Last week, the Centers for Medicare and Medicaid Services (CMS) unexpectedly halted the risk-adjustment program that spreads the expenses of covering high-cost enrollees across insurers. Insurers and some states now predict higher rates and fewer choices in the individual and small-group markets as a result.
Risk Adjustment Spreads High Costs Across Insurers
Risk adjustment is the only permanent premium-stabilization program in the Affordable Care Act (ACA). It works by spreading the expense of high-cost enrollees across insurers within the individual and small-group health insurance markets, respectively. Insurers with lower-risk enrollees pay money to the government, based on a CMS-created formula, that is then transferred to insurers with higher-risk enrollees. The program discourages insurers from cherry-picking low-cost, healthy enrollees through benefit design, network structure, marketing, or other approaches. It also protects insurers that happen to attract a significantly sicker pool of enrollees or those with preexisting conditions.
CMS Has Options to Continue the Risk-Adjustment Program
The administration’s action came in response to a lawsuit from a New Mexico co-op, which sued CMS, claiming the risk-adjustment formula for 2014–2018 is unlawful. Small insurers, including co-ops, are more likely to face high risk-adjustment charges under the formula. This was particularly harmful to co-ops because, unlike traditional insurers, they have limited ability to cover financial losses. The court ruled in February that the formula is arbitrary and capricious because CMS did not adequately justify key assumptions. The court left open that the formula may be allowed, if justified through notice and comment rulemaking. Four months later, CMS put risk-adjustment transfers for 2017–18 on hold. But, there are other options available.
interim final rule justifying the assumptions behind the formula — an approach CMS took recently to address a court order requiring more justification for a federal rule on out-of-network emergency department care. In fact, CMS has already justified the use of budget neutrality in the risk-adjustment formula for future years in the 2019 payment rule. Alternatively, CMS could have waited for the court to issue an opinion on a motion to reconsider the decision, which is expected later this summer, then appeal and request a stay to keep the formula in place through the appeals process. Reversal on appeal may not be a long shot given that a court in Massachusetts upheld the formula in a similar case.
States and Insurers Expect Major Disruptions to Insurance Markets
States and insurers are urging the administration to find a quick resolution. Organizations representing a range of insurers said the action would create “market disruption” and “turmoil.” Without a quick resolution, the Blue Cross and Blue Shield Association expects large premium increases for 2019 as well as the potential for “far fewer health plan choices” because some insurers that should receive payments fear the program may never be reinstated or operated in good faith. Safety-net health plans denounced the administration’s action as “the most significant destabilizing factor yet introduced.” Insurers that typically owe large payments under risk adjustment might also increase rates. If an insurer’s rates are significantly lower than the dominant carrier in the market, it could cause an influx of new enrollees that could overwhelm a small insurer’s reserves and provider capacity.
Similar to last year, when there was uncertainty about whether the federal government would give insurers cost-sharing reduction payments, states are once again having to manage the fallout of a major policy change after premium rates have been filed. Officials in California, New York, and Washington issued statements referring to the administration’s action as “unjustified” and “sabotage” that would create more “instability” in the insurance markets. Nevada officials say it is too early to know the impact, but New Jersey has extended the rate-filing deadline and Washington State is considering allowing insurers to file two sets of rates. States can implement their own risk-adjustment programs — Massachusetts had one before the ACA and New York is looking into implementing its own — but that would take time.
Looking Forward
Suspending the risk-adjustment program adds more uncertainty in markets that are already facing numerous federal policy changes. Insurers are proposing to raise rates for 2019 to account for lower enrollment, particularly among relatively healthy individuals, thanks to the elimination of the individual mandate penalty, changes to association health plans, and expansion of short-term health plans. Adding to the market challenges, the administration has slashed navigator funding for the year ahead. If CMS does not make risk-adjustment payments soon, there may be major disruption in the individual and small-group markets.