1. Challenges of Introducing Risk
Adjustment in a Health System
Presented by
Simon Moody FIA
Consulting Actuary, Milliman
29 June, 2011

2. Hold the Front Page!
Risk Adjustment Models are Not Perfect!
2 29 June 2011 Not to be used or distributed without the prior written consent of Milliman.

3. So what’s the problem?
 Overall predictive accuracy up to 30% R2 for prospective
models, up to 60% R2 for concurrent models.
 They don’t therefore explain a significant proportion of the
differences in health spend.
 Particular problems with high cost patients.
=> In ‘actuarial’ parlance: Actual will differ from Expected.
 May never be perfect…
– but always better than just age/gender adjustment;
– they are improved with better design, richer data and more
advanced modeling techniques; and
– the modelling has multiple uses and provides many useful insights.
3 29 June 2011 Not to be used or distributed without the prior written consent of Milliman.

4. Implementation Challenges
 Appropriateness of the Model
 Unintended Consequences
 Data Sources and Clinical Validity
 Coding
 Patient Attribution & Partial Eligibility
 Inclusion/Exclusion of Healthcare Services
 Risk Adjusted Budget Allocation Frequency
 Transparency
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5. Prospective or Retrospective (or both!)
 Prospective (Ex Ante)
– Typically based on ‘global’ risk adjustment factors (e.g. age, gender,
geography)
– Incorporates historic utilisation and cost information.
– More prone to imperfections.
 Retrospective (Ex Post, Concurrent)
– Uses data that arises during the period for which the RA is being
calculated.
– Can induce little incentive for improving efficiency.
 Some RA systems may use both
– Retrospective used to ‘adjust’ the imperfections of prospective
calculations.
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6. Netherlands Diabetes Example
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7. Data Sources & Clinical Validity
 Choice of risk factors to be included:
– Age, gender and diagnosis and/or pharmacy information most
common; often geography too.
– But what about socio-economic factors for example.
– Level of complexity
 Initial calibration
– Appropriate data sets available, representative of the current
environment?
 Recalibration requirements
– Most recent past experience
– Clinical coding classifications change
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8. Coding
 Diagnosis-based RA relies heavily on physicians coding
diagnoses accurately, specifically and consistently.
 Is a change in risk score due to coding or true increase in illness
burden?
– Understand the importance of coding
– Quantify the impact of coding
– Or is it due to ‘up-coding’?
8 29 June 2011 Not to be used or distributed without the prior written consent of Milliman.

9. Further Practicalities
 Patient Attribution
– Assign patients to organisation most responsible for care.
 Partial Eligibility
– How should movement of patients be allowed for?
– How do you deal with new enrollees?
 Risk Adjusted Budget Allocation
– How frequently should risk adjusted budget allocation be
performed?
 Inclusion/Exclusion of Healthcare Services
– What is the organisation on risk for?
9 29 June 2011 Not to be used or distributed without the prior written consent of Milliman.

10. A “Black Box”
 Most risk adjustment models and methodologies are proprietary
and not available to users
 How much insight can we gain beyond a simple risk score?
– Use in medical management
 What about other relevant stakeholders?
– Patients / Policyholders
– Shareholders
– Regulators
10 29 June 2011 Not to be used or distributed without the prior written consent of Milliman.

11. Risky Business
 Clinical Commissioning Groups likely to be (more) accountable
for financial risk
– And individuals/smaller groups within CCGs too?
 Risk-adjusted budget allocation takes on a greater significance
 But risk will never be eliminated
– Uncontrollable random fluctuations exist
– Risk transfer/risk pooling solutions will be necessary
 Size is important
– Not just about relative purchasing power in commissioning services
– But also about inherent risk volatility; and
– Predictive accuracy of the RA model.
11 29 June 2011 Not to be used or distributed without the prior written consent of Milliman.

12. Thank You!
Simon Moody FIA
Consulting Actuary, Milliman
simon.moody@milliman.com