Risk adjustment, risk corridors and reinsurance measures would help states, insurers mitigate risk

Nov. 03, 2011

The U.S. Department of Health and Human Services has issued a proposed rule regarding certain standards for the risk adjustment, reinsurance and risk corridor systems that will begin in 2014. Additional details, including the methodology that will be used for risk adjustment, reinsurance and risk corridors, will be released in subsequent regulations.

Beginning in 2014, the Affordable Care Act provides for a program of risk adjustment, a process that uses a member's medical diagnosis and demographic information to estimate spending on health care services, on non-grandfathered individual and small group coverage. The risk adjustment program aims to level the playing field by stabilizing benefit premiums, forcing plans to compete on price, quality and service. 

HHS, together with the states, will establish criteria to be used in determining the average actuarial risk score for each health insurance issuer in the individual and small group markets, both on and off the health insurance exchange. The risk adjustment system will determine an average risk for each state. Issuers with aggregate risk that is greater than the average for the state will be compensated by issuers with aggregate risk that is less than the average for the state. 

While a state may choose to allow HHS to administer its risk adjustment program, a state can also opt to use an approved alternative if it has also elected to operate its own exchange. Significant requirements are placed on states to ensure privacy of protected health information. Issuers must submit all data requested, including but not limited to, claims and encounter data, enrollment and demographic information, and prescription drug utilization data.

The ACA requires the establishment of a transitional reinsurance program in each state to help stabilize premiums for coverage in the individual market during at least the first three years of the exchange. Transitional reinsurance applies to non-grandfathered, individual market coverage available on and off the exchange from 2014-2016, though states have the option to extend the program to 2017 or 2018, if funds remain. 

A state that chooses to run its own exchange must also establish an entity to operate the transitional reinsurance program in the state. If a state does not run its own exchange, it may still elect to run the reinsurance program, or it can defer to the federal government.

The reinsurance program creates an attachment-point reinsurance system, but the proposed rule does not establish the attachment point, reinsurance rate or cap. Future federal regulations will suggest what these values should be, though states that are running the reinsurance program will have the option of choosing their own attachment point, reinsurance rate or cap. 

The early retiree reinsurance program, established by the ACA, is an example of an attachment point reinsurance system. In the early retiree reinsurance program, the federal government covers 80 percent of approved claims costs between $15,000 and $90,000. In this setup, $15,000 is the attachment point, 80 percent is the reinsurance rate and $90,000 is the cap. Like the early retiree reinsurance program, the transitional reinsurance program would allow an individual to submit reinsurance claims as soon as those costs exceed the attachment point. 

The transitional reinsurance will serve to subsidize the individual market and reduce prices significantly. However, as the transitional reinsurance program phases out, the cost of premiums in the individual market will likely increase. The funding collected nationally for the reinsurance program decreases from $10 billion in 2014 to $6 billion in 2015 and $4 billion in 2016. Since states have the option to hold onto reinsurance funds and use them in 2017 and 2018, the subsidy will disappear completely sometime between 2017 and 2019, depending on state decisions. Each year that the subsidy decreases, there will likely be a related increase in individual market premiums due to the loss of subsidy. 

To fund the transitional reinsurance system, health insurance issuers and self-insured group health plans will pay an assessment based on market share. Federal regulation will establish a contribution rate, which will effectively serve as a premium tax rate for fully insured business and a claims tax rate for self-insured business.

The temporary risk corridor is a federally administered program that offers a third layer of protection for health plan issuers by allowing them to share the risk for allowable costs with the federal government from 2014 through 2016. The goal is to mitigate uncertainty and pricing risk for issuers and ensure a robust, competitive marketplace in 2014.

In essence, the risk corridor system will compare actual claims costs to predicted claims costs. The predicted amount is referred to as a "target amount" in the ACA and is based in part off the premiums that are charged to customers. The actual cost is referred to as "allowable cost," which must meet certain criteria. In a risk corridor system, a plan with allowable cost that exceeds the target amount is considered to have been underpriced, due to underestimating the expected claims experience of enrollees. Plans with allowable cost that is less than the target amount, are thought to have been overpriced-if they would have correctly predicted (targeted) the claims experience of their enrollees, then premium prices would have been lower, and the target amount would have lined up with the actual, allowable cost. Thus, plans with allowable costs in excess of 103 percent of their target amount will receive payment from HHS, while plans with allowable costs less than 97 percent of target must pay the federal government a portion of their excess margins. The level of risk or gain sharing varies based on the difference from the target.

The ACA requires that risk adjusters, risk corridors and reinsurance be in place in the market no later than January 2014. Both states and issuers will have to implement significant changes in order to execute these three risk mitigation mechanisms.

For more information please go to: healthcare.gov.

The information on this website is based on BCBSM's review of the national health care reform legislation and is not intended to impart legal advice. Interpretations of the reform legislation vary, and efforts will be made to present and update accurate information. This overview is intended as an educational tool only and does not replace a more rigorous review of the law's applicability to individual circumstances and attendant legal counsel and should not be relied upon as legal or compliance advice. Analysis is ongoing and additional guidance is also anticipated from the Department of Health and Human Services. Additionally, some reform regulations may differ for particular members enrolled in certain programs such as the Federal Employee Program, and those members are encouraged to consult with their benefit administrators for specific details.