scenario 2, risk has increased more than costs, leading to gains.
In Scenario 3, risk is moderated. Costs are the same as in Scenario 2, but
on a risk-adjusted basis there are no longer gains.
How the Intervention Impacts the Risk Score
Risk- Risk-
Risk Risk adjusted adjusted
Scenari Score Score Cost Cost Cost Cost
o (Year 1) (Year 2) (Year 1) (Year 2) (Year 1) (Year 2) Gains
1 1.00 1.25 $500.00 $625.00 $500.00 $500.00 $0
2 1.00 1.25 $500.00 $595.00 $500.00 $476.00 $24
3 1.00 1.10 $500.00 $595.00 $500.00 $540.91 -$40.91
SCIOinspire Corp Proprietary & confidential. Copyright 2011 13

14. Prospective or Concurrent?
Concurrent Risk Scores have the advantage of reflecting actual conditions
in a population. The disadvantage is that the effect of good patient
management and patient risk reduction are adjusted away.
Prospective Risk Scores have the advantage of increasing the certainty of
reimbursement . The disadvantage is that they do not reflect emerging
conditions.
In the U.S. Medicare Advantage uses concurrent scores; in Massachusetts
we use prospective scores.
A related issue is the treatment of members with limited exposure and
claims experience.
SCIOinspire Corp Proprietary & confidential. Copyright 2011 14

15. Discussion
SCIOinspire Corp Proprietary & confidential. Copyright 2011 15

16. Solucia Consulting, Contact
Ian Duncan, FSA FIA FCIA MAAA
Consultant
(Cell) 860-614-3295
Email: Iduncan@soluciaconsulting.com
www.soluciaconsulting.com
SCIOinspire Corp Proprietary & confidential. Copyright 2011 16