By Timothy Jost

On June 30, the Centers for Medicare and Medicaid Services (CMS) released the results for the third year (2016) of the reinsurance and risk adjustment programs, two of the Affordable Care Act’s “three R” premium stabilization programs. The 2016 results from the risk corridor program, the “third R” will be announced later this year.

ACA’s “Three R” Programs Are Modeled After Medicare Part D,
But Are Weaker And More Controversial Than Their Part D Counterparts

The ACA’s three R programs were modeled after similar premium stabilization programs that have operated for about a decade for Medicare Part D prescription drug plans. The Part D program also has a risk adjustment program (which adjusts premiums prospectively rather than insurer income retrospectively), a reinsurance program (which is much more generous than the ACA program and permanent rather than temporary), and a risk corridor program (also permanent, and initially more generous than the ACA program.). The part D premium stabilization programs played an important role in attracting insurers to the prescription drug program initially and have helped to keep premiums stable and premium increases low since the program was launched in 2006. They have undoubtedly been an important factor in maintaining the popularity and bipartisan support for Part D.

The ACA premium stabilization programs have proven far more controversial than the Medicare Part D programs. The risk corridor program has been criticized as an Insurer “bail-out” and was seriously undermined by appropriations riders enacted by Congress limiting program payouts to the amount collected from insurers. For 2014, the Department of Health and Human Services was only able to pay out 12.6 percent of the amounts owed insurers under the statutory formula because of this constraint, while it has been unable to make any payments for 2015 as it had to set off 2015 collections against 2014 obligations.  This no doubt contributed to the insolvency of a number of insurers and has resulted in a number of lawsuits in the Federal Court of Claims, as insurers attempt to collect the full amount they claim they are due under the statute.

The reinsurance program was supposed to collect $25 billion over its three- year life and pay $5 billion of that amount to the Treasury, apparently to reimburse it for funds spent on the Early Retiree Reinsurance program from 2010 to 2013.  Collections fell short in the first two years, and the Obama administration took the position that this reimbursement to the Treasury would only be paid after all reinsurance obligations were first met.  It paid nothing to the Treasury in 2015 and less than a half a billion dollars for 2016.  This position has been condemned by ACA critics and legislation was introduced in 2016 to force HHS to make the repayment.  The Trump administration has apparently not bowed to this pressure and is paying the full $4 billion due to insurers under the program for 2016.

The formula used by the risk adjustment program has also come in for criticism. CMS made a number of changes in its risk adjustment methodology for 2017, including factoring in preventive services and better accounting for drug cost increases.  It will incorporate even greater changes for 2018, including adjustment for partial-year enrollees and prescription drug use and setting up a separate risk adjustment pool for very high costs cases.

A Widespread Recognition Of The Importance Of Reinsurance

Despite criticism, the reinsurance program has in fact made a substantial contribution to constraining marketplace premiums. During 2014, the reinsurance program reduced net claim costs an estimated 10 to 14 percent, during 2015, 6 to 11 percent, and during 2016, 4 to 6 percent.  The end of the reinsurance program after 2016 has been a major driver of premium increases for 2017 and 2018.  Recognizing this, there is a consensus in Congress that further reinsurance funding is needed.  The House’s American Health Care Act, the Senate’s Better Care Reconciliation Act, and health reform legislation introduced by Democrats all include reinsurance funds for the individual market.

The federal risk adjustment program for 2016 covered non-grandfathered insurers in the individual and small group markets in every state except Massachusetts, which operated its own risk adjustment program. Transfers happened within each state.  The reinsurance program covered non-grandfathered insurers in the individual market in every state.

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. Nationally, 496 insurers were eligible for reinsurance payments.  Of these 445 will receive reinsurance payments.  CMS estimates that 52.9 percent of claims between $90 and $250,000 will be payable for the year, with 83 percent of that money currently available through the $3.3 billion already collected for the reinsurance program.

A total of 751 insurers participated in the risk adjustment program, which covered the individual and small group markets. Default risk adjustment charges were assessed against 42 insurers, 41 that did not submit EDGE server data and one that did but did not provide HHS with access to the required data. Of the 709 insurers that participated in transfers, 469 issued individual market non-catastrophic plans, 247 issued individual market catastrophic plans, 552 issued small group market plans, and two issued merged market plans.

The CMS report states that reinsurance and risk adjustment transfers correlate strongly with paid claims, showing that the programs are working as intended.  Insurers in the lowest quartile of claims costs were assessed on average a risk adjustment charge of 18 percent of total collected premiums, while insurers in the highest quartile of claims received risk adjust payments of 27 percent of total premiums.  Risk adjustment transfers averaged 11 percent of premiums in the individual market, up from 10 percent in 2015, while small group transfers remained steady at 6 percent of premiums.  CMS reports that there was a significant improvement in the quantity and quality of data provided by insurers for 2016, and thus a higher correlation between interim risk scores released in the spring and the final scores released on June 30.

Surprisingly, CMS reports that risk scores remained stable in the individual market and decreased in the small group market.  It was expected that as individuals had been enrolled longer in the program and insurers became more experienced in reporting the diagnoses on which the risk scores were based, the risk scores would go up, but they did not.  The data also would seem to refute the commonly held belief that the marketplace population is becoming sicker.  Risk adjustment transfers (calculated using the absolute value of net transfers for each issuer in the risk pool) amounted to 11 percent of enrollment-weighted monthly premiums in the individual market, 6 percent in the small group market, and 18 percent in the catastrophic market, for a national average of 8 percent.

Big Winners And Losers

The size of some of the transfers is remarkable.  Blue Cross of California will receive an estimated $210 million in reinsurance payments, $49 million in risk adjustment in the individual market, and $217 million in risk adjustment in the small group market.  Blue Shield of California is slated to receive $201 million in reinsurance, $265 million in risk adjustment in the individual market, and $106 million in risk adjustment in the small group market. The California Kaiser Foundation Health Plan will receive $99 million in reinsurance, but must pay in $183 million in risk adjustment in the individual market and $255 million in risk adjustment in the small group market.

Blue Cross Blue Shield of Florida is slated to receive $127 million in reinsurance and  $464 million in risk adjustment payments in the individual market, while Molina Healthcare of Florida must pay in $253 million, Celtic Insurance Company of Florida $161 million, and Coventry Health Care of Florida $112 million. Molina Healthcare of Texas must pay in $126 million in individual market risk adjustment.  Other insurers receiving nine-figure risk adjustment or reinsurance payments include Humana Employers Health Plan of Georgia, Blue Cross Blue Shield of Illinois, Blue Cross Blue Shield of Minnesota, Blue Cross Blue Shield of North Carolina, and Blue Cross Blue Shield of Texas.

Timothy Jost of Harrisonburg an Emeritus Professor at the Washington and Lee University School of Law and the author of Health Law, a widely used textbook.