Standards for Reinsurance, Risk Corridors and Risk Adjustment

The Affordable Care Act (ACA) creates three risk-spreading mechanisms to mitigate the potential impact of adverse selection and stabilize premiums in the individual and small group markets as ACA’s insurance reforms and Exchanges are implemented, starting in 2014. These risk-spreading mechanisms are in the form of the following programs:

• Reinsurance Program – A transitional reinsurance program will be established to help stabilize premiums for coverage in the individual market during the first three years of Exchange operation. The reinsurance assessment impacts health insurance issuers and third-party administrators (TPAs) of self-insured group health plans.
• Risk Corridor Program – The Department of Health and Human Services (HHS) must establish a temporary risk corridors program that will apply to qualified health plans (QHPs) in the individual and small group markets during the first three years of Exchange operation to protect against uncertainty in rate setting.
• Risk Adjustment Program – A permanent risk adjustment program will be established for all non-grandfathered plans in the individual and small group markets both inside and outside of the Exchanges to better spread the financial risk carried by issuers.

On March 23, 2012, HHS issued final regulations implementing ACA’s standards for reinsurance, risk corridors and risk adjustment programs. This Benefit & Compensation Specialists, PLLC Legislative Brief provides an overview of ACA’s three risk-spreading programs, including the guidance contained in HHS’ final regulations.

reinsurance program

The transitional reinsurance program is intended to help stabilize premiums for coverage in the individual market during the first three years of Exchange operation (2014 through 2016) when individuals with higher-cost medical needs gain insurance coverage.

The final regulations provide that states have the option to establish their own reinsurance program, regardless of whether they establish an Exchange. If a state decides not to establish its own reinsurance program, HHS will establish the program and perform the reinsurance functions for that state.

Under ACA and the final regulations, all health insurance issuers and TPAs of self-insured group health plans will be required to make contributions to support reinsurance payments to individual market issuers that cover individuals with high medical costs. Contributions are not required for plans or coverage that consist solely of excepted benefits. The final regulations provide that the contributions will be based on a national per capita contribution rate, which HHS will announce annually. HHS has not yet established the rate for 2014. Under the final regulations, states may elect to collect additional contributions on top of the federal contribution rate.

According to HHS, the contributions will apply on a per-covered-life basis. Payments will be based on a portion of the costs paid once claims reach a certain level (attachment point) and until a payment limit (cap) is reached. Contributions to HHS must be submitted quarterly beginning Jan. 15, 2014. If a state elects to collect reinsurance contributions, the state may establish its own frequency for collecting payments.

Health insurance issuers and TPAs must also maintain records to substantiate their contribution amounts.

risk corridor program

The risk corridor program is a temporary one (2014-2016) that provides additional protection for issuers of QHPs in the Exchanges. The program, which will be administered by HHS, protects against uncertainty in rate setting for the first several years of the Exchanges by creating a mechanism for sharing risk between the federal government and QHP issuers. The final regulations provide that under the risk corridor program:

• QHPs with costs that are at least three percent less than their cost projections will remit charges for a percentage of those savings to HHS; and
• QHPs with costs at least three percent higher than cost projections will receive payments from HHS to offset a percentage of those losses.

The final regulations contain detailed information regarding the program’s formula for sharing risk, including imposing a 20 percent cap on allowable administrative costs that may be taken into account in the target amount.

risk adjustment program

Risk adjustment is a permanent ACA program. According to HHS, the primary goal of the risk adjustment program is to better spread the financial risk carried by health insurance issuers to make sure premiums remain stable. The program is intended to provide payments to issuers that attract higher risk populations by transferring funds from plans that enroll the lowest risk individuals to those plans that enroll the highest risk individuals.

This program applies to all non-grandfathered plans in the individual and small group markets both inside and outside of the Exchanges.

The final regulations provide that states that are certified to operate an Exchange may establish a risk adjustment program, but they are not required to do so. If a state does not establish a risk adjustment program, HHS will establish the program and perform the risk adjustment functions for that state. HHS intends to establish a federal risk adjustment methodology. The final regulations provide that states operating their own risk adjustment programs may propose an alternative methodology for approval by HHS. According to HHS, protecting the privacy and confidentiality of an individual’s personal health information remains one of its highest priorities.

Source: Department of Health and Human Services