- The implementation of the Affordable Care Act risk adjustment program has created a number of challenges - as well as some promising opportunities - for payers participating in the ACA marketplaces.
Under the ACA, payers can only adjust premiums according to an enrollee’s age, geography, family composition, and tobacco use. Health plans may also charge members more if members decide to enroll in generous health plan benefits beyond what is offered in a benchmark plan (standard essential health benefit plan).
Because payers are limited in terms of pricing and cannot deny coverage to individuals due to pre-existing conditions, they are at risk of losing profitability if they cover a high proportion of very expensive enrollees under their plans.
For payers offering individual or group insurance plans in the state and federal marketplaces, the ACA risk adjustment program attempts to lessen the financial burdens of being unable to pick and choose enrollees.
The program redistributes an average of 10 percent of individual health plan premiums from low-risk plans to high-risk plans,
ACA risk adjustment rewards payers through payment transfers based on certain risk adjustment methodologies with specific guidelines for individual and group plans. States operating an independent insurance exchange can choose to either incorporate their own methodology or rely on HHS’s methodology.
The HHS methodology assigns numerical values called risk scores that predicts a person’s likely healthcare costs based health conditions, age, and gender. HHS then calculates all the risk scores to determine a health plan’s entire average risk score. The average risk score represents a plan’s expected costs.
The new HHS methodology plans to incorporate other risk indicators such as prescription drug use and surgical expenditures.
Risk adjustment payments are then transferred to plans with the highest average risk scores after all plans compare risk scores to a regional baseline premium.
This process is intended to protect payers and patients from adverse selection and risk selection.
Adverse selection is when individuals wait to enroll in a health plan once they become sick. This practice would likely spike premium rates for other beneficiaries and have a negative impact on payer finances.
Risk selection is when payers actively try to enroll healthier individuals and dissuade unhealthier people from enrolling to drive down costs.
Provisions in the ACA protect both payers and beneficiaries from risk selection and adverse selection by limiting open enrollment periods, enforcing risk selection protections, and redistributing funds from health plans with low-risk populations to high-risk health plans.
The risk adjustment environment under the ACA
The ACA’s risk adjustment program is the only premium stabilization policy currently administered by law. Risk adjustment is critical to manage, since payers aren’t likely to see the benefits of stabilization programs that have been discontinued or otherwise weakened.
The federal reinsurance program in place from 2014 to 2016 provided additional funds to payers that experienced high rates of spending on catastrophic illnesses or other high-cost events.
Reinsurance programs at the federal and state level have led to millions in payer savings. The reimplementation of a $10 to $15 billion federal reinsurance program could lower individual premiums by 13 to 17 percent, according to experts from AHIP and Avalere.
A second program, called the risk corridor, was designed to enforce the ACA’s medical loss ratio (MLR) rule so that marketplace participants were spending at least 80 percent of their premium dollars on healthcare expenses.
The program transferred premium dollars from health plans that had an MLR under 80 percent to those that had an MLR of 80 percent or more.
However, the federal government now owes billions in risk corridor payments to payers. A Wharton School at UPenn analysis of risk corridor payments estimates that the federal government owes payers nearly $12.3 billion in risk corridor payments.
Many payers are owed risk corridor payments from 2014, 2015, and 2016 since they had higher MLRs. However, lawmakers in Congress delayed the payments and caused many payers to file federal lawsuits to pursue these payments.
Risk adjustment challenges for health insurers
Waning participation in the individual market, issues with individual health plan profitability, and new federal policies are creating a number of risk adjustment challenges for payers.
For example, fluctuations in enrollment due to uncertainty around the law are producing significant concerns.
A PricewaterhouseCoopers report from 2016 found that in Covered California, the state’s insurance marketplace, individual health plan enrollees were only likely to maintain health plan membership for two years. The findings suggest that individual health plans experience sharp changes in beneficiary risk as members suddenly drop their coverage.
Similar individual health plan fluctuations occurred in the state of Minnesota, creating increased risk uncertainty.
Payers in the state cited rising medical costs for fluctuations in health plan enrollment. Individual health plan enrollment in the state decreased by 35 percent from 2016 to 2017 but created increased profits for payers. Other types of coverage including commercial, Medicaid, and Medicaid saw increased enrollment while earning lower revenues.
A number of payers are also abandoning the marketplaces all together, altering the available funds for redistribution.
Anthem, Aetna, and several other large payer organizations have left the exchange marketplaces, citing issues with profitability and incurring multi-million dollar losses.
Significant federal changes such as expanding short-term and association health plans, repealing the individual mandate, and eliminating cost sharing reduction payments are likely to destabilize individual health plan markets.
How ACA risk adjustment policies impact payers
Payers operating under the ACA’s risk adjustment program will need to take it upon themselves to ensure they are being accurately rewarded for covering the expenses of higher-risk beneficiaries.
Accurate identification of high-risk and low-risk populations is essential for claiming the correct repayments. In order to ensure that payers are assessing their populations correctly, they must engage in risk stratification analytics.
An all-payers claims database allows local and regional payers to submit and analyze data related to healthcare costs and beneficiary diagnoses from across the community. The volume of information in these databases may help develop better indicators of how chronic conditions increase healthcare spending.
Payers could also leverage social determinants of health data to address other beneficiary risks outside of clinical environments. Social determinant data can help payers understand which demographic groups are more likely develop chronic diseases based on socioeconomic characteristics.
In order to get ahead of chronic diseases and keep costs low, payers may wish to explore preventive care programs. Successful preventive care programs can reduce risks around common chronic conditions such as diabetes and COPD. Chronic disease interventions that support provider operations may also help reduce chronic disease rates. Interventions are likely to work best with a mix of clinical and community partnerships.
Payers that can successfully address the challenges of the ACA risk adjustment program are more likely to maintain financial solvency and less likely to experience destabilizing financial outcomes.