On March 16, 2012, the Department of Health and Human Services published a final rule on the implementation of the reinsurance, risk adjustment, and risk corridor programs which are to be put in place under the Affordable Care Act (ACA), effective January 1, 2014. HHS also published final (and interim final) rules on Medicaid eligibility requirements and student health plans, an advanced notice of proposed rulemaking (ANPRM) on how it intends to handle coverage of contraception services, and a notice regarding the early retiree reinsurance program. This blog post will address the “3R” rule, with posts to follow soon on the Medicaid and Student Health Plan rules, the ANPRM, and the notice.

The Affordable Care Act will, beginning in 2014, eliminate health status underwriting through its guaranteed issue and modified community rating requirements and pre-existing condition ban.  It will also offer premium tax credits to lower- and middle-income Americans and create health insurance exchanges.  These steps will radically change the nongroup (individual) and small group health insurance markets in the United States.

The temporary reinsurance and risk corridor programs are designed to ease this transition between 2014 and 2016.  The reinsurance program will do this by collecting assessments from insured and self-insured group health plans and paying out funds to individual  plans that cover high-risk individuals.  The risk corridor program will collect funds from issuers of qualified health plans (primarily but not exclusively plans in the exchanges) that have lower-than-expected claims costs and pay out those funds to issuers of qualified health plans with higher-than-expected costs. It will thus stabilize the experience of these plans over the first three years when insurers will have a difficult time predicting exactly how to set their premiums.

Finally, the third “R” program, risk adjustment, will on a permanent basis move funds from issuers in the nongroup and small group market (other than grandfathered plans) with lower-than-average-risk populations to those with higher-risk populations; this will discourage risk selection and compensate insurers that cover sicker enrollees.

The proposed “3R” rule was published on July 15, 2011  and was discussed in my blog post  at that time.  The final rule retains most of the provisions of the proposed rule with primarily technical amendments.  This post focuses on the changes between the proposed and final regulation.

What’s In The 3R Final Rule?

Any state may contract with one or more private contractors to operate a reinsurance program.  No state is required to operate a reinsurance program.  If a state chooses not to operate a program, the federal government will operate the program in that state.  In any event, the federal government will collect reinsurance assessments from self-insured plans, and the state may opt either to collect payments itself or have the federal government do it for insured plans.

The federal government will operate the risk adjustment program in a state that does not operate its own exchange.  In a change from the proposed rule, however, a state that does operate its own exchange does not have to operate the risk adjustment program, but may choose whether to operate the risk adjustment program or allow the federal government to do it.  The federal government will operate the risk corridor program in all states.

Reinsurance assessments are collected from all insured and self-insured plans quarterly (unless a state decides to collect them more or less frequently) on a per capita basis. Reinsurance assessments will be collected from Federal Employee Health Benefit Program, state and local government, multi-state, COOP, and self-insured plans, but not Medicare and Medicaid plans.  HHS chose to use a per capita rate because it was simpler administratively than a percentage-of-premium rate, particularly for application to self-insured plans.

The total amount collected nationally is established by the Affordable Care Act: $10 billion for 2014, $6 billion for 2015, and $4 billion for 2016, plus $2 billion in 2014 and 2015 and $1 billion in 2016 for a “U.S. Treasury contribution.”  HHS will set a national contribution rate.   States may themselves collect additional contributions for additional reinsurance payments if they choose to.  Reinsurance funds collected in a state, either by the federal or state government, will remain in that state, except for the U.S. Treasury contribution and federal administrative expenses.

Nongroup plans will receive reinsurance payments on a quarterly basis (unless a state decides otherwise) to cover a percentage of  expenses of claims costs of enrollees (coinsurance rate) when claims exceed a specified threshold (attachment point) up to a maximum reinsurance cap. The final rule specifies that all covered claims, and not just claims for essential health benefits, are eligible for reinsurance payments, which may prove a significant protection for consumers in states where a highly restrictive plan is chosen as the essential health benefit benchmark.  States must eliminate or modify their high-risk pools to coordinate with their reinsurance program, and may not use reinsurance funds to subsidize high-risk pool programs.

HHS will publish an advance notice of the benefit and payment parameters it proposes to use in the federal reinsurance and risk adjustment programs in October of the second calendar year before the applicable benefit year and a final notice, after a comment period, in the following January.  States that choose to operate their own reinsurance or risk adjustment programs must publish a notice of any benefit or payment parameter modifications that they intend to make in the federal program by March 1 of the year proceeding the benefit year to which the notice applies.  States must also notify HHS if they intend to use more than one reinsurance entity–each of which must have a distinct coverage area–and if they intend to collect and make extra reinsurance payments.

All insured plans in the nongroup and small group market will participate in the risk adjustment program, including CO-OP and multistate plans, but not including Medicare Advantage, Medicare Prescription Drug, Medicaid managed care, excepted benefits (such as dental or vision), grandfathered, or self-insured plans.  The federal government, or a state (or its contractor) in states that operate their own exchange and choose to operate the risk adjustment program, will collect funds from plans that have better-than-average risks and pay them to plans with higher-risk enrollees.  Collections and payments will be calculated by multiplying a plan-specific actuarial risk score by a baseline premium, such as a state average premium.  A national methodology will be used unless a state chooses on a timely basis to apply its own methodology, which must be approved by HHS.

Plans will calculate their own risk scores and not turn the underlying data over to the federal government. In perhaps the most important change in the final rule, HHS has chosen to use a “distributed model” for assigning risk scores to plans.  Under a distributed model, each insurer calculates its own risk score from its own data using a common calculator and does not turn claims data over to the federal or state government.  Under the proposed rule the states, or HHS on behalf of the states, would have collected the underlying data and calculated the scores.  States that operate their own programs can choose to collect the data themselves, but can only collect data necessary for calculating risk scores and must observe strict privacy protections.

HHS chose to use a distributed model because of privacy concerns and administrative simplicity.  The HHS choice no doubt also took into account a complaint to HHS by 41 Congressional Republicans about the creation of a federal database containing sensitive private health data.  Nevertheless, the distributed model does open the door to insurer manipulation and gaming  It also deprives the government of the opportunity to use the data for other purposes, such as recalibrating risk adjustment models or verifying risk corridor or reinsurance information.  The states must validate insurer risk adjustment score reports.

The resemblance between the risk corridor and medical loss ratio provisions. Under the risk corridor program, plans whose allowable costs fall below a certain percentage of a target amount (premiums minus allowable administrative costs) must pay the federal government an exaction to be paid to plans whose allowable costs exceed a specified percentage of their allowable costs.  The risk corridor program resembles the current medical loss ratio rebate program in that plans that spend too little on allowable costs must give up some of their excess earnings, except under the risk corridor program the funds are transferred to plans that overspend rather than to the consumer, as they are in the MLR program.

Because of the resemblance between the programs, the final rule attempts to align definitions with the MLR rule.  Allowable costs, for example, include claims, quality improvement, and certain IT costs, as in the MLR rule; administrative costs (including profits) cannot exceed twenty percent, as in the MLR rule.  Unlike in the MLR rule, however, risk corridors are calculated on the plan rather than the issuer level, and taxes and regulatory fees and reinsurance and risk adjustment payments or receipts are applied to adjust allowable costs rather than subtracted from the premium. Moreover, the MLR rule suggests that the MLR must be calculated by adding or subtracting from the premium reinsurance, risk adjustment, and risk corridor payments and receipts before calculating the MLR, but although MLR rebates are now due on August 1, risk adjustment payments are not even due under the final rule until June 30, and no timeline is given for applying risk corridor collections and payments.

Remaining Questions

If you are finding this hard to follow, I cannot see how it is all going to work out either.  The final rule also fails to explain what will happen if risk corridor collections do not equal risk corridor payments.  Further guidance will, it is hoped, clarify things.