Is California Different? State-Specific Risk Adjustment Needs under Health Reform

The Affordable Care Act (ACA) allows state variation in implementing health reform. Critical to a stable health insurance market under reform is the use of risk adjustment to share risks across insurance plans. The ACA requires states to implement risk adjustment, but a California-specific risk adjustment scheme would require expertise beyond existing abilities of state agencies. California could rely on a default federal risk adjustment scheme, but it is unclear California’s health care market is sufficiently different from the national market to render the federal scheme inadequate. We compare the distribution of risk-adjusted health care expenditures in California versus the United States. We find California expenditures highly similar to the United States and conclude that California could rely on a federal risk adjustment scheme that pays special attention to high risks and differential patterns for HMO vs PPO plans.