While the answer may be no, with health insurance risk-mitigation mechanisms again in the news—related to the forthcoming release of the 2021 Notice of Benefit and Payment Parameters and 2021 CMS-HCC methodology, continued state interest in 1332 waivers, and upcoming oral arguments in the Supreme Court, it may be time to brush up on the 3Rs: risk-adjustment, reinsurance and risk corridors.
Risk-adjustment is a feature of several federal health benefit programs, for example, Medicare Advantage, Part D and Affordable Care Act (ACA) Marketplaces. Risk-adjustment serves to balance health risk in multi-issuer markets in which beneficiaries cannot be denied enrollment (guaranteed issue) and sicker individuals cannot be charged more (community rating). In these markets, because of reputation, premium, or network, one issuer may enroll a disproportionate number of sicker individuals. If risk-adjustment were not present, then that health plan would have to charge more to reflect its higher costs—making the plan uncompetitive and ultimately leading to market withdraw and consolidation. Most commonly risk-adjustment is done by mathematically estimating expected costs based on an enrollee’s demographics and diagnoses. While these estimates are not very accurate the individual level, they do tend to perform well across a population, except for very high cost individuals.
To that end, some markets also include reinsurance as a risk-mitigation mechanism. Reinsurance provides protection for the highest cost individuals in a market; ones that are not usually well-accounted for in risk-adjustment. For example, once an individual’s medical expenses exceed $300,000 in year, a reinsurance program could be set up to cover 75% of the cost beyond the point. Part D has a catastrophic coverage benefit that acts as reinsurance, and the ACA Marketplaces had a reinsurance program in place for the first three years of operation (2014, 2015, and 2016). Recently, many states have used 1332 waivers (named for Section 1332 of the Affordable Care Act) to reintroduce reinsurance into their individual markets to encourage broader plan participation and lower premiums.
The last of the 3Rs is risk corridors. Risk corridors are most often found in new programs or markets. They are used to mitigate uncertainty around market performance overall (e.g. the individuals who enrolled in a market had different costs than anticipated, or costs and utilization were different than priced). Specifically, a government-based risk corridor program mitigates both excessive profits and losses by having the government take increasing cuts of profits and losses past given thresholds (e.g. the issuer is only liable for 20% of the losses beyond 8% of its target).
Risk corridors can also lower the absolute losses for new market entrants; thus, more issuers may participate and make a market more competitive. Part D, for example, was set up with a risk corridor program because Medicare had not previously offered outpatient drugs as a benefit. Furthermore, CMMI demonstrations like the new Direct Contracting model can include risk corridors to facilitate providers without substantial financial reserves entering into a capitated arrangement without risking bankruptcy.
Like with reinsurance, risk corridors were a feature of the ACA for its first three years of operation. This was because the government anticipated many previously uninsured individuals without claims experience would be entering the market. Without the risk corridors, smaller plans may have been more reluctant to participate, and all issuers would have likely priced their products higher to account for the risk of systematic adverse selection. As it turned out, policies like allowing some individuals to keep their non-ACA compliant plans along with pent-up demand for services did result in higher-than-expected costs in the Exchanges—resulting in billions of dollars in claims to the ACA risk corridor program that have yet to be paid.
On December 10th the Supreme Court will hear oral arguments on the question of whether the government must pay health plans that participated in the early days of the ACA exchanges more than $12 billion dollars in accrued risk corridor program obligations. The legal issues, at a high level, are related to (1) whether the risk corridor program was supposed to be budget neutral (i.e. losses could only be paid to the extent profits were collected), and (2) if it was not meant to be budget neutral, does the fact that Congress did not appropriate money to fund the losses in the risk corridor program absolve the government from its obligations to pay.
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