All Health Policy Is A Matter Of Transferring Monetized Risk

Jaan Sidorov has written a fascinating analysis of the Affordable Care Act and Paul Ryan’s Medicare privatization proposal, contextualizing both plans within the concept of “transferring risk” from one party to another. He argues that if the ACA lowers costs by transferring some of the risk of paying Medicare’s medical bills to hospitals and doctors — by lowering their reimbursement rates and encouraging them to become more efficient (i.e. do more with less), the Republicans are shifting risk to insurers and beneficiaries. Ryan’s plan “is an example of transferring some of the risk to commercial insurers in the form of ‘premium support vouchers,’” Sidorov explains. “[B]eneficiaries will use their vouchers to ‘shop’ Medicare’s monetized risk around to insurers. What’s more, because the Ryan Plan will cap the vouchers, beneficiaries are also being asked to reassume a fraction of their monetized risk. As a result, it is likely that they will need to also transfer that to insurers in the form of additional out-of-pocket premium expenses.”

Policymakers on both sides of the aisle agree that the risk should transferred from the government to another party, but disagree about the “where.” Sidorov offers the following insights:

1) Given Medicare’s looming insolvency, it is no accident that the U.S. government is intensely interested in transferring its risk and that it wants to do so at the lowest possible price. This undoubtedly accounts for lingering suspicions among patient advocates as well as health provider trade groups that that the current health reform proposals are attempting to transfer too much risk for too little money.

2) As risk is transferred, so is the responsibility for managing it. Whether it’s up to beneficiaries to find the best deal or providers to find the best cost-effective care paths, the end result for Medicare is the same. Despite partisan debate on the “role of government in health care,” everyone ironically agrees that CMS cannot price or manage risk and that its responsibility in a key dimension of health insurance — even if there are consumer protections and quality bonuses — is ironically destined to decline.


3) Since risk transfer is ultimately a gamble, acceptors of risk need to plan for the possibility that future costs will exceed today’s original price. For commercial health insurers, that has meant keeping a “surplus” in place to guard against this possibility. For providers assuming increasing levels of risk under the ACA, that will mean uncharacteristically keeping financial reserves, untapped beds and personnel on hand, just in case, despite their best efforts, there are greater than expected “never events,” hospital acquired conditions, or care deviations. How well providers will plan for or absorb the losses that could occasionally occur remains to be seen.

4) Finally, risk transfer has been the logic underlying the Medicare Advantage (MA) program, in which risk has been directly transferred to commercial insurers. Politics aside, critics charge that the Medicare beneficiaries that typically enroll in MA have lower than average risk at too high a price and that denials of health care services are all too common. While some of this may be true, it’s doubly ironic that the one policy option that is specifically configured to accept and manage risk is going largely unmentioned in the 2012 debates.