Health Care Reform Primer: Reinsurance and Risk Adjustment

This is a part of the Patient Protection and Affordable Care Act that is quite important but very technical. I won't go into as much detail on this as I have the other sections.

Reinsurance

By January 2014, all states must contract with one or more tax-exempt, not-for-profit reinsurance entities to provide backstops for the plans and carriers operating in the states' exchanges. The plans' third party administrators and the carriers will pay the entity for plan years beginning in the three-year period starting that month. The reinsurers will the plans and carriers that cover "high risk" individuals in the individual market for any plan year in that period. Multiple states can form reinsurance compacts with a single entity.

High risk individuals will be identified on the basis of a list of 50 to 100 high-risk medical conditions, based on identification of diagnostic and procedure codes that indicate individuals with pre-existing, high-risk conditions. They can also be identified by other comparable objective methods recommended by the American Academy of Actuaries. Payments to the plans will be based on a formula designed to provide an equitable allocation of funds. It may include a schedule of payments specifying the amount payable for each of the high-risk conditions, or it may use other comparable methods recommended by the AAA that encourage use of care coordination and care management programs for high-risk conditions.

States may require plans and carriers to pay reinsurance premiums based on percentage of total revenue, total costs of providing benefits to enrollees in self-insured plans, or on a flat basis per enrollee. They can require payment in advance or in installments throughout the plan year. It must proportionately reflect each carrier's fully insured commercial book of business for major medical products, fees the carrier charges, and costs of coverage administered by a TPA. States can also charge an additional amount to cover the reinsurers' administrative expenses. Aggregate contributions start at $10 billion in 2014 and decrease in each following year. States can coordinate their high-risk pools with the reinsurance program.

Risk Corridors

The federal Department of Health and Human Services must create and administer a program of "risk corridors" for calendar years 2014 through 2016. In this program, qualified health plans for individuals and small groups will pay into or receive payments from a system based on how their total costs of providing covered benefits (not including administrative costs, risk adjustment and reinsurance payments) compare to their total premiums (including any government program premium subsidies but not including administrative costs.) This is based on a program for regional providers under the Medicare prescription drug benefit program.

Sparing you a great deal of math, here's how it works. Plans whose total cost of benefits is within three percent (higher or lower) of total premiums neither pay nor receive payments. Those whose costs are between 92 and 97 percent of premiums pay a portion of the amount that premiums exceed 97 percent of premium; those whose costs are less than 92 percent of premium pay a percentage of premium plus most of the excess of 92 percent of premiums over costs. Conversely, those whose costs are from 103 to 108 percent of premium receive back some of the amount by which costs exceed 103 percent of premium; those whose costs exceed 108 percent of premium receive a percentage of premium plus most of the amount by which costs exceed 108 percent of premium.

Risk Adjustment

States are to level out the competitive playing fields in their individual and small group markets by assessing charges whereby plans and carriers with low actuarial risk subsidize those with high actuarial risk. HHS has to develop criteria and methods similar to those used in the Medicare Choice and prescription drug benefit programs for calculating these assessments and subsidies. To determine relative actuarial risk, a state must compare the actuarial risk of a plan's enrollees to that of all enrollees in all plans in the state (excluding self-insured group plans.) Those with lower risk will pay the state, while those with higher risk will receive payments from the state. This program does not apply to grandfathered plans or policies.

If that wasn't enough math for you, tune in next time. We'll be discussing premium tax credits and cost-sharing reductions.

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