- Board Education March 2012
What are the new 3 R s? The 3 R s are the risk leveling programs required by the Affordable Care Act (ACA) to help protect insurers in the individual and small group markets against risk selection and market uncertainty, and ensure Exchange and market viability. Reinsurance (temporary) Risk Adjustment (permanent) Risk Corridors (temporary) Protects insurers offering individual coverage from the risk of high cost claims and allows for lower premium levels. It is funded by contributions from all health insurers and third party administrators. Levels the playing field by assessing insurers with individual and small group enrollment of less-than-average risk and transferring those dollars to insurers with enrollment of higher-than-average risk. Limits the extent of issuer gains or losses inside the Exchange. Insurers with costs less than projected remit a percentage of savings to HHS; insurers with costs more than projected receive a payment from HHS. Reinsurance and Risk Corridors are temporary (3 years) and intended to help provide premium stability as market reforms begin; Risk Adjustment is permanent and intended to help level the playing field inside and outside the Exchange, and to reduce differences in rates between insurers. There is uncertainty about the effectiveness of the 3 R s; additional measures may be needed. States operating their own Exchange: Must administer the Reinsurance program (via a non-profit reinsurance entity ) May administer the Risk Adjustment program (or let HHS administer it) May Not administer the Risk Corridors program (HHS will administer this program for all states) 1
Why the new 3 R s matter Risk leveling programs are critical to a viable Exchange and health benefit market post 2014. Exchanges are a key component of the ACA. The purpose of these virtual marketplaces is to facilitate expanded access to individuals and small businesses and serve as the mechanism through which individuals receive premium and cost-sharing subsidies. Adverse selection must be minimized to ensure adequate choice and affordability. Adverse Selection Adverse selection occurs when individuals at greater risk of high health spending are more likely to purchase coverage than low risk individuals. Higher premiums result which lead to more low risk individuals opting out of coverage which lead to even higher premiums. The individual mandate and premium subsidies aim to reduce adverse selection by increasing overall participation, but they do not reduce adverse selection that can occur between health plans. This risk must be minimized or leveled to ensure adequate choice and affordability. Insurers might leave the market if risks are too high (reminiscent of the early 1990 s in WA). Many insurers left the market after guaranteed issue was introduced and never returned. Premiums for individual products became (and remained) some of the highest in the nation. Insurers will not be able to price Exchange products accurately if the 3 R s are not clearly understood, modeled, and communicated - early and in sufficient detail. Understating premiums could result in large losses to insurers, threatening plan solvency. Overstating premiums could result in large gains to insurers or reduced enrollment. Uncertainty by insurers could lead to conservative assumptions = higher premiums. 2
Why they matter now (2012) States have critical decisions to make in 2012 to ensure the readiness and effectiveness of the 3 R s. Where will these functions reside and who will govern them? What data and resources will be used to inform program decisions? How will that data be collected? Who will collect it? When will it be collected? How and to what extent will the non-profit reinsurance entity help inform state policy decisions? How and to what extent will stakeholder input be incorporated into the state s decision process? How will the development and operations of the programs be financed? How will planning and operations be coordinated between various state entities and stakeholders (e.g., the Exchange, Insurance Commissioner, non-profit reinsurance entity, state high risk pool, stakeholder work group), and with HHS? One size will NOT fit all - states have an opportunity to customize, but only if they act quickly. The ACA provides flexibility for 2 of the 3 R s - reinsurance and risk adjustment. Alternatives to federal reinsurance parameters or risk adjustment methodology must be submitted to HHS by November 2012; these decisions will require data collection, analysis and modeling. States that want to use an alternate risk adjustment methodology must agree to administer the risk adjustment program (which will need to be factored into the state s decision). The application deadline for our state s Exchange Level Two Establishment Grant is March 31, 2012. States will incur significant costs to develop the infrastructure and functionality of the risk leveling programs, as well as to conduct initial analysis, simulations, and stakeholder outreach. Funding for the initial development and implementation of these programs can be sought through Exchange Establishment Grants cost estimates will depend upon decisions regarding the questions above. 3
What are these risks? Health insurers face unprecedented risks under the Affordable Care Act (ACA). Guaranteed issue means insurers must accept all enrollment regardless of health status. The individual mandate does not have adequate penalties to ensure that healthy individuals will comply. Insurers will be prohibited from excluding pre-existing conditions or varying premiums based on health status. The substantial influx of previously uninsured individuals into the Exchange will make it difficult for insurers to price products accurately because they lack detailed data and experience regarding health spending for the uninsured. Future spending on newly insured is likely to increase once they obtain coverage, but it is unclear how much. Federal high risk pools, which exclusively serve previously uninsured high risk individuals, have experienced health spending costs significantly higher than state high risk pools. High risk individuals, including those exiting from current state and federal high risk pools, will add extreme costs into the Exchange that were previously managed and funded separately. Federal market mechanisms and their related market controls may not be flexible enough to balance the markets. Risk adjustment is untried in the individual and small group markets. Risk adjustment has also been found not to correct well for extremes of high and low risk individuals. 4
Reinsurance States operating an Exchange must establish or designate a non-profit reinsurance entity to administer the reinsurance program. The reinsurance entity is allowed to contract with a third party administrator to run the operations of the program. (Most existing reinsurance companies are for-profit entities.) High risk pools are an option to serve as the non-profit reinsurance entity because of tax status and relevant experience and similarities in mission. The ACA also allows them to be modified for this purpose. Reinsurance supplements risk adjustment by reimbursing insurers in the individual market for the cost of unusually high claims. Although a risk adjustment program can help compensate insurers that enroll high risk individuals, it is not able to compensate insurers fully for unusually high claims. The proposed rules provide flexibility, allowing states to vary the thresholds for when reinsurance begins and ends, and include administrative costs in the assessments. All insurers, including fully-insured and self-funded group plans, will make contributions to the reinsurance fund. Assessments will include: Assessment Rate Rate must be at least the amount of the federal assessment rate US Treasury Contribution * Assessments must include specified contribution funds for US Treasury (the national contribution funds are set at $2 billion in years 2014 and 2015 and $1 billion in 2016) Administration Costs Assessments may also include the collection of funds necessary to cover administrative costs incurred by the reinsurance entity * The US Treasury contribution serves as an offset for the costs of administering the Early Retiree Reinsurance Program. Board Education March 14, 2012 5
Reinsurance Administration Carriers Information, Notices & Reporting Non-Profit Reinsurance Entity Carriers Carriers Assessment Payments Reinsurance Claims Data Third Party Administrator Admin Fee Carriers Reinsurance Claims Payments US Treasury Carriers Adapted from Risk Adjustment and Reinsurance: A Work Plan for State Officials, Wakely Consulting, December 2011 6
Risk Adjustment States operating an Exchange may administer the risk adjustment program OR let HHS administer it. If the state wants to use a risk adjuster methodology different than the federal methodology, the state must administer the risk adjustment program. Resources required to administer risk adjustment programs are significant. The administrator will incur various costs, including software licenses and costs associated with data collection and reporting. These costs can be passed along to the insurers or be financed through alternative means. An available All Payer Claims Database (APCD) is considered especially important for states wishing to administer their own risk adjustment program given the short time frames. A number of risk adjustment models are currently used for risk adjusted payments in Medicare, Medicaid and other public programs. No funding mechanism for administration is specified in the proposed rules; states will need to develop a funding mechanism if they administer the risk adjustment program. Work needed during 2012 and 2013 does not change if the state decides to let HHS administer the risk adjustment program because insurers will still need information based on state-specific data (APCD) and modeling in order to price products. (HHS will not be providing this information.) Risk adjustment will generally need to be phased in since complete data on health-based information will not be available for many enrollees and health plan diagnosis data may not be fully coded. Risk adjustment must be coordinated with reinsurance and risk corridors. Timely completion of risk adjustment is important because it affects calculations of risk corridors. 7
Risk Adjustment Example Plan Level Example: If the average premium rate is $500 pmpm: Insurer A will be assessed $50 pmpm Insurer B will receive $50 pmpm Risk Adjustment Administrator Sends data to Administrator Average Risk Score is 0.9 Pays State/Fed $50 pmpm Insurer A Collects data Assigns Average Risk Score Assesses insurers that have less-than-average risk and transfers it to insurers with higher-than-average risk Sends data to Administrator Average Risk Score is 1.1 Receives $50 pmpm Insurer B Adapted from Risk Adjustment and Reinsurance: A Work Plan for State Officials, Wakely Consulting, January 2012 webinar 8
Risk Corridors Risk corridors limit the downside risk for insurers entering the Exchange during the early years when health spending of newly insured will be unknown. The risk corridors in the ACA are symmetric (similar to the risk corridors used by Medicare Part D). Insurers set a target amount equal to total premiums (including premium subsidies) less administrative costs. If actual allowable costs (net of risk adjustment and reinsurance payments) come within 3% of the target, the insurer bears the loss or keeps the gains. If actual costs fall outside the 3% corridor, the federal government shares in the losses or gains. Risk corridors are last in order of the 3 R s since their calculation includes net risk adjustment and reinsurance payments. States must coordinate their reinsurance and risk adjustment programs with the risk corridors program; however, administration of the risk corridors program will be performed by HHS. Once more data becomes available on the health spending of newly insured, the ability to set premiums accurately should increase, thereby reducing the need for risk corridors. 9
Funding the 3 R s 3 R s Program Costs Funded by: Admin Costs Funded by: Reinsurance Risk Adjustment All Insurers and Third Party Administrators Includes fully-insured and self-funded Group Plans (inside and outside Exchange) All Individual and Small Group Plans (inside and outside Exchange) State (if operating Exchange) State may include administrative costs in reinsurance assessments State States must develop a funding mechanism if they choose to administer risk adjustment Risk Corridors All Exchange Plans Federal 10
Challenges for 3 R s success Final regulations are not available yet we don t know what we need to know. The ability of the 3 R s to predict and balance risk is limited and untested in the individual and small group markets. Data collection and reporting needs are significant for all parties. An All Payer Claims Database (APCD) is not yet available in our state. Consolidating data collection and reporting for the 3 R s (to the extent possible) will help preserve data integrity and promote efficiencies and cost-effectiveness. Timelines for state decisions and program development work are aggressive. Federal reinsurance parameters and risk adjustment methodologies will not be available until October 2012; state alternatives will need to be submitted within 30 days of their release. The non-profit reinsurance entity will need adequate planning and development time. (WSHIP estimates at least 18 months if it is to be considered an option for performing these functions.) Insurers will need to be provided with sound projections of risk adjustment and reinsurance financial transfers before the end of April 2013 for product pricing. Input/decisions for implementing the 3 R s in our state is getting underway but is limited as of this writing. Health Care Authority s (HCA) Exchange Policy Brief on Risk Leveling has not been completed. Actuarial input and recommendations to the HCA/Exchange for risk leveling options are pending. The Commissioner has assembled a Risk Leveling Work Group; first meeting is March 20 th. Prepared 3 6 12 11