CalPERS uses a risk mitigation strategy to risk adjust premiums for the Health Maintenance Organization (HMO) and Preferred Provider Organization (PPO) Basic plans. This strategy is the result of a year-long analysis (PDF) and subsequent policy change designed to stabilize the Basic plan program.

Our HMO risk mitigation strategy prices plans based on the value of their benefit design and network, rather than the concentration of healthy or unhealthy lives in them. Plans then compete on cost and quality of care instead of relying on their ability to attract younger and healthier members.

Implementation of the risk mitigation strategy impacts individual HMO Basic plan premiums (PDF) based on benefits, network, and plan level risk score.

Our risk mitigation strategy prices PPO Basic plans based on the adjusted benefit and network differentials.

Medicare plans aren’t included in our risk mitigation strategy.

Health Plan Risk Scores

To implement our risk mitigation strategy in the HMO plans, we engaged Milliman, an international actuarial and consulting firm, in the development of health plan risk scores based on the Milliman Advanced Risk Adjusters (MARA) prospective tool. MARA analyzes each member’s medical and prescription drug claim history to produce risk scores that predict their risk of incurring future health care costs.

A risk score lower or higher than one means a member’s medical costs are lower or higher than the average.

Here’s how the risk score works:

Risk Score of a Plan	Associated Frequency of Health Care Services Provided
Greater than 1	More Frequent than Average
Equal to 1	Average
Less than 1	Less Frequent than Average

Health plans with a risk score greater than one have members with higher-than-average use of health care services. Plans with a risk score less than one have members with lower-than-average use of health care services.

2023 Risk Scores by HMO Basic Plan

Health plan 2023 risk scores are provided in the table below:

Basic HMO Plan	2023 Adjusted Risk Score
Anthem Blue Cross Select HMO	0.9838
Anthem Blue Cross Traditional HMO	1.2121
Blue Shield Access+	1.3275
Blue Shield Trio	0.9630
Health Net Salud y Más	0.7586
Health Net SmartCare	1.1627
Kaiser	0.9525
Sharp Performance Plus	0.8897
UnitedHealthcare Alliance HMO	1.0170
UnitedHealthcare Harmony HMO	0.9418
Western Health Advantage	1.0800
HMO Total	1.0000

Development of Risk Adjusted Premiums

The following is a high-level example for risk mitigation. There are additional, more intricate steps involved that are outside the scope of this description.

Each plan’s total premium consists of three component costs: Medical, Pharmacy, and Administrative Service Fees (ASF). ASFs are the operating costs associated with administering the plan and are set at the outset of the five-year contract with the plan.

Plan A has an unadjusted single-party premium of $950 comprised of the following components:

Medical	Pharmacy	ASFs
$700	$200	$50

Plan A has an Adjusted Risk Score of 1.2, indicating members in this plan use health care services more than the average member, and its overall costs are higher than the value of the plan based on its network.

By portfolio rating Plan A, the premium will decrease to better align with the value of the plan and its network.

Let’s follow the steps for portfolio rating Plan A:

Step 1	Add medical and pharmacy components	Medical + Pharmacy $700 + $200 = $900
Step 2	Divide the result from Step 1 by the Adjusted Risk Score	÷ Adjusted Risk Score $900 ÷ 1.2 = $750
Step 3	Add the ASFs to the result from Step 2 to arrive at the risk mitigated premium	+ ASFs $750 + $50 = $800

After risk mitigation, Plan A has a single-party premium of $800.