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3 ways the ACA individual health market foundation cracked

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Ordinary people’s eyes start to glaze over when they hear the phrase the “Affordable Care Act risk-adjustment program, but, of course, that’s like people’s eyes glazing over when they hear about the “foundation of a house,” or “the human kidney.”

Foundations may seem boring when they’re intact, but, when they break down, a homeowner can face big repair bills.

Kidneys may seem boring when they’re doing a good job of maintaining the right amount of water and other substances in a patient’s blood. When kidneys stop working, they become more interesting. Toxins may build up in a patient’s body and poison the patient to death, or excess fluid may build up in the patient’s lungs and drown the patient.

The ACA risk-adjustment program is supposed to act like a kidney for the individual commercial health insurance market and the small-group commercial health insurance market.

The designers of the ACA system stripped away most of the defenses health insurers once used to keep applicants with known, serious health problems from smothering them with health claims. The risk-adjustment program is a permanent program that helps issuers defend themselves against one specific health claim threat: the possibility that the sickest enrollees will flood into certain plans, possibly because those plans offer great prices, benefits or doctors for sick people, and choke those plans with huge medical claim costs.

The Centers for Medicare & Medicaid Services (CMS), the agency that manages the ACA risk-adjustment program, tries to stabilize the flow of health risk by pulling money from issuers with enrollees with low health risk scores, and pushing the money to issuers with high risk scores. 

Related: 10 top ACA individual risk-adjustment bills

The program came to life in 2014. CMS and insurers are just now publishing the data actuaries and other observers need to understand how the risk-adjustment kidney is really working.

Frederick Busch, a consulting actuary at Milliman, and three colleagues at the Seattle-based actuarial and consulting firm, have used the program performance figures available for 2014, and the preliminary numbers available for 2015, to size up the program.

The analysts warn against giving the first year or two of data from such a complex program too much weight.

“It is rather easy to list the various reasons why the results may or may not maintain a level of consistency over time,” the analysts write.

The analysts say factors that could throw off results include everything from ACA public exchange system enrollment glitches to insurers’ efforts to learn to use the risk-scoring system CMS set up.

Results could even depend partly on insurers’ success at learning how to feed the health risk data into CMS computers, the analysts say.

But there are some signs hinting that the ACA kidney might be having problems.

For a look at what the Milliman analysts found when they crunched the available program data, read on:

Thermometer (Photo: Thinkstock)

Some health insurers that pulled cash from the program in 2014 may have been shocked at how healthy their enrollees looked in 2015. (Photo: Thinkstock)

1. Swings in health risk hit 14 percent of the issuers hard.

The ACA risk-adjustment program affects only individual commercial health insurance plans that comply fully with the ACA major medical rules that took effect in January 2014. The program does not cover temporary health insurance, Medicare plans, or individual health coverage that’s allowed to operate under the rules in effect before January 2014.

The size of the individual health risk-adjustment program grew between 2014 and 2015 partly because use of individual commercial health insurance increased, and partly because more of the individual health coverage in force complied fully with the new ACA rules. 

Milliman found that the total number of individual health insurance issuer billable months covered by the risk-adjustment program increased to about 163 million in 2015, up 62 percent from the 2014 total. 

The issuers ended up with the equivalent of about 14 million people with year-round individual commercial health coverage.

The average amount of premiums collected per month increased just 3.1 percent, to $363.

CMS has estimated that the program should transfer about $5.6 billion from issuers with low-risk scores to issuers with high-risk scores for 2015. The projected transfer total has increased from $3.5 billion for 2014. Risk-adjustment program transfers amounted to 9.5 percent of premium revenue in 2015, down from 9.9 percent of premium revenue in 2014.

In theory, insurers and others might assume that a successful risk-stabilization program should be reasonably predictable.

For about three-quarters of the individual health issuers, the risk-adjustment program was somewhat predictable: If they were supposed to pay money into the program in 2014, they also had to pay into the program in 2015. If they received money in 2014, they also received money in 2015.

But the Milliman analysts found that about 14 percent of the issuers flipped from getting cash from program in 2014 to paying cash into the program in 2015.

Those issuers pulled about $193 million from the program for 2014 but then had to pay a total of $646 million into the program for 2015.

The Milliman analysts do not show how the size off the 2015 payments compares with those issuers’ revenue. But, if the issuers that flipped from being risk-adjustment cash recipients to payers account for about 14 percent of total premium revenue, then the $646 million in payments they made in 2015 could amount to about 8 percent of their revenue.

Mark Farrah Associates, a Portland, Maine-based health care research firm, has reported that the big, publicly health insurers had profit margins of about 3 percent to 8 percent in 2014.

Related: Milliman: How PPACA World really worked in 2014 


By the time issuers had pretty good risk-adjustment program data for the 2014 benefit year, they’d pretty much locked in their 2016 plan menus. (Photo: Thinkstock) 

2. Issuers were stuck using stale data to set their 2016 premiums.

By the time individual health insurance issuers had access to a full year of 2014 Affordable Care Act risk-adjustment program data, they were already half-way into the 2015 plan year and had no ability to change 2015 plan premiums or benefits, the Milliman analysts say.

By that point, the issuers had already filed plan design and rate information with insurance regulators and ACA exchange program managers.

Related: Tech companies offer to save health insurers from ACA despair

Congress and federal agencies have changed ACA risk program rules before and could change them again. (Photo: Thinkstock)

Congress and federal agencies have changed ACA risk program rules before and could change them again. (Photo: Thinkstock) 

3. The Milliman analysts are not really sure what happened what went on inside the program, or what rules will apply going forward.

Milliman is one of the companies that helps insurers design their health insurance plans and set their rates.

Busch and his colleagues emphasize that they had only limited access to ACA risk-adjustment program performance information when they evaluated the program.

Even most of the data sources the Milliman analysts use do not provide any specific information about how, for example, the rich-benefit gold plans did when compared with the bare-bones bronze plans, the analysts say.

The analysts also emphasize the program’s high level of legislative and regulatory instability.

“Our results could be affected at any time by the shifting legislative environment,” the analysts write. “Since full implementation of the ACA, aspects of the risk adjustment program alone have been modified several times. Should any salient feature of the ACA change, our conclusions may no longer apply.”


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