Reinsurance, Risk Corridors, Risk Adjustment

Premium Stabilization Programs

Among the many aspects of the Affordable Care Act that the general public is unaware are elements that are intended to stabilize premiums for the public but also in another sense assure the insurance companies that they won’t lose money.  These are often nicknamed “The Three R’s” – Reinsurance, Risk Adjustment, and Risk Corridors.  As with any government program, the rules are complex.  Though the three programs all target stabilization of premiums, each of them do it in a different way and target different mechanisms that would otherwise encourage carriers to increase rates and avoid high risk enrollees.  At the same time, you can see how they also stabilize profits for the insurance companies.

Some of these programs are temporary just to get everyone through the period where no one knows exactly what will happen including who and how many will enroll.  Will they only be the old or the young; will they be those already ill versus those who are purchasing insurance to protect themselves from future expenses.

Reinsurance

ACA requires health insurance companies and self-funded group health plans to fund a transitional reinsurance program from 2014 through 2016.  This temporary program is meant to stabilize premiums by reducing the incentive for insurers to charge higher premiums due to the uncertainty about the health status of enrollees.  To implement this, all health insurance companies and self-insured plans are required to contribute funds to the reinsurance pool.  These reinsurance fees are then disbursed to issuers and self-funded plans that disproportionately attract individuals at risk for high medical costs.  It is rightly assumed that individuals with high risk for high medical costs will naturally be attracted to plans offered through the ACA, particularly those who have not had access to insurance because of pre-existing conditions.

Reinsurance fees are paid back to individual market plans where the claims cost for an enrollee exceeds a certain threshold – called an “attachment point” — up to a set reinsurance cap.  For those with access to CMS documentation, this functionally is outlined in the Financial Management Blueprint Process Models, specifically BP-FM-10, -15, and -17.

Obviously there are two aspects to this, the collecting of the fees and the disbursement of the fees.  HHS is responsible for collecting the fees.  HHS uses enrollment counts to calculate a per capita fee – currently $63 per enrollee for 2014 and then decreasing over the next two years.  Insurance companies are required to provide these counts by November 15, 2014.  The first invoices for these fees are expected by December 15, 2015 for the 2014 benefit year.  The first payments are to be made in January of 2015.

As one can imagine, the Reinsurance program requires contributing entities to register and set up a fairly complex infrastructure to compile and make available information about their enrollees and claims.

Risk Adjustment

Risk Adjustment is a permanent plan.  Where Reinsurance is meant to stabilize premiums by protecting insurance companies from the uncertainty of the health status of enrollees, Risk Adjustment is meant to stabilize premiums by mitigating the effect of risk selection across plans.  It provides a disincentive to insurance companies to only attract healthy clients by sharing the risk across plans and companies.

Risk Adjustment essentially transfers funds from plans with lower-risk enrollees to plans with higher risk enrollees.  Again, all plans pay into the program and money is paid out to carriers of both the individual and SHOP (small business) market based on expected costs determined through actuarial calculations.  The program will not make payments until 2018 to allow adequate time for HHS to optimize the data validation process. For those with access to CMS documentation, this functionally is outlined in the Financial Management Blueprint Process Models BP-FM-11 and -18.

Risk Corridors

Risk Corridors, another temporary program, is meant to stabilize premiums by limiting both gains and losses thus mitigating the uncertainty involved in who will enroll and who will not. Plans are to target a payout of 80% of premiums on enrollee’s medical care.  Issuers with costs less than 3% of the target amount must pay into the risk corridors program while funds are redistributed to plans with costs that exceed 3% of the target amount. For those with access to CMS documentation, this functionally is outlined in the Financial Management Blueprint Process Model BP-FM-12.