Risk corridors are intended to protect health insurers from having premiums that end up being too high or too low. However, some aspects of the rule’s formula and language pose challenges in this risk-sharing agreement between insurers and the federal government.
In the article “Risk corridors under the ACA,” Milliman consultants provide three scenarios showing the complexities of risk corridor calculations. This excerpt demonstrates the results of a mispricing scenario:
Because the goal of the program is to cushion against pricing uncertainties, let us modify our example to see what happens when our issuer prices its product 10 percent higher than what would have been ideal (above and beyond the priced-for profit margin), and when our issuer prices its product 10 percent lower than what would have been ideal. Does the risk corridor “protect” against these scenarios?
Just to be clear, given all the “profits” floating around: The line labeled “Priced Profit Margin” in Figure 2 is the profit the issuer intended to make. The “Profits” line is the profit amount used in the risk corridor formula after applying the floor. Finally, the last two lines show the approximate profit margins the issuer experiences as a percentage of total premium before and after the impact of the risk corridor program.
In both scenarios shown in Figure 2, the transfer payment between the plan and HHS mitigates the impact of the deviation from pricing assumptions to some degree, but far from completely. In the overpricing scenario, the allowable administrative costs are capped at 20 percent of after-tax premiums, plus taxes and fees. If this cap were not present, then the issuer would be permitted to deduct its entire allowable administrative costs (including the large profit), and there would be no risk corridor payment made.
Similarly, in the underpricing scenario, if the profits were not floored (at 3 percent of after-tax premiums), then there would be no risk corridor payment received. This explains why the cap and floor are needed—without them, the program doesn’t make sense (assuming that it is to be based on actual expenses rather than pricing assumptions).
Originally published in Health Watch, October 2013 by the Society of Actuaries.
The October 2013 edition of Health Watch focuses on the “three Rs” of the Patient Protection and Affordable Care Act (ACA): reinsurance, risk corridors, and risk adjustment. Milliman consultants contributed three articles on these issues:
• The cover article, “Risk corridors under the ACA” by Doug Norris, Mary van der Heijde, and Hans Leida, examines the technical and strategic considerations of the risk corridor provision.
• In the article “Strategies for leveraging the ACA risk adjuster,” Jason Siegel outlines operational strategies that health plans could deploy to optimize their risk adjustment performances.
• Rob Damler’s article, “Medicaid expansion under the Affordable Care Act,” examines how expected increases to the Medicaid population could affect different demographics and risk compositions within existing state programs.
The Patient Protection and Affordable Care Act (PPACA) introduces new restrictions on insurers’ ability to use demographic variables to price policies in the individual and small group markets. Gender, age, and other community variables have long been used for premium price differentiation. However, beginning on January 1, 2014, rates may not differ based on gender, and must adhere to a maximum 3:1 ratio when comparing the premium for the most expensive adult age group and the least expensive adult age group.
These new regulations will increase the difference between healthcare costs and what insurers are allowed to charge in premiums, raising the potential for adverse selection as traditionally less expensive demographics, such as young males, seek other health insurance alternatives. Plans will also be allowed to vary rates by area, tobacco use, and family size, but those factors are unlikely to offset this effect. Although much of the recent focus on the implications of this change is on the age limitations, in reality much of the restriction’s impact is caused by moving to unisex rates.
See the full article here.
The Patient Protection and Affordable Care Act (PPACA) mandates changes to health insurance products if they are to be sold through an exchange starting in 2014. These benefit design changes will not only affect insurer cost, but may result in several other consequences—most notably changes in utilization. Insurers need to properly prepare for and manage the potential for increased utilization and adverse selection when designing plans for entry into a health exchange.
Read the full briefing paper on this here.