Affordable Insurance Exchanges: Standards Related to Reinsurance, Risk Corridors and Risk Adjustment

On July 11, 2011, the U.S. Department of Health and Human Services (HHS) published a Notice of Proposed Rulemaking (NPRM) outlining a framework that will enable States to build Affordable Insurance Exchanges, State-based competitive marketplaces where individuals and small businesses will be able to purchase affordable private health insurance and have the same insurance choices as Members of Congress.  This rule is a major step forward in implementing the Exchanges.

Exchanges will begin operating in 2014 and will make it easy for consumers and small businesses to compare health plans, get answers to questions, and enroll in or offer to their employees a health insurance plan that meets their needs.  Individuals will be able to find out if they are eligible for tax credits for private insurance or health programs like the Children’s Health Insurance Program (CHIP); small businesses may be eligible for the small business tax credit for coverage purchased for employees through the Exchange.

Confidence and Stability in the New Marketplace

To help protect insurers against risk selection and market uncertainty, the Affordable Care Act establishes three programs, which begin in 2014: temporary reinsurance and risk corridor programs to give insurers payment stability as insurance market reforms begin, and an ongoing risk adjustment program that will make payments to health insurance issuers that cover higher-risk populations (e.g., those with chronic conditions) to more evenly spread the financial risk borne by issuers.  These programs will ensure that health plans and issuers compete for coverage on the basis of price, quality and service. The proposed regulations provide standards to make the programs work and significant State flexibility for their implementation, while minimizing the burden on States and issuers.  Well-designed reinsurance, risk corridors and risk adjustment programs can help encourage innovative care delivery that will slow the growth in our Nation’s health care expenditures. 

Risk Adjustment

The Affordable Care Act provides for a program of risk adjustment for all non-grandfathered plans in the individual and small group market both inside and outside of the Exchange.  Under this provision, the Secretary of Health and Human Services, in consultation with the States, will establish criteria and methods to be used by States in determining the actuarial risk of plans within a State.  The risk adjustment program serves to level the playing field, both inside and outside of the Exchange.  Risk adjustment ends the incentive for issuers to avoid the sick and market only to the healthy by transferring excess payments from plans with lower risk enrollees to plans with higher risk enrollees.  For this reason, plans will have to compete on the basis of price, quality and service.  This allows consumers the ability to pick the plan that best meets his or her needs.  The proposal suggests that a constant set of data for risk adjustment be considered, preventing a health insurer that offers qualified health plan in different States from having different reporting requirements.  It proposes that risk adjustment calculations occur at the State, rather than plan or Federal level, given States’ role in the system.  And while a Federal risk adjustment methodology would be developed, States could use an approved alternative.  We welcome comments on the risk adjustment program design.

Reinsurance

The transitional reinsurance program is a critical element in helping to even out the health insurance market, moderate premium increases and set the foundation for the establishment of the Exchanges from 2014 through 2016.  The Affordable Care Act provides that each State establish a transitional reinsurance program to help stabilize premiums for coverage in the individual market during the first three years of Exchange operation.  Under this provision, all health insurance issuers, and third-party administrators on behalf of self-insured group health plans, will make contributions to a nonprofit reinsurance entity to support reinsurance payments to individual market issuers that cover high risk individuals.  The proposed rule would simplify the reinsurance program: rather than using a list of 50 to 100 conditions to set reinsurance policy, it would base reinsurance on high-cost enrollees’ claims.  This is similar to the private reinsurance market practice and the current Early Retiree Reinsurance Program.  It also proposes flexibility for States, allowing them to run the reinsurance program regardless of its Exchange decision, supplement the payments, vary the thresholds for when reinsurance begins and ends, and contract with reinsurance entities to run the program.

Risk Corridors

In addition to risk adjustment and reinsurance, the risk corridor program is a third element of protection for qualified health plan issuers in the Exchange.  Risk corridors create a mechanism for sharing risk for allowable costs between the Federal government and qualified health plan issuers.  From 2014 through 2016, qualified health plan issuers with costs that are at least three percent less than the issuers’ costs projections will remit charges for a percentage of those savings to HHS, while qualified health plan issuers with costs greater than three percent of cost projections will receive payments from HHS to offset a percentage of those losses.  The Affordable Care Act directs HHS to administer the risk corridors program.  The proposed rule aims to align the data and payment policies for this temporary program with other programs to promote simplicity and efficiency.

Posted on: July 11, 2011