The elements of the Patient Protection and Affordable Care Act (ACA) known as the “three Rs”—risk adjustment, reinsurance, and risk corridors—are designed to level the playing field for insurers in the commercial individual market. They are also intended to help insurers transition through healthcare reform, address adverse selection, and protect consumers by keeping premiums as stable as possible. To one degree or another, all three were earlier implemented as part of Medicare Advantage and Medicare Part D (MAPD), albeit in somewhat different forms.
In Hans Leida’s new paper “Learning from Medicare Advantage and Part D: Lessons for the individual insurance market under ACA,” he discusses how the three Rs will function within ACA’s commercial market in comparison with their applications in the MAPD market.
Here is an excerpt from the paper:
The first R is risk adjustment. Part of the mission of ACA is to make health coverage more equitable by eliminating rating on the basis of health status, and by eliminating or restricting other rating variations (such as by age and gender). However, in order not to bankrupt insurers that take on sicker individuals, the ACA imposes transfers of money between insurers that are intended to even out costs across issuers. These transfers are called risk adjustment, and are based on a complicated formula involving a risk score given to each individual based on their demographics and medical conditions. Issuers with a member base that is relatively riskier than others will be subsidized, and those with a less risky member base will be assessed. The risk adjustment program is a permanent feature of ACA.
In MAPD, the government directly varies its payments to insurers based on the risk scores of the individuals each insurer covers, and managing risk scores is a crucial key to success in that market.
Second in the government’s lineup of risk mitigation strategies is reinsurance. Under this program, the federal government will reimburse individual market issuers for a portion of the claims incurred by high cost individuals. A form of reinsurance for high claimants is also part of the Medicare Part D drug program, and was probably included for the same reason: to make insurers less nervous about jumping into an untested market.
While reinsurance is currently set to be phased out of commercial markets over the course of three years, it is a permanent feature (barring statutory changes) of Part D. Reinsurance does not fully protect individual market issuers from high claimants or do away with the uncertainty surrounding new market entrants, but it does materially mitigate issuer’s risk during the transitional years of ACA implementation.
Third, the ACA implements another tool borrowed from Medicare Part D: the risk corridor. A risk corridor protects plans against mispricing by sharing profits and losses with the federal government. As usual, the details are complex. At a high level, the government reimburses a portion of losses to plans that lose money, and requires profitable plans to remit a portion of their profits to the government. The risk corridors are the different tiers defining the government’s share of gains or losses, which starts at zero percent for small gains or losses, and ramps up to 80% for large ones.
This concept is set to apply to QHPs in the individual market for three years starting in 2014. By contrast, in Part D this is again a permanent feature, although CMS has the authority to increase the amount of risk borne by Part D insurers over time, which would amount to a phase-out of the risk corridors.
As with MAPD, the operation of these three programs will require significant amounts of data and reporting back and forth between issuers and the federal government. In addition to supplying the data and reporting, issuers must also maintain records and prepare for federal audits of this information.
One lesson learned from Medicare Part D is that all of these risk abatement features intended to increase insurers’ willingness to take part in the new market can actually be too successful. In Part D, some insurers may have seen these government subsidies as an opportunity to price aggressively in order to capture market share, since the government would bear a significant portion of losses should rates turn out to be insufficient. If this were to happen in the individual market under ACA, it is possible that the risk corridor program—which was scored as revenue neutral to the government by the Congressional Budget Office—might in fact require a significant net expenditure of federal funds.
A previous post examined the parallels between ACA’s regulation of the commercial market and existing MAPD market regulations.