The Affordable Care Act (ACA) will prohibit health insurers from denying coverage and from excluding coverage of pre-existing coverage.  It will also limit how much more in premiums insurers can charge to high-cost groups compared to low-cost groups.  For example, a consumer’s health status and sex may not be used to set premiums, even though unhealthy consumers and women tend to have higher per capita medical costs.  Health plans will also be limited in their abilty to vary premiums based on a person’s age.  In the new risk pools in the health insurance market starting in 2014, the healthy, the young, and men will subsidize the unhealthy, the older, and women.

To counterbalance the cost of insuring unhealthy people, the health reform law requires states to establish risk adjustment mechanisms that, in essence, transfer money from plans with relatively healthy enrollees to those with relatively unhealthy and expensive enrollees. As with health insurance exchanges, states that choose not to run their own risk adjustment programs will have the Center for Consumer Information and Insurance Oversight (CCIIO) at the HHS Centers for Medicare and Medicaid Services (CMS) do it for them.

A brief from the Robert Wood Johnson Foundation, published in Health Affairs,  described several potential complications of risk adjustment in the new health insurance marketplace starting in 2014. The two most significant issues were:

  • Large-scale risk-adjustment payments present uncharted territory. Medicare Advantage health plans have received risk adjustment payments for more than 10 years. But the people who will be newly covered after 2014, when the individual mandate takes effect and health insurance exchanges must be in place, will be younger and have more pent-up demand for health care than Medicare Advantage enrollees. As a result, insurers will find it hard to predict how much health care will cost for those newly insured people, which will make the task of mitigating those costs more difficult.
  • “Upcoding” could make people appear to be more sick than they are and could warp risk-adjustment systems. Providers seeking insurance payments sometimes label, or code, a treatment case in the most severe category the treatment will allow. Providers might also treat conditions such as heart disease or arthritis that are not related to the reason a person sought care. Both practices are called “upcoding,” and states and CMS will need to develop methods to prevent it from making insured people seem more risky than they are. Diagnosis-based information as opposed to demographic information, the brief says, also will be important to measure risk correctly and to avoid over- or under-compensating insurers for the cost of care.

Risk adjustment payments will affect all new individual and small group qualified health plans (QHPs) – health plans that offer essential health benefits as defined by the ACA – both in and out of the health insurance exchanges.

States can opt to use risk-adjustment systems similar to those Medicare Advantage and Medicare Part D already use. They can also propose a different method.  Most state Medicaid agencies use risk adjustment as part of their capitated payment systems for Medicaid health plans.  CMS intends to publish its own risk adjustment methodology later this year.

Reinsurance and Risk Corridors

From 2014 to 2016, states may use a transitional reinsurance method: States, or CMS in states that choose not to participate, would collect a fee from insurers based on their market share. The funds would then pay for a percentage of claims, above a certain amount and limited by a cap, in individual health plans with high-cost enrollees.

CMS will run a separate transitional program to manage risk, called a risk corridor. During 2014-2016, health plans whose costs are at least 3 percent below projections would pay CMS a percentage of their savings. The money would compensate plans whose costs are more than 3 percent higher than projections.

Both temporary, three-year programs – reinsurance and rick corridors – will help to mitigate the risks health insurers face under the new ACA regulatory framework, particularly in the individual market.

A research report from the Society of Actuaries – Design and Implementation Considerations of ACA Risk Mitigation Programs – examines the potential implications of all three risk mitigation programs – risk adjustment, reinsurance, and risk corridors – established under the Affordable Care Act.  The report was authored by Jim O’Connor and Adrian Clark of Milliman, Inc.

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Kip Piper is a Medicare, Medicaid, and health reform consultant, speaker, and author.  He advises health plans, health systems, states, drug and device manufacturers, and investment firms throughout the U.S.  For more, visit KipPiper.com.  Follow on Twitter at @KipPiper and connect with Kip on LinkedIn.