Under the Affordable Care Act (ACA), the Centers for Medicare & Medicaid Services (CMS) was tasked with implementing a risk-adjustment model for ACA-compliant business in the commercial non-group and small group markets beginning in 2014. The risk-adjustment model is one of the “premium stabilization programs” Congress wrote into the law and was intended to “reduce or eliminate premium differences between plans based solely on expectations of favorable or unfavorable risk selection.” In what follows, Kurt Giesa, head of Oliver Wyman Actuarial Consulting’s Healthcare Practice, presents four charts summarizing the impact of the model:
Taken together, the four charts below tell the story of risk adjustment in the non-group market in 2014. Each point in these charts represents an issuer’s experience in a state, and the y-axis in each of the charts shows the issuer’s risk-adjustment receipts per member per month (PMPM). A positive receipt means the issuer received funds through the risk-adjustment model, and a negative means the issuer paid into the system.
We think these charts show that, while there are certainly outliers, and there likely is room for improvement, from a nationwide perspective, the CMS-operated risk-adjustment system has contributed positively toward the intended objective of allowing issuers to compete on bases other than risk selection.
We show how risk-adjustment receipts varied with the payments the issuer received under the transitional reinsurance program, another of the “premium stabilization programs.” In 2014, the transitional reinsurance program paid issuers 100% of an enrollee’s claims between $45,000 and $250,000. The transitional reinsurance program phases out over time, and 2016 is the last year it will operate. Chart 1 shows that risk-adjustment receipts were strongly correlated with transitional reinsurance receipts (R2 = 0.43). In other words, and not surprisingly, plans with a relatively large number of high-cost claimants as measured by transitional reinsurance program receipts tended to be recipients of risk-adjustment payments as well.