CMS: Reinsurance, Risk Adjustment Programs Worked Well in 2016

July 06, 2017 - CMS has released the results from 2016 for reinsurance and risk adjustment transfers, two of the “three R’s” used to stabilize premiums in the Affordable Care Act (ACA) marketplaces.  

This marks the third year the agency has disclosed its data on the two premium stabilization programs.  Data related to the third “R,” risk corridors, will be announced later this year.

When the ACA marketplaces were launched, the “three R’s” were implemented as a means to provide security for insurers to enter the exchanges and offer compliant plans.   Despite political criticism, CMS found that the results of both risk adjustment and reinsurance premium stabilization programs were satisfactory.   

Risk adjustment is intended to transfer funds from issuers with low actuarial risk to plans with high actuarial risk.

The reinsurance program is designed to reduce the liability on claims for insurers with extremely high-cost enrollees who receive coverage through the health insurance exchanges.   

READ MORE: Risk Adjustment Affects Plans on Health Insurance Exchanges

“The transitional reinsurance and permanent risk adjustment programs functioned smoothly for the 2016 benefit year, as the Patient Protection and Affordable Care Act compliant market continued to grow,” stated CMS in its report.

“Both the transitional reinsurance program and the permanent risk adjustment program are working as intended in compensating plans that enrolled higher-risk individuals, thereby protecting issuers against adverse selection within a market within a state and supporting them in offering products that serve all types of consumers,” the report further stated.

A total of 767 issuers participated in the reinsurance and risk adjustment programs for the 2016 benefit year, of which 726 established External Data Gathering Environment (EDGE) servers.

As a result of the premium stabilization program, some insurers will receive large transfers of funds, and some will be paying.  For example, insurers such as Blue Shield of California are slated to receive $201 million in reinsurance, $265 million in risk adjustment in the individual market, and $106 million in risk adjustment in the small group market.

Some insurers will have to transfer out substantial sums, particularly in risk adjustment payments.   The contrast between payers can be extreme. While BCBS of Florida is set to receive $464 million in risk adjustments, some of its Sunshine State neighbors owe nine-figure sums.  These include Molina Healthcare of Florida, which will pay $253 million, Celtic Insurance Company of Florida ($161 million), and Coventry HealthCare of Florida ($112 million). 

READ MORE: Risk Pool Gains on Horizon for Health Insurance Marketplace

The risk adjustment program has come under fire from insurers for the formula used to assess payments. 

The risk adjustment program applies to any health insurance issuer offering plans in the individual or small group market, with the exception of grandfathered health plans.  

Risk adjustment has been used to compensate insurers for high cost enrollees.  In the lowest quartile of claims costs, the assessed risk adjustment was charged at 18 percent of collected premiums.  In the highest quarter of claims costs, risk adjustment payments were approximately 27 percent of premiums. 

CMS cited this data as evidence the risk adjustment program works.  “The correlation of payment transfers confirm that risk adjustment is working as intended to transfer funds from issuers with low actuarial risk to plans with high actuarial risk. Likewise, issuers with higher claims costs also received larger reinsurance payments,” concluded CMS.

Beginning in 2017, CMS implemented changes to its risk adjustment methodology to provide more accurate projections.  This includes incorporating the costs of preventive services and prescription drug price increases into the formula.  Further changes are planned for 2018, including the establishment of a high-risk pool.  Additional adjustments will be made for partial-year enrollees and prescription drug pricing, as well.

READ MORE: ACA Risk Adjustment, Reinsurance Improved Payer Financials

The report found that in 2016, as like 2014 and 2015, risk adjustment transfers as a percentage of premiums were similar.  In 2016, the absolute value of risk adjustment transfers was 11 percent of premiums for the individual market and six percent in small group markets.  The report cited the statistics were due to a shift from healthy enrollees from platinum and gold to silver or bronze plans.

A total of 751 insurers participated in the 2016 risk adjustment program.  CMS reported that 42 insurers received default risk adjustment charges, 41 did not submit data, and one insurer did not provide HHS with access to the collected data.

Risk adjustment transfers averaged 11 percent of premiums in the individual market, up from 10 percent in 2015, while small group transfers remained steady at 6 percent of premiums.  

It was expected that risk scores across the marketplace would increase as the ACA progressed.  This would be in part to better modeling and data of enrollees, and the belief that the marketplace population would include larger numbers of higher-cost enrollees.  That result has not materialized, according to CMS data.

For the 2016 benefit year, an estimated $4 billion in reinsurance payments will be paid out to 496 insurers nationwide.  In its report, CMS estimates that over half the claims (52.9 percent) are between $90 and $250,000, and will be payable by the end of 2017.    

Over 83 percent of these reinsurance payments will come from the $3.3 billion already collected from other insurers.  

Even though the debate over the merits of reinsurance programs continues, they have been shown to make a substantial contribution to reducing net claim costs.  According to the CMS report in 2014, reinsurance lowered net claim costs 10 to 14 percent.  In 2016, reinsurance programs lowered claim costs by four to six percent. The discontinuation of this transitional reinsurance program after 2017 was cited as a factor in higher marketplace premiums for 2017 and beyond, and led to calls for establishing a permanent reinsurance program.

Despite continued political uncertainty over the health of the state marketplace exchanges, the CMS report serves to confirm that the premium stabilization programs in place are working effectively as designed.