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Implementing Health Reform: Health Insurance Exchanges (Part 3)



July 13th, 2011

Editor’s Note: Below, Timothy Jost continues his Health Affairs Blog series analyzing regulations implementing the Affordable Care Act. Health Affairs Blog will also offer additional perspectives on the newly released regulations governing the state health insurance exchanges established under the Affordable Care Act.

Although the proposed exchange rule released by HHS on July 12 was the focus of media attention (and the focus of parts one and two of this series), a second proposed rule was also released that day addressing the three reinsurance and risk adjustment programs created by sections 1341, 1342, and 1343 of the Affordable Care Act.  Two of these three programs will be implemented by the states and all three will dramatically affect insurers. Thus, it was important for HHS to get guidance out reasonably early.

Like the proposed exchange rule, the reinsurance, risk corridor, and risk adjustment proposed rule is a work in progress and raises almost as many questions as it answers.  However, it does provide a surprisingly lucid picture of how these three programs will operate and what options are being considered for further defining their operation.

Though superficially similar, the three programs are different in their purpose and operation.  All deal ultimately with counteracting adverse selection and stabilizing the insurance market, but each does so uniquely.

What The Rule Covers

Reinsurance. The reinsurance program will be operated primarily by the states beginning in 2014 and ending in 2016.  It will assess charges against health insurers and third party administrators of group health plans and pay out funds collected to non-grandfathered individual health plans to cover high-risk individuals. The exchanges will initially be inundated by individuals with high-cost conditions who were formerly uninsured or covered through the state or federal high-risk pools, and the reinsurance program will stabilize their coverage until the exchanges can pick up a substantial number of healthy enrollees. Each state that runs an exchange must run a reinsurance program, while states that elect not to run an exchange can either operate the reinsurance program or cede the task to the federal government.  States will enter into contracts with nonprofit reinsurance entities to operate these programs.

Risk corridors. The risk corridor program will also operate only from 2014 to 2016.  It will be operated by HHS, and will collect funds from qualified health plans (QHPs) with better than expected experience and distribute them to qualified health plans that have worse than expected experience. The risk corridor program is intended to stabilize insurer risk during the early years of the exchange until insurers are able to more accurately predict their risk. By reducing the risk faced by QHPs, the program will, it is hoped, reduce the cost of coverage.

Risk adjustment. Finally, the risk adjustment program moves money from insurers that have lower than average risk enrollees to insurer that have higher than average risk enrollees.  The risk adjustment program will begin in 2014 and continue indefinitely.  It applies to health plans and insurers in the small group and individual market, inside and outside of the exchange, but not to self-insured ERISA plans, large group plans, or grandfathered plans.

The risk adjustment programs can be run by states that operate an exchange but must be run by the federal government in states that have a federal exchange.  The risk adjustment program is intended to discourage cherry picking and to provide an incentive for health plans to cover higher risk populations.

The proposed rule is focused on the responsibilities of the states and of insurers.  At a number of places the preamble describes alternatives that HHS considered for addressing a particular issue and why it adopted the approach it did.  The preamble often requests comment on an issue, however, leaving open the possibility that HHS will change its position in the final rule.

The proposed regulation begins with definition section, subpart A.  Most definitions are taken from the ACA, the Public Health Services Act, or earlier regulations.  The definitions identify the plans covered by the various programs.  For example, “Reinsurance-eligible plan” is defined as individual market plans other than grandfathered plans.

Subpart B requires states that operate an exchange or reinsurance program to issue an annual notice to insurers and others if the state intends to use benefit and payment parameters other than those published annually by the federal government.  The federal government will publish proposed parameters to be used for the reinsurance and risk adjustment programs in mid-October of the second year before the target year (October 2012 for 2014) and final parameters in mid-January of the preceding year.  If the state elects to modify these, it must publish its parameters by early March.

How The Reinsurance Program Will Work

Reinsurance parameters include the attachment point above which reinsurance is available, the coinsurance rate that will apply to the insurer who receives reinsurance payments, and the reinsurance cap above which payments will not be available.  If a state intends to use more than one reinsurance entity, it must also indicate the geographic area covered by each entity.  States must also provide a detailed description and rationale for any modification in the federal risk adjustment parameters.

Subpart C of the proposed rule establishes the rules that the states are to apply for the reinsurance program.  It is supplemented by Subpart E, which describes the reinsurance provisions that apply to insurers.  The goal of the program, as identified in the preamble is to protect insurers from cost overruns from high cost enrollees, to provide early and prompt payment of funds (rather than an end of the year reconciliation), and to do so with minimum administrative burden.

Under the proposed rule, insurers and third-party administrators on behalf of self-insured plans will be required to pay a total of $10 billion in 2014, $6 billion in 2015, and $4 billion in 2016 into a reinsurance fund, with contributions allocated based on a percentage of the total premium volume of insured plans and total medical costs of self-insured plans.  (An additional $2 billion will be collected in 2014 and 2015 and $1 billion in 2016 to cover the budgeted cost of the early-retiree reinsurance program now in effect).  States that operate exchanges or otherwise elect to do so (and the federal government in states that choose not to) will contract with a reinsurance entity to collect and distribute these funds.  Although the funds will be collected by and distributed within the states, a national contribution rate will apply.  States may collect additional funds to cover the cost of the reinsurance program, however.  Contributions will be collected early and frequently to cover expenditures, perhaps on a monthly basis beginning in January 2014.

Payments from the reinsurance program will be made to insurers with high cost enrollees based on a percentage of the cost of high cost claims for essential health services that exceed the established attachment point up to the reinsurance cap.  The federal government will set the parameters for payment, but states may choose alternative values.    The ACA suggests that reinsurance payments be made on the basis of defined high cost conditions, but allows HHS to use an alternative methodology.

HHS considered basing reinsurance payments on high cost conditions, but determined that this approach would be too administratively complex and rejected it.  The approach it has adopted is more like that of traditional reinsurance (and the current early retiree program).  Total payments may not exceed total contributions on a state-by-state basis, and will be reduced pro-rata if contributions are inadequate.  Payments will be made as claims are filed so that funds become immediately available to insurers.  Final claims will have to be filed within a fairly short period, as reinsurance payments must be known to calculate risk corridor collections and payments and medical loss ratio rebates under section 2718.

It is expected that states will terminate their high risk pools as the reinsurance program goes online.  The federal pre-existing condition high risk pool and early retiree reinsurance programs will also end by 2014, if not sooner.  States that choose to continue to operate risk pools must coordinate them with the reinsurance program.

How Risk Adjustment Will Work

Subpart D of the proposed rule provides standards for state risk adjustment programs, while Subpart G covers risk-adjustment provisions for health plans.  The risk adjustment program, again, applies to non-grandfathered individual and small group plans in and out of the exchange, and will level the playing field both among plans and between the exchange and outside market. The definitions distinguish between a “risk adjustment methodology” used to determine average actuarial risk and a “risk adjustment model,” used to determine costs associated with relative actuarial risk of enrollees.

The federal government will develop a risk adjustment methodology, probably based on methodologies used for the Medicare Advantage or Part D drug programs, but states may also use their own alternative methodologies if they are certified by HHS.   States that propose alternative methodologies must do so no later than November in the calendar year two years before the effective date.   States must aggregate risk pools at the state level for risk distribution.

States that establish exchanges may either operate the risk adjustment program themselves, do so through a contractor, or let the federal government run the program, but in states where the federal government runs the exchange it must also run the risk adjustment program.  This would seem to be essential to protect the federal exchange form adverse selection.

Risk adjustment is retroactive but must be timely as it will precede the application of risk corridors and minimum medical loss ratio rebates. A June 30 deadline for the year following the reporting year is suggested.  Since the program is budget neutral, states will need to collect funds from low-risk plans before the funds are distributed to high-risk plans.

The preamble to the regulation describes two methods that could be used for calculating charges and payments and three alternative methods for equalizing charges and payments where they are unequal, and requests comments on the advantages and disadvantages of each.  The preamble also discusses three alternative approaches to data collection — a centralized approach, a state-based approach, or requiring each insurer to calculate its own risk profile — and settles tentatively on the state-based approach while requesting further comments.

Plans must submit claims and encounter data on a monthly basis to the states.   Standards are proposed to facilitate data collection and validation and protect privacy.

How Risk Corridors Will Work

Subpart F of the proposed rule describes the risk corridor program. This program is administered by HHS rather than the states.  It is the most mysterious of the three programs.  The basic concept is reasonably straightforward:  between 2014 and 2016, qualified health plans whose allowable (medical) costs for a year exceed their target amount (total premiums reduced by allowable administrative costs) by more than 103 percent but less than 108 percent will receive a payment from HHS equal to 50 percent of the amount in excess of 103 percent of the target amount, and QHPs whose allowable costs exceed the target amount by more than 108 percent will receive payments of 2.5 percent of the target amount plus 80 percent of the amount above 108 percent of the target amount.  Conversely, QHPs whose allowable costs are less than 97 percent of the target amount but more than 92 percent must remit 50 percent of the difference between 97 and 92 percent to HHS, and QHPs with allowable costs below 92 percent must remit 2.5 percent of the target amount plus 80 percent of the difference between 92 percent of the target amount and allowable costs to HHS. These calculations are applied after accounting for premium tax credits, cost-sharing reduction payments, and reinsurance and risk adjustment charges or payments, but before minimum medical loss ratio rebates are calculated.

Unanswered questions about risk corridors. But many questions about the program remain unanswered.  One mystery is where the funds will come from (or go) if collections do not equal payments.  There is no obvious reason why they should, but no provision for dealing with the imbalance.  The issue is not addressed in the regulation or preamble.

Another issue is how the program will interact with the minimum medical loss ratio rebate program.  The preamble suggests that allowable administrative costs should perhaps be limited to 20 percent and quality improvement costs be treated as claims, as they are in the MLR rule.  If administrative costs are not so limited, the risk corridor payments could end up subsidizing the MLR rebate payments.  But even if the rules of the two programs are made uniform, it would seem that rebates will be reduced for some plans because of risk corridor assessments.  This provision comes out of Medicare payment methodology, but has always seemed misplaced in the ACA private insurance subsidy program.  HHS seems willing, however, to figure out how to make it work.

Further exchange regulations are expected before the end of the year.  State exchange developments are ongoing, and the states must soon begin to work on the reinsurance and risk adjustment programs.  Stay tuned for further developments.

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