The Department of Health and Human Services (HHS) has released a final rule on the standards related to reinsurance, risk corridors and risk adjustment. The Affordable Care Act created these programs to eliminate incentives for health insurance plans to avoid insuring people with pre-existing conditions or those who are in poor health and to reduce uncertainty that could increase premiums when Affordable Insurance Exchanges begin. These programs are intended to ensure that insurance plans compete on the basis of quality and service and not by attracting the healthiest individuals.
Risk adjustment is a permanent program created by the Affordable Care Act. The primary goal of the risk adjustment program is to spread the financial risk borne by health insurance issuers. This is intended to ensure that premiums remain stable so that issuers will be able to offer a variety of plans to meet the needs of a diverse population. The deficit-neutral risk adjustment program is intended to provide payments to health insurance issuers that attract higher risk populations by transferring funds from plans that enroll the lowest risk individuals to plans that enroll the highest risk individuals. Thus, the risk adjustment program is intended to reduce or eliminate premium differences among plans based solely on favorable or unfavorable risk selection in the individual and small group markets. All non-grandfathered plans in the individual and small group markets are subject to risk adjustment, inside and outside of the Exchange.
States certified to operate an Affordable Insurance Exchange have the option to establish a risk adjustment program, but are not required to do so. If a state does not establish a risk adjustment program, HHS will establish the program and will perform the risk adjustment functions for that state. HHS says that it will propose a federally-developed risk adjustment methodology in the annual HHS Notice of Benefit and Payment Parameters in the fall of 2012. This is an annual payment notice to be published in the Federal Register with a comment period. States operating risk adjustment programs may propose an alternative methodology for approval by HHS. The final rule affords states flexibility in how they collect data for risk adjustment; when HHS operates risk adjustment on behalf of the state, a distributed data collection approach will be used. Under the distributed approach, issuers retain their own data and do not submit personal health information to a state or HHS on a state’s behalf.
The Affordable Care Act establishes a transitional reinsurance program in each state to help stabilize premiums for coverage in the individual market due to individuals with higher cost needs gaining insurance coverage during the first three years of Exchange operation (2014 through 2016). All health insurance issuers, self-insured group health plans, and third party administrators on their behalf, will make contributions to support reinsurance payments to individual market issuers that cover individuals with high medical costs.
Under the final rule, states have the option to establish a reinsurance program, regardless of whether they establish an Exchange. If a state elects not to establish a reinsurance program, HHS will establish the program and will perform the reinsurance functions for that state. Reinsurance contributions will be based on a national per capita contribution rate, which HHS says it will announce in the annual HHS Notice of Benefit and Payment Parameters. Under this program, reinsurance payments are similar to traditional, commercial reinsurance. Payments will be based on a portion of costs per enrollee paid once claims costs reach a certain level (attachment point) and until a payment limit (cap) is reached. The final rule clarifies that reinsurance payments will apply to claims incurred in a calendar year and that reinsurance is payable on all covered benefits, not just essential health benefits.
A state that establishes a reinsurance program must specify the attachment point, reinsurance cap and coinsurance rate if the state plans to use values different from those set forth by HHS. If a state plans to use more than one reinsurer, the state must specify the geographic boundaries of each reinsurer. States will be allowed to continue a reinsurance program beyond 2016, but may not use funds collected prior to 2017 after 2018. HHS will collect contributions from self-funded plans and third-party administrators acting on their behalf, whether or not a state elects to establish its own reinsurance program. HHS will distribute the contributions to the applicable reinsurer, net of the state’s share of U.S. Treasury contribution and administrative expenses. HHS will set the Treasury share, expenses and the national contribution rate each year.
The risk corridor program provides additional protection for issuers of qualified health plans in the Exchanges. Risk corridors protect against uncertainty in rate-setting in the first several years of the Exchanges by creating a mechanism for sharing risk between the federal government and qualified health plan issuers. Qualified health plans with costs that are at least three percent less than the plans’ costs projections will remit charges for a percentage of those savings to HHS, while qualified health plans with costs at least three percent higher than 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 from 2014 through 2016.