ACA risk programs level the playing field for insurers

Two of the Affordable Care Act's programs meant to compensate health insurers that receive higher than average claims are working just as they should, according to a new study.

Of the insurers that sold plans on the individual market in 2014 and 2015, those that received the highest-cost claims also got the biggest payouts from the healthcare law's risk-adjustment and reinsurance programs, a study published last week in the journal Health Affairs showed.

In the individual market, some plans get lucky and enroll healthier-than-average members, while others tend to attract sicker, costlier ones. The study showed that risk adjustment and reinsurance “help level the playing field so insurers can focus on other aspects of their business not related to risk selection,” said Paul Jacobs, the study's lead author and a service fellow at HHS' Agency for Healthcare Research and Quality.

Under the ACA, health insurers can no longer charge plan members a higher price for being sick. The law also prohibits insurers from denying coverage to someone with a pre-existing condition. That means insurers are required to sell sick people health policies that will leave insurers on the hook for big health bills beyond a policyholder's deductible. That's a big incentive for an insurer to avoid enrolling those sick members.

To reduce that incentive and keep premiums down, the ACA created premium-stabilization programs: risk adjustment and reinsurance. The permanent risk-adjustment program is meant to discourage insurers from cherry-picking healthy plan members over sicker, riskier ones in the individual and small-group insurance markets.

It works by collecting payments from plans with healthier-than-average members and distributing that money to plans saddled with high-cost members. The program is based on a patient's risk score, similar to what's used in Medicare Advantage, except risk adjustment is a zero-sum game under the ACA.

The three-year reinsurance program, which ended in 2016, protects insurers from costly claims. Insurers pay into the reinsurance pool, and those funds are then paid to health plans that had members with extremely high medical claims. The federal government made $7.8 billion in reinsurance payments to insurers for 2015.

The study did not analyze the third risk program, called risk corridors, which has been politically fraught and labeled a “bailout” by GOP lawmakers.

Small, regional health insurers have complained that the risk-adjustment program unfairly favors bigger payers with more claims experience. Some health co-ops established under the ACA have sued the federal government claiming the Obama administration mismanaged the program by using a flawed formula.

But the study shows the programs have worked fine for most insurers. Most of the revenue transferred through the risk-adjustment program went from insurers with lower paid claims to insurers with higher paid claims, according to the study.

In the reinsurance program, insurers that had higher paid claims received higher reinsurance revenue than insurers with lower paid claims. The 25% of insurers that had the highest claims received more than two times what insurers with the lowest claims received in reinsurance revenue. Together, the two programs boosted most insurers' revenue relative to their claims.

Insurance claims in 2014 and 2015 exceeded premium revenue by $90 to $397 per enrollee per month for the 30% of insurers with the highest claims. But after factoring in revenue from the risk-adjustment and reinsurance programs, the effect was reversed and premium revenue exceeded insurance claims by $0 to $49, according to the study.

Researchers also found that smaller insurers benefited most from both the risk-adjustment and reinsurance programs.

“These programs are working well to compensate insurers for the health status of those they insure,” said Erin Trish, health policy professor at the University of Southern California who was not part of the study. “In any situation where you're going to not allow insurers to fully adjust their premiums to reflect the health status of who they're covering, you need to have risk adjustment in place to adequately compensate insurers.”

The CMS has finalized several changes to the risk-adjustment program. Starting in 2018, the program for exchange plans will now factor in the effects of people who are enrolled for only part of the year. Prescription drug data will also be factored into the program's complex formula.