Risky Business: How State and Federal Insurance “Risk” Calculations Could Stabilize ACA Markets

As Congress returns from its summer break, the country is two months away from the start of open enrollment in the Affordable Care Act’s (ACA) marketplace, leaving little time for policymakers to develop solutions for 2018. With bipartisan hearings on market stabilization scheduled, this blog examines how different approaches to calculating risk could help state and federal officials stabilize the insurance market.

Risk 101: An ideal insurance market is built on a healthy “risk” mix of individuals, meaning the insurance pool attracts a good balance of high- and low-cost consumers so potential medical payouts can be effectively distributed across its members in a way that makes coverage affordable and attractive for all.

Every year, insurers set their rates based on their estimates of a pool’s anticipated risk mix. While insurers base these estimates on actuarially sound analyses, their calculations include some guesstimating of what may lie ahead for their consumers. For example, insurers never know if they could get hit with a “million dollar patient,” such as the Iowa teenager who incurred nearly $1 million in monthly medical expenses. As political leaders brainstorm risk stabilization strategies for ACA, they will undoubtedly wrestle with the 3 Rs of risk calculation to see if adjusting risk could stabilize the individual insurance market.

Balancing Risk—the ACA’s Risk Programs
ACA includes many risk provisions to give consumers greater financial protection, but this limits the ability of insurers to balance their own bottom lines. For example, insurers currently cannot eliminate the annual or lifetime limits on dollar amounts consumers can receive. Insurers are also barred from discriminating based on a consumer’s health status (guaranteed issue and modified community rating), and they have to cover 80 cents of every premium dollar received on medical claims (medical loss ratio). As a tradeoff, ACA includes provisions intended to reduce the negative impacts on insurers that may have resulted from an influx of previously-uninsured and potentially unhealthy consumers. This includes enactment of federal risk corridor, reinsurance, and risk adjustment programs, also known as the “three Rs” (see box for definitions).

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The three Rs are not new ideas, they have existed in both state and federal programs prior to ACA. Under ACA, the programs have been considered generally successful in promoting market stability. A July 2017 report issued by the Centers for Medicare &and Medicaid Services (CMS) found the reinsurance and risk adjustment programs have been successful in protecting consumers against adverse selection and that risk scores have been stable in the individual market and reduced in the small group market. However, some limitations on the program have prohibited their effectiveness. For example, Congressional action taken in 2015 attached a budget neutrality requirement to the Risk Corridor program, limiting the amount of payouts made under the Risk Corridor program to only what was collected through insurer payments into the program. However, payments into the program did not meet what was needed to pay insurers who had spent outside of the established corridors. As a result, insurers were not paid the full amount they had anticipated, spurring a series of lawsuits from insurers hoping to recoup the expected funds and leading some insurers to exit markets because of the losses. To date, courts have been split on whether the government must pay insurers for risk corridor funding, and the lawsuits are now pending appeal with no clear date for final decisions.

Some experts and insurers have also critiqued the formula used to calculate Risk Adjustment payments. Annually, CMS does adjust the formula to account for updated program information. For example, in the 2018 Payment Rule, the formula was changed to better account for partial-year enrollments and prescription drug utilization.

Where Are We Now? State Solutions and Federal Considerations
Ongoing litigation over Risk Corridor payments aside, insurers will enter 2018 with the federal Reinsurance and Risk Corridor programs ended. This leaves the markets with fewer risk mitigation protections as insurance pools continue to fluctuate and stabilize. Both federal and state governments have signaled interest in implementing new strategies that could help stabilize markets and mitigate risk.

In response to a June 8, 2017, RFI issued by CMS requesting ideas to stabilize markets, several states (Minnesota, Oregon, Washington, Kentucky, West Virginia, Vermont, and New York) suggested re-establishment or strengthening of some or all of the 3 Rs as federal programs. Major health reform bills considered by both the Senate and House over the summer included $182 billion and $100 billion respectively for long- and short-term stability funding so states could create their own market stabilization programs.

Meanwhile, some states are moving forward with implementation of their own risk programs. Alaska’s 1332 waiver, approved earlier this summer, grants federal support to a state reinsurance program and is expected to reduce premiums by 20 percent in 2018. Minnesota’s pending waiver application would lead to the implementation of a state-managed reinsurance program. Its program is estimated to reduce premiums by as much as 20 percent for some plans. Oregon’s yet-to-be-submitted draft 1332 application would similarly start a state reinsurance program.

While pursuing some efforts at the state-level, several states have stressed the importance of having federal programs manage risk, noting that unique budget constraints on states limits their capacity to guarantee adequate and/or long-term funding for these efforts. This was noted in comments to CMS submitted by Minnesota, Oregon, Washington, West Virginia, and Vermont and most recently in a letter sent by 12 state-based exchange executives to the Senate’s Health Education Labor and Pensions (HELP) Committee, as well as a list of policy proposals submitted by a bipartisan group of Governors.

As Congress begins hearings on ACA, these risk concepts are expected to be on the radar for both federal and state policymakers. NASHP will continue to monitor as potential solutions emerge.