Opinion

ACA Rate Increases, Risk Adjustment, and Health Insurance Market Stability

The recently announced proposed rate increases for many insurers offering health insurance through the Affordable Care Act (ACA) exchanges have brought renewed attention to instability in health insurance markets and the long-term sustainability of the exchanges – apart from disruptions that would ensue if the Supreme Court rules in King v. Burwell that the ACA does not allow premium subsidies in states with federal exchanges.

The structure of ACA premium subsidies (i.e., basing premium subsidies on enrollee income and the second lowest cost Silver plan) has the potential to leverage proposed rate increases into much larger increases in premiums net of subsidy for currently subsidized exchange enrollees who want to stay with their existing health plan. Significant rate increases also threaten to reduce enrollment and jeopardize achievement of the broad risk pool necessary to ensure the long-term sustainability of the exchanges.

While proposed rate increases are subject to regulatory review, they generally are based in significant part on the plan’s 2014 experience, and regulators in many if not most cases will have only limited ability to press for lower increases without discouraging insurer participation in the exchanges. One wildcard, however, is that the proposed rate increases also are based on assumptions regarding the insurer’s expected risk adjustment transfer payment to occur in the latter half of 2017 for the plan’s experience for 2016.

Under the risk adjustment policy, the Department of Health and Human Services (HHS) compares the relative health risk of the population enrolled in each plan and then transfers payments to those plans who have attracted a disproportionate number of sicker members from plans with a disproportionate number of healthier members. The risk adjustment program is intended to financially protect those plans that attract sicker members and ensure health plans do not have an incentive to attract healthier members.

Because the risk adjustment transfer depends on a health plan’s risk relative to other plans in the market, the risk adjustment estimate reflected in the plan’s rate filing must consider its own population as well as the health risk for other plans in order to produce rates that allow the plan to cover its expected costs and achieve a reasonable expected profit. HHS is expected to announce on June 30 risk adjustment transfers for the 2014 contract year. Thus, health plans across the nation had to develop risk adjustment estimates for their 2016 contract year rate filings without knowing risk adjustment transfers for 2014 and without any mechanism to directly compare the relative medical risk among health plans in a market. Once this information is released by HHS on June 30, health plans will have the first true picture of their actual financial performance in 2014.

Depending on the circumstances for each plan, the risk adjustment information released on June 30 could be critical in developing accurate rates for 2016. A health plan with modest market share and a smaller population, for example, could have attracted a population that is materially different than the average for the entire market and have a risk adjustment transfer that is much larger than other health plans. The originally filed rates for such plans could be based on risk adjustment assumptions that are materially different than what was actually experienced in 2014. As a result, the risk adjustment information released on June 30 could impact the regulatory review process and result in significant changes to the originally submitted rates.

While this issue is problematic in the current filing year, it will be further magnified in 2017 and subsequent years after the ACA’s temporary reinsurance and risk corridor programs have expired. The reinsurance program provides plan’s with additional financial protection for high-cost claimants; the risk corridor program mitigates the effects of incorrectly predicting health costs for the population of enrollees.

Health plans will be required to develop rates for the 2017 contract year in the first half of 2016 without the reinsurance and risk corridor programs and with only having information on risk adjustment transfers for 2014. Because the risk pool could change substantially between these contract years (including from the effects of premium increases in 2016), many health plans will be facing very substantial pricing risk, which will likely be especially challenging for smaller plans.

Although the ACA’s risk protection programs may seem arcane, the details are important for pricing and market stability. In the shorter term, the delay in the release of information on risk adjustment transfers requires health plans to make assumptions that could be materially different than the actual results and lead to either inaccurate rates or additional changes through the regulatory review process.

While the temporary reinsurance and risk corridor programs have thus far mitigated insurers’ risk (even with uncertainty concerning risk corridor funding), the cessation of those programs in 2017 will put additional upward pressure on rates, which could in turn destabilize enrollment. If the ultimate risk characteristics of the insured population are consistent with long-term sustainability, market stability in individual health insurance is unlikely for at least several more years regardless of what the Supreme Court opines on subsidies.

Scott Harrington is the Alan B. Miller Professor and chair of the Health Care Management Department in the University of Pennsylvania’s Wharton School. Kurt Wrobel is the Chief Actuary of the Geisinger Health Plan, which participates in the federally operated health insurance exchange in Pennsylvania.

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