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3 peeks inside the PPACA risk-adjustment machinery

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Some health insurers seem to be comfortable with the new Patient Protection and Affordable Care Act (PPACA) risk-adjustment program, but some seemed inclined to stock up on garlic and silver bullets to protect themselves against its capital-drinking teeth.

Officials at the Massachusetts Division of Insurance recently held a small-group health rate hearing. The hearing gave insurance company executives a chance to say what they really think about the program, now that they’ve seen how the program affects operations.

Drafters of PPACA created the risk-adjustment program, along with a three-year reinsurance program and a three-year risk corridors program, in an effort to give insurers the confidence to hold down individual and small-group premiums by buffering them against the turbulence resulting from the start of PPACA benefits mandates and individual market underwriting restrictions.

The reinsurance program was supposed to use cash from just about all payers to help issuers of PPACA-compliant individual coverage pay the bills of enrollees with catastrophic claims. That “three R’s” program has worked about as well as expected.

The risk corridors program was supposed to use cash from PPACA public exchange plan issuers that did well in 2014, 2015 and 2016 to help issuers that did poorly. Because most issuers outside of California did poorly, that program has collected only enough cash to pay about 12 percent of its 2014 obligations.

The risk-adjustment program is supposed to be a permanent program that uses cash from issuers of PPACA-compliant individual and small-group coverage with relatively low-risk enrollees in a state market to help competing individual and small-group coverage that happen to have relatively high-risk enrollees.

See also: What if you owe the PPACA 3R’s programs money?

Representatives from some insurers, such as Blue Cross Blue Shield of Massachusetts and ConnectiCare mentioned the risk-adjustment program only briefly, but representatives from others, including Harvard Pilgrim Health Care and Minuteman Health, said uncertainty about the program has contributed to serious pricing headaches.

See also: CMS schedules PPACA risk-adjustment clash

Gerald Belastock, a Massachusetts health insurance broker, sat through the hearing and came away alarmed by what he heard about how the PPACA risk adjustment program appears to be working in the Bay State.

If the insurers with concerns about the program are right about their objections, “risk adjustment could cause the prices of policies issued by all but the largest insurers to make their plans non-competitive, resulting in a serious decrease, if not complete elimination, of competition, in health insurance in Massachusetts,” Belastock wrote in a comment letter.

For a look at more about what the insurer reps said about the PPACA risk-adjustment program, based on a written version of the reps’ testimony, read on.


1. A big insurer that’s expecting to get money from the PPACA risk-adjustment program seems to like it.

Michael Caljouw, a vice president at Massachusetts Blue, and Sara Wilcox, a commercial pricing manager, said Massachusetts Blue expects to get money from the risk-adjustment program because repeated analyses, “verified by outside experts,” have shown that the company’s plans have attracted a substantial number of high-risk enrollees.

“It should be noted that other health plans with higher-risk membership likewise fell into the same category when claims were fully analyzed,” the Massachusetts Blue reps testified.

Massachusetts Blue is asking to increase its small-group rates about 4 percent.

See also: PPACA World: Legal work heats up

Tangled cord

2. A big insurer that’s expecting to pay money into the risk-adjustment program says the program is complicated and unpredictable.

Bill Graham, a senior vice president at Harvard Pilgrim Health Care — which is asking for an average small-group increase of about 13 percent for coverage written by a health maintenance organization (HMO) unit, but an increase of about 35 percent for policies written by a unit licensed as an insurance company — said his company has had big problems with the risk-adjustment program.

“The risk-adjustment program is exceedingly complex,” Graham said.

Experts who tried to help the company understand what its obligations might be, never came up with estimates that were in the same neighborhood, and it now believes its risk transfer payment obligation for 2015 will be much bigger than it had expected, Graham said.

Brian Mackintosh, Harvard Pilgrim’s actuarial director, testified that the company obtained eight different simulations of its 2014 risk-adjustment program exposure and received estimates ranging from a gain of $10 million to an obligation to pay out over $50 million.

That’s “an extremely large range to put into pricing,” Mackintosh said.

Health insurers typically aim for a profit margin of about 1 percent to 2 percent, but national 2014 risk-adjustment program figures show that substantial number may have to pay out funds equal to 30 percent of the premiums collected, Mackintosh said.

That kind of unpredictable swing can put a severe strain on insurers’ finances, he said.

See also: How sick is everyone? A vast PPACA tracking system takes shape

Measuring tape

3. A small, new insurer that’s expecting to pay money into the risk adjustment program says the program rules are unfair.

Gregory Pence, chief actuary of Minuteman Health, a nonprofit HMO founded with Consumer Operated and Oriented Plan (CO-OP) loans, said his company worries about the unpredictability about the risk-adjustment program, and about what it believes to be unfair rules.

The program uses a market-wide average premium to calculate risk-transfer amounts, and that hurts low-cost plans, by requiring low-cost plans to pay transfers simply because their premiums are low, Pence said.

The program also appears to score the riskiness of some health problems inaccurately, and it does not provide any cushion for new, or rapidly growing, plans, that have little information about their enrollees’ health Pence said.

The risk-adjustment program is “a force of instability in the Massachusetts market,’ Pence said.

See also: 

UnitedHealth Says N.Y. PPACA risk-adjustment program could be in trouble

5 ways PPACA cushion programs could drive deal-making


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