For health plans, the Affordable Care Act dramatically increases complexity and uncertainty in the health insurance market.  One thing is clear – Obamacare turns traditional risk management practices of health plans upside down.

Predicting and adapting to the financial and operational dynamics of ACA is a daunting challenge for health plans, both in and outside the new health insurance exchanges:

  • Enrollment mix is difficult to predict, as is the behavior of individuals and employers under Obamacare pricing, regulations, penalties, and subsidies.
  • The demographic and morbidity characteristics of new enrollees are, so far, different than what insurers and their actuaries assumed when setting premiums for 2014.  Adverse selection is a ongoing concern.
  • The interactions, nuances, and ultimate impact of key ACA policies – guaranteed issue, adjusted community rating, risk adjustment, transitional reinsurance, risk corridors, minimum loss ratio (MLR) rebates, individual mandate, employer mandate, new taxes and fees, and federal subsidies – are as unprecedented as they are complex.
  • The disastrous rollout of the health insurance exchanges, muted take-up, an ill-informed public, unstable policymaking, a less than transparent HHS, rampant political spin, implementation delays, and ever-changing deadlines all combine in further increase uncertainty.
New Risk Management Paradigm for Health Plans:

Under guaranteed issue, health plans must take all comers.  Under adjusted community rating, insurers must charge healthy and unhealthy consumers the same.  They also can’t charge women (who tend to use substantially more services) more than men, and are more limited in how much more they can charger older consumers.

Risk adjustment – something routine for Medicaid health plans and Medicare Advantage plans but new to the commercial market – is a particular game changer.  Under the traditional financial incentives of the pre-ACA markets, health plans were strongly motivated to attract and retain healthy members. However, in the post-ACA market, health insurers face a fundamentally different risk management dynamic. Generally, the members likely to be profitable (or not profitable) in the ACA regulated markets are the opposite of what you would expect.

This new dynamic is carefully explained in an interesting new health reform briefing paper by Jason Petroske and Jason Siegel, both consulting actuaries with Milliman.  ACA policies will generally make certain types of high utilizers – notably newborns, adult women, and older workers – the most profitable type of members.  In particular, risk adjustment will drive increased payments to health plans with a greater mix of members with multiple medical conditions – at the expense of those insurers with a greater mix of healthier consumers.  In fact, health plans with a disproportionally healthy mix of members could see pretax losses.

The federal risk adjustment methodology, which will be used in most of the country, will generally boost plan payments more than the expected average higher cost of members with health conditions.  That is, risk adjustment is expected to more than compensate for having a higher mix of unhealthy members.

However, by design, risk adjustment is a zero sum process across a market – with money moving from plans with low risk scores to plans with high risk scores.  Health plans with high-risk consumers also benefit from federal reinsurance payments.  Risk adjustment is a permanent feature of the post-ACA insurance market.  Transitional reinsurance payments and risk corridors will operate in 2014-2016 only.

A New Bottom Line for Health Plans:

Of course, the idea of health plans making higher profit margins on high utilizers and unhealthy consumers is precisely the opposite of what you would expect. But, as the Milliman analysis shows, the ACA policies turn many of the financial incentives of the health insurance industry 180 degrees.

Successful health plans will be those that adapt and align their strategies, capabilities, and practices – rating setting, benefit designs, marketing, retention, risk management, care management, network performance, data collection, and analytics – to the ACA’s brave new world.

To read the Milliman issue brief, click here.