Reinsurance key for risk adjustment, stabilizing marketplace, research finds

Dive Brief:

  • The National Bureau of Economic Research released a working paper Monday making the case for modifying payment options in the health insurance marketplace for companies with high-cost consumers. 
  • Lowering the reimbursement threshold for reinsurance results in more patients gaining coverage as well as more costs being covered, according to the analysis.
  • While CMS' risk adjustment program is permanent, the other two elements of the ACA's strategy for stabilizing premiums - the reinsurance program and the risk corridor - will expire in 2017.

Dive Insight:

The researchers ultimately conclude that lower reinsurance thresholds are permanently needed in the ACA risk adjustment program for small insurers to better compete in the marketplace.

Provisions within the ACA intended to address insurers' risk of destabilization due to a substantially increased number of patients, some of which turned out to require more costly coverage, have received mixed reactions.

The risk adjustment program, in particular, has been under fire recently, since the payment methodology is said to be skewed in favor of larger health insurance companies because it factors the flow of money from high- to low- risk plans to determine payments made to the program and fails to account for the variance in revenue that both larger and smaller insurers have had. Smaller insurers have generally taken on a greater number of new consumers post-ACA as their rates were comparatively lower.

The authors from Harvard Medical School made several simulations with higher and lower attachment points, otherwise known as thresholds, which are typically based on the a level exceeding the number of claims a company expects to receive in a plan year, as one of their measures for comparing the existing alternative payment models.

The 2010 claims data used for the analysis was the same used for the development of the Health and Human Services-Hierarchical Condition Categories' (HHS-HCC) risk adjustment model. The model does not project the total costs to to plans, the authors noted.

For the risk adjustment program, the current transfer formula is used to offset variations in actuarial risks, while the reinsurance program reimburses for half of each enrollees' spending exceeding the threshold, which was set at $90,000 for 2016 with a cap of $250,000.

Four alternative attachment points were studied - $2 million, $1 million, $500,000 and $100,000. A lower threshold for reinsurance was more favorable from the insurer's standpoint and the for consumers. For insurers, lowering the attachment point decreases their risk of ruin - the likelihood of costs to plans exceeding revenues by at least 5%.

In addition, although there are few very high-cost patients (1%) in the sample of 2,006,126 people studied, they accounted for 28% of the total annual healthcare costs, according to the analysis.

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Filed Under: Payer Finance Policy & Regulation