The ACA Risk Adjustment Program—A Critical Element in Assuring Market Stability and Affordability

Since the ACA was enacted six years ago, 20 million Americans have gained health insurance coverage through the exchange marketplace, expanded Medicaid and related coverage expansions in the law.¹ While the expanded access to coverage represents important progress, policymakers and stakeholders must work to advance real reforms to address stability and affordability in the exchange marketplace.

The ACA risk adjustment program plays a critical role in the future of the market. By reducing the potential for adverse selection and encouraging a level playing field, the risk adjustment program plays a crucial role in promoting stability and affordability for consumers.

Background on ACA Risk Adjustment Program

The ACA risk adjustment program is part of an interconnected set of programs—the ACA premium stabilization programs or 3Rs—that work to protect consumers from market volatility and keep coverage affordable. The premium stabilization programs include:

• A permanent risk adjustment program (2014 and beyond) that applies to plans in the individual and small-group market (inside and outside the exchange) that seeks to mitigate the impact of adverse selection and promote a level playing field in the new marketplace.
• A transitional reinsurance program (2014–2016) that promotes affordability in the individual market by offsetting some of the cost of high-cost and high-risk patients.
• A temporary risk corridor program (2014–2016) that aims to promote market and pricing stability by limiting losses (and gains) for qualified health plans in the exchange marketplace.

Risk mitigation programs—such as the permanent risk adjustment—are one of the cornerstones of a competitive health insurance marketplace in which plans compete on value and the efficiency of care delivery to the consumers. Moreover, similar risk mitigation programs have been implemented successfully to promote and facilitate competition and stability in other markets—including the popular Medicare Part D program.

As a permanent feature of the ACA, the risk adjustment program applies to plans in the individual market (both inside and outside the exchange), as well to plans in the small-group market. The goal of the risk adjustment program is to reduce adverse selection among plans in the new marketplace. It accomplishes this through payment transfers among participating plans—those that disproportionately enroll higher-risk patients receive payments under the risk adjustment program, while plans that disproportionately enroll lower-risk, healthier patients make payments into the program. Payments under the risk adjustment program are funded by transfers among health insurers and do not involve the use of federal funding. Specifically, payments and charges under the program must be balanced (e.g., net to zero) within a state and within a market.

By promoting a level playing field in the marketplace and reducing adverse selection among competing plans, the risk adjustment program works to assure market competition based on price, quality and effective care management. It also works to assure coverage is more affordable for patients—particularly for those with chronic health care conditions—by compensating plans that enroll higher-cost and higher-risk patients.

Risk Adjustment Program Results and Performance

On June 30, 2016, the Centers for Medicare and Medicaid Services (CMS) released a summary report detailing payments under the ACA reinsurance program and payment transfers under the risk adjustment program for the 2015 benefit year.² The report includes detailed payment data—including plan-specific reinsurance amounts and risk adjustment transfers on a state-by-state basis—and represents an important milestone in the implementation of the reinsurance and risk adjustment programs. Key findings include:

• The transitional reinsurance program and permanent risk adjustment program continued to function smoothly for the 2015 benefit year, as the ACA compliant market grew substantially.³
• Both the reinsurance and risk adjustment program are working to protect against adverse selection and are supporting plans’ efforts to offer products that serve all types of consumers. For example, the report found the amount of paid claims was strongly correlated with risk scores and risk adjustment and reinsurance transfers. Moreover, the report found that small and large insurers received similar risk adjustment transfers on average, and overall transfers—as a percentage of premium—were similar to 2014.⁴

Independent assessments of the risk adjustment program also point to early success in promoting market stability and protecting plans from adverse selection.

• The American Academy of Actuaries found the risk adjustment program “compressed loss ratio differences among insurers—risk adjustment transfers increased average loss ratios among insurers with low loss ratios and reduced loss ratios for insurers with high loss ratios.” This indicated the program was “operating as intended—by shifting funds from insurers with low-cost enrollees to insurers with high-cost enrollees.”⁵
• An analysis by Oliver Wyman concluded that the risk adjustment program “appears to have worked as intended in 2014, transferring funds from plans with relatively low risk (using claims as a proxy for risk) to plans with relatively high risk.”⁶
• A report by Milliman found the risk adjustment program “did redistribute funds from plans with lower-risk enrollees to plans with higher-risk enrollees for all issuer sizes,” which was consistent with the design and intent of the program.⁷

Moreover, the administration and operation of the risk adjustment program—which is a complex and data-intensive process in which insurers submit data to EDGE servers in order for CMS to administer the program and run the risk adjustment and reinsurance payment calculations—continues to improve and function more smoothly. For example, on the EDGE server data submissions, virtually all insurers (817 out of 821) successfully submitted the data necessary to calculate risk adjustment payment transfers.⁸

At the same time, CMS⁹ and other experts have acknowledged the risk adjustment program—while largely working as intended—remains a work in progress, and there are opportunities for improvement. Changes currently under consideration by CMS include changes to the underlying risk model (such as incorporating prescription drug data and better reflecting the cost of partial year enrollees), revising the risk model (such as continuing to assess and review the risk weights), recalibration of the model so risk adjustment results better reflect experience of the exchange population) and more sweeping changes (such as adjustments to the payment transfer formula). Many of these options were examined and assessed in a white paper released earlier this year by CMS.¹⁰

Policy Options to Strengthen the Risk Adjustment Program

Two important changes under consideration are adopting an adjustment factor for partial year enrollees and incorporating prescription drug data into the risk-adjustment model. These proposed changes were previewed in a CMS white paper released earlier this year, and more recently were included as part of a broader range of actions by CMS to improve the risk pool—including implementing a new confirmation process for special enrollment periods (SEPs).¹¹

With respect to partial year enrollment, there is widespread recognition that the current model does not fully capture the risk of partial year enrollees and that these costs/risks are not accurately accounted for in the model. CMS has indicated that it intends to move forward and include an adjustment factor for partial year enrollees starting with the 2017 plan/benefit year. While further details will be included in forthcoming regulations later this year, this represents a positive step in improving the effectiveness of the risk-adjustment model and promoting market stability.

CMS also announced that it intends to move forward with including prescription drug data in the model beginning in 2018—a step that can help improve payment accuracy. Prescription drug data is an important source of clinical information and could be incorporated into the model with relative administrative ease, as prescription drug data already is submitted to the EDGE servers by plans for administering the reinsurance program. Moreover, actuaries and other experts agree that incorporating prescription drug data can help improve the predictive power of the model, as well as enhance payment accuracy. CMS specifically intends to move forward with incorporating prescription drug data into the model, both as a source of information about an individual’s health status and the severity of his or her condition. To address complexities and the potential for misaligned incentives, CMS intends to start with a limited and select few drug-condition pairs that have high predictive power.¹²

Conclusion

As policymakers and stakeholders continue to evaluate and assess the risk-adjustment program, it will be important to carefully consider potential changes to the program and whether they will advance the market-stabilizing goals of the program. Given the considerable complexity of the model, strong consideration should be given to an incremental approach—such as incorporating a limited set of drug-condition pairs for inclusion into the risk adjustment model. An incremental, targeted approach can help policymakers and stakeholders better evaluate the impact of any changes and learn from experience as the model continues to be implemented. Moreover, as contemplated by CMS, any proposed changes should be subject to adequate stakeholder input through the formal regulatory notice and comment process.

Well-designed and incremental public policy changes to the risk-adjustment program hold promise in further strengthening the risk-adjustment program, which, in turn, can help promote market stability and affordability for consumers in the new exchange marketplace.