Implementing Health Reform: First-Year Results From Reinsurance And Risk Adjustment Programs

On June 30, 2015, right on schedule, the Centers for Medicare and Medicaid (CMS) announced the results of the first year (2014) of the operation of the reinsurance and risk adjustment programs. The reinsurance and risk adjustment programs are two of the “three R” premium stabilization programs. Results from the third program, the risk corridor program, will be announced in mid-August.

From all appearances, the programs are operating successfully as intended. The reinsurance program was intended to collect a pool of $10 billion from health insurers and self-insured health plans for 2014 to distribute to health plans in the individual market to reinsure the cost of high-cost cases. The risk adjustment program was intended to collect funds from health insurers in the individual and small group market that attracted a healthier than average pool of enrollees and transfer those funds to insurers that serve less healthy than average enrollees.

Premium Stabilization Programs

Regulations implementing the premium stabilization programs were published in 2012, but the programs have been refined through the annual Benefit and Payment Parameters rules and a seemingly endless series of frequently asked questions and guidance seminars on the CMS REGTAP website. They are among the most complicated ACA programs as they involve assembling and analyzing massive amounts of data and collecting and distributing large sums of money.

The federal risk adjustment program included insurers in every state except Massachusetts, which operated its own risk adjustment program, while the reinsurance program covered insurers in every state except Connecticut, which operated its own reinsurance program (although Connecticut reinsurance data is included in the report). Nationally, 484 insurers participated in the reinsurance program, of which 437 received payments. Of risk adjustment, 758 insurers participated in the program.

Participating insurers were required to set up EDGE servers through which they could transfer to CMS the data necessary to calculate reinsurance programs and risk adjustment information while retaining control of sensitive enrollee information. CMS reports that 99.7 percent of insurers who set up EDGE servers successfully submitted the data necessary to calculate program payments and transferred. Nationally only 10 insurers failed to create an EDGE server or transfer the necessary data and were thus subject to a default risk adjustment charge, which was redistributed to other insurers in the insurer’s state.

The Cost of Claims

The reinsurance program was supposed to collect $10 billion for 2014 and to pay insurers offering ACA-compliant (non-grandfathered or grandmothered) plans in the individual market 80 percent of the cost of claims that exceeded $45,000 up to a cap of $250,000. In fact the program only collected $8.7 billion, but total claims equaled only $7.3 billion, so the program will pay out 100 percent of the claims between the $45,000 threshold and $250,000 cap.

Four hundred and thirty-seven insurers will receive reinsurance payments. Excess funds collected will be used to enhance reinsurance payments for 2015 or 2016. The amount of reinsurance funds that will be paid out to each insurer are listed in the report, although the report notes that reinsurance and risk adjustment funds are subject to sequester (a reduction of about 7 percent) for this year, with the difference to be paid out next year.

The risk adjustment program will transfer 10 percent of funds in the individual market, 6 percent in the small group market, 21 percent in the catastrophic market, and 2 percent in states with merged markets. The report lists for each insurer subject to the risk adjustment program how much the insurer will pay or receive in the individual and small group market.

While many insurers will receive, or in some cases, pay relatively small net amounts, for some insurers massive amounts of money are involved. Blue Cross of California will receive $401 million in reinsurance payments but owe $182 million in risk adjustment contributions in the individual market. The California Blue Shield plan, on the other hand, will collect $363 million in reinsurance and $135 million in individual market risk adjustment funds.

The Florida Blue Cross Blue Shield program will collect $265 million in reinsurance and $221 million in individual market risk adjustment programs. Coventry of Florida will collect $64 million in reinsurance but owe $161 million in risk adjustment contributions in the individual market.

CMS states in the report:

Our preliminary analysis of the risk adjustment transfers for the 2014 benefit year shows that the risk adjustment methodology is working as intended — by compensating issuers that enrolled higher risk individuals and protecting against adverse selection within a market within a state. For example, we have found that:

• Issuers that enrolled a large share of HIV/AIDS patients, whether because they offered more robust prescription drug coverage or contracted with the Ryan White Foundation, received risk adjustment payments;
• Issuers that attracted more high-risk patients due to networks that include key specialty hospitals received risk adjustment payments;
• Issuers that had a history of serving high risk individuals as the issuer of last resort and therefore enrolled a disproportionate number of expensive consumers received risk adjustment payments; and
• Small plans with isolated cases of catastrophically ill individuals received risk adjustment payments.

Without a great deal more knowledge than I have about the insurers listed in the report, it is difficult to verify these claims. Anecdotally, three of the four plans that were subject to a civil rights complaint for discriminating against AIDS patients in Florida seem to have on net paid into the risk adjustment program but one was a net gainer.

Nationally, many of the new cooperative plans received risk adjustment programs, but others paid into the risk adjustment program. The Blue plans, traditionally the insurer of last resort in many states, generally did well in the reinsurance programs but had mixed results in the risk adjustment program.

Certainly insurers that have to pay in to the program will not be pleased, and we can expect to hear from them. There may also be mistakes in the data. Insurers can appeal results they believe to be incorrect.

But the big news is that two incredibly complex programs that play a key role in encouraging insurers to accept high-cost patients and to discourage insurers from risk selection seem to have come off without serious technical problems. It is quite a contrast to last year’s launch of the exchanges and a testimony to the effectiveness of the current management of CMS and its relationship with insurers.