How the COVID-19 pandemic can distort risk adjustment of health plan payment

The COVID-19 pandemic has led to disruptions in healthcare utilization and spending. While some changes might persist (e.g. substitution of specialist visits by online consultations), others will be transitory (e.g. fewer surgical procedures due to cancellation of treatments). This paper discusses the implications of transitory changes in healthcare utilization and spending for risk adjustment of health plan payment. In practice, risk adjustment methodologies typically consist of two steps: (1) calibration of payment weights for a given set of risk adjusters and (2) calculation of payments to insurers by combining the calibrated weights with enrollee characteristics. In this paper, we first introduce a simple conceptual framework for analyzing the (potential) distortions from the pandemic for both steps and then provide a hypothetical illustration of how these distortions can lead to under- or overpayment of insurers. The size of these under-/overpayments depends on (1) the impact of the pandemic on patterns in utilization and spending, (2) the distribution of risk types across insurers, (3) the extent to which insurers are disproportionately affected by the pandemic, and (4) features of the risk adjustment system.