The insurance exchanges created by the Patient Protection and Affordable Care Act (ACA) has become an unstable marketplace, causing many insurance carriers to exit individual and small employer markets both on and off the state exchanges and the federal Marketplace. In the wake of this instability, the Center for Medicare & Medicaid (CMS) expects to propose new rules to improve the risk pools and make the exchanges more attractive to carriers which still provide marketplace coverage. The regulatory proposal (Proposal) addresses one factor initially designed to ease the financial burden on issuers of health plans on the Marketplace during the so-called transition years. The Proposal is linked here.
As of January 1, 2014, insurers are no longer able to deny coverage or charge higher premiums based on preexisting conditions (under rules referred to as guaranteed issue and modified community rating, respectively). These aspects of the ACA– along with tax credits for low and middle income people buying insurance on their own in new health insurance marketplaces – make it easier for people with preexisting conditions to gain insurance coverage. However, if not accompanied by other regulatory measures, these provisions would have unintended consequences for the insurance market. Namely, insurers might compete by avoiding sicker enrollees rather than by providing the best value to consumers. In addition, in the early years of market reform insurers face uncertainty as to how to price coverage as new people (including those previously considered “uninsurable”) attain coverage, potentially leading to premium volatility. Thus, the ACA created three mechanisms to combat these effects – risk adjustment, reinsurance, and risk corridors – that were intended to promote insurer competition on the basis of quality and value and promote insurance market stability, particularly in the early years of reform.
Some of the Proposal’s changes could take effect in January, in time for the 2017 enrollment. For example, the Proposal would take into account enrollees who are not yet signed up for a full 12 months to better reflect the risk.
Beginning in 2018, the Proposal would allow the use of prescription drug utilization data in calculating the risk adjustment models to better reflect an enrollee’s health. The absence of this data makes enrollees appear to be healthier and reduces the risk adjustment payments made to carriers who insured the unhealthy population. The intent of the risk adjustment payments is to compensate those insurers who carry a less healthy enrollment population and even out losses in the early years of the Marketplace.
As of 2018, the CMS Proposal will also establish transfers to facilitate risk spreading with regard to high cost enrollees. This change would make risk adjustment more effective at pooling risk. A portion of costs exceeding $2 million for an individual would be shared among issuers. This form of risk sharing would reduce uncertainty for the issuers who are not yet able to reliably predict the prevalence and nature of high-cost membership.
Without market stability, more carriers will inevitably withdraw from ACA markets. United Healthcare, Humana, Aetna, and certain smaller carriers such as Oscar have already initiated withdrawal proceedings. Consumers will be the ultimate beneficiaries of a stable Marketplace, which is what has prompted CMS regulation.