A commonsense step to help the individual health insurance market

July 29, 2020 stgblase

By Brian Blase

A little-known program continues to cause problems in the individual and small group health insurance markets. The program involves shared risk payments among insurers, and it must be reformed to expand choices and lower premiums. 

Under the Affordable Care Act (ACA), health insurers are required to offer coverage to every applicant, regardless of their underlying health conditions, and they must charge healthy applicants the same premiums as those who are sicker. By prohibiting rate variation, the ACA created an incentive for healthy people to under insure since they are charged higher premiums than their expected use of medical care, and sick people to over insure since they are charged lower premiums than their expected use of care. By itself, this means insurers make profits on the healthy and lose money on the sick.

In an attempt to prevent insurers from designing coverage to attract only the healthy, the ACA’s architects included a risk-adjustment program. The program has had the unintended consequence of driving premiums higher and forcing some insurers out of the markets. The Trump administration should reform it. 

Risk adjustment transfers money from insurers with healthier enrollees to insurers with less healthy enrollees through a complex calculation. Under ideal circumstances, risk adjustment transfers would equalize the risks that plans face for insuring enrollees, leaving the plans indifferent to enrollees’ underlying health conditions and plan selection. 

But the risk adjustment program is failing because its formula is not accurately measuring enrollee risk and because the program transfers too much money among insurers. Many insurers lose money on healthy enrollees and make money on sicker enrollees. Risk adjustment thus incentivizes insurers to enroll people with certain medical conditions so they can reap the large risk-adjustment payments on their behalf and avoid the healthy for whom they must pay large risk adjustment charges.

Because the risk adjustment program is creating less-attractive products for healthy enrollees, it is further weakening the entire ACA program since these are the very people who must enroll for the ACA’s overall regulatory scheme to work. Overall, individual market enrollment is more than 60 percent below expectations, as those who expect to incur larger medical costs disproportionately buy coverage while those who expect to use fewer services drop out of the market. The percentage of individual market enrollees with underlying health conditions has risen by 18 percent since 2016. Adverse selection has been mitigated to some extent by extremely large federal subsidies that have induced some relatively healthy people to purchase coverage. But that means taxpayers are paying more to repair the damage of a flawed program. 

The ACA also failed to create more competition as the number of insurers offering coverage is substantially below pre-ACA levels. The ACA created co-ops with federal grants, for example, but they quickly collapsed and left many people without coverage, in significant part because of the large, unexpected risk-adjustment transfer payments the co-ops faced. 

While some progress has been made to improve the program’s formula, risk adjustment is still weakening the markets as too much money continues to be transferred. Many smaller and more regionally based insurers subject to large and unpredictable risk adjustment transfers have decided to sit on the sidelines or raise premiums. For one-in-five insurers, at least 10 percent of individual market premiums charged was to recoup an expected risk adjustment payment in 2020. For example, Oscar Health filed a 2021 small group premium in New York of more than $10,000 with more than $4,000 coming from expected risk adjustment charges. 

Risk adjustment has proven to benefit the largest and most established insurers in the market, particularly Blue Cross Blue Shield plans. From 2017 through 2019, Blues plans received more than $9 billion through risk adjustment transfers from other insurers in the market.

Democrats and Republicans disagree on many health policy issues. But both parties want the individual and small group health insurance markets to be successful. While other reforms are needed to repair them, fixing the ACA’s risk-adjustment process represents a positive and commonsense step and one the Center for Medicare & Medicaid Services (CMS) can undertake reforms through the normal regulatory process.                                             

Most importantly, CMS must reduce the amount of money transferred through the program and recalibrate the formula values so insurers are not discouraged from enrolling the young and healthy people needed for the markets to work best. CMS should also release more and better data so health plans can more accurately model how risk adjustment will affect them. Finally, CMS needs to commit to improved oversight to ensure that insurers are not inappropriately gaming the formula.

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