Actuaries Examine How Changes to ACA Market Rules Would Affect Risk Adjustment
WASHINGTON, May 19, 2017 — Proposals to alter the market rules applying to the individual and small group health insurance markets would likely require changing the Affordable Care Act’s (ACA) risk adjustment program, the American Academy of Actuaries said in an issue brief published today.
Loosening the issue and rating rules, incorporating high-risk pools, allowing sales across state lines, or eliminating federal essential health benefit (EHB) requirements could necessitate changes ranging from minor adjustments to major structural modifications.
“Risk adjustment plays an important stabilizing function in the individual and small group markets, leveling out the differences in risk among enrolled populations through payments to and from insurers,” said Academy Senior Health Fellow Cori Uccello. “The risk adjustment program reduces incentives for insurers to avoid enrolling people at risk of high health spending, thereby supporting the ACA’s protections for people with pre-existing conditions. But some changes in market rules would make it more difficult for the risk adjustment program to operate as intended.”
The ACA risk adjustments shift funds from insurers with relatively healthy enrollee populations to those with less healthy enrollees. The model and formulas used to determine those payments would need to be revised under various health policy proposals, including the American Health Care Act (AHCA) that was passed by the U.S. House of Representatives on May 4.
“Some changes, such as incorporating high-risk pooling and increased flexibility in cost-sharing requirements, could require only adjustments to the risk adjustment design,” the Academy’s issue brief notes. “Other changes, such as loosening or eliminating the EHB requirements and allowing sales across state lines, could greatly complicate the design and effectiveness of a risk adjustment mechanism. If states have flexibility in setting benefit and rating rules, the risk adjustment models and payment transfer factors may need to vary by state.”
Excerpts from the Academy report
Incorporating High-Risk Pooling
High-risk pools are being considered as a potential mechanism to provide coverage to individuals with pre-existing conditions and to lower premiums and stabilize the individual health insurance market. There are different ways to structure high-risk pools. One way is a traditional high-risk pool approach. Prior to the ACA, many states used traditional high-risk pools to provide coverage in a separately run insurance pool to individuals who were not able to get insurance due to pre-existing health conditions. In addition, to create a bridge to guaranteed issue coverage in 2014, the ACA established the Pre-Existing Condition Insurance Plan (PCIP) program, under which local or federally run high-risk pools would be created in every state.
Another high-risk pool approach is to use “invisible” risk pools, where enrollees remain in the individual market, but all or a portion of their claims are reimbursed by the high-risk pool. Invisible high-risk pools are typically characterized as determining eligibility based on conditions. Alaska’s program, for instance, provides payments to insurers for individual enrollees who have one or more of 33 identified high-risk conditions. Reinsurance is a third approach, which is similar to invisible high-risk pools in that enrollees would remain in the individual market. But rather than being condition based, payments to plans for high-risk enrollees would be based on claims exceeding a specific dollar threshold. The ACA’s transitional reinsurance program followed this approach. Funding high-cost claims in the individual market through external sources would result in lower premiums.
Loosening or Eliminating Essential Health Benefit Requirements
Insurers are required to cover a specific set of federally defined essential health benefits. Those requirements could potentially be loosened or eliminated at the federal level, thus leaving it to states to set benefit requirements. If insurers are still required to cover the major EHB categories, but are allowed more flexibility regarding the scope of covered services within each category, the risk adjustment methodology may not need major changes. However, if health plans are allowed to offer major categories of benefits, such as prescription drugs, mental health/substance abuse benefits, or maternity benefits, as an optional benefit or have the ability to place internal limits on them, enrollees needing the benefits will enroll in plans covering those benefits without limitations. Depending on the type of optional benefit, these enrollees may be higher risk overall. Under this kind of benefit design flexibility, insurers would face increased selection risk and it would be difficult to develop a risk adjustment methodology that would adequately compensate for the resulting risk differences among plans.
In particular, varying benefits among plans would complicate the task of developing risk model factors. The current ACA risk adjustment models predict the expected cost of conditions assuming uniform EHB coverage. The risk adjustment methodology would need to be integrated with the rating rules, which could treat optional benefits in one of two ways—(1) the optional benefits are paid entirely by the enrollees electing the benefits (i.e., the full impact of selection is borne by those opting for the benefit), or (2) the benefits are rated according to the premium differential that would be required if the entire risk pool selected the benefit (i.e., the impact of selection is spread across all enrollees). The first case would lead to higher premium differentials for the optional benefit and the second case would have lower premium differentials but require larger risk adjustment transfers.
Read the entire report here.