Actuarial risk. Market Stabilization. Statewide Average Premium. There’s enough technical jargon associated with the Affordable Care Act’s (ACA) Risk Adjustment program to cause most of us to dismiss it as having no relevance to our daily lives. But this program is essential to the ACA’s goal of ensuring that people with pre-existing conditions have access to affordable, comprehensive health insurance. And the Trump administration has just dealt it a major blow.
What’s the Risk Adjustment Program?
The ACA’s risk adjustment (RA) program was designed to fundamentally change the business model for insurance companies operating in the individual and small-employer markets. Before the ACA, insurers largely competed by trying to attract healthy enrollees or businesses with healthy workers, and discourage the less healthy from joining their plans. The drafters of the ACA wanted insurers instead to compete on the price and quality of their products. Thus, the RA program requires insurers with a relatively larger share of healthy enrollees to transfer funds to insurers with a larger share of less-healthy enrollees. It’s not only used in the ACA’s insurance markets, but is core to the stable functioning of any program that relies on private insurers to deliver benefits. For example, it has been a longstanding feature of the Medicare Advantage and the Medicare Prescription Drug (Part D) programs. Many states also run risk adjustment programs for their Medicaid managed care plans.
What did the Trump administration do?
Although Congress failed to repeal the ACA in 2017, the Trump administration quickly shifted to using its administrative powers to undermine the law in several ways, such as reducing the length of the ACA’s annual enrollment period, cutting off a subsidy that reduces plan cost-sharing for low-income individuals, and promoting alternative insurance products that are exempt from the ACA’s consumer protections. And, on July 7, the administration announced that it would suspend payments between insurers under the RA program, for an indefinite length of time.
The administration’s stated rationale is that the suspension was required under a New Mexico district court ruling that the government’s methodology for implementing the RA program was “arbitrary and capricious.” In particular, the court’s February 2018 decision said that the federal government needs to explain why the RA program must be budget neutral, and why a statewide average premium, rather than each insurer’s average premium, is used to determine risk adjustment payments. However, as noted by Professor Nick Bagley of the University of Michigan Law School, the administration had multiple options in response to the court ruling, with suspension of the RA payments being perhaps the most disruptive and destructive one. The simplest and least damaging option would be to publish a regulation that articulates its rationale for its RA methodology, which is, in the end, all the court is asking it to do.
People with pre-existing conditions lose the most under the administration’s decision
At this point it’s not clear when, or if, the payments under the RA program will resume. The insurers most harmed by this are those that are owed money because they have a relatively higher number of people with health needs enrolled than their competitors. And depending on the financial health of the company, the delay could have serious consequences. A small company without a large cushion of reserves could face cash-flow problems. Even more established companies with large surpluses could still face quite a hit if they’re owed a substantial amount, such as Blue Cross Blue Shield of Florida, which is owed over $660 million for 2017 alone.
For these and other insurers that lose confidence in the government’s good faith operation of the RA program, and begin to believe that the program won’t adequately compensate them for enrolling people with high health costs, they have a few choices. One is to reduce their participation in the ACA markets or exit them entirely. Another is to raise premiums. A third is to revert to the pre-ACA days of marketing and plan design strategies that cherry pick the healthy and discourage enrollment among people with pre-existing conditions. Under all three scenarios, consumers with health care needs have the most to lose.